On March 27, the President signed into law the coronavirus Aid, Relief, and Economic Security Act
(CARES Act)
, which is aimed at providing financial relief for the economic downturn caused by the coronavirus pandemic. This commentary covers some of the more pertinent issues to small businesses and individuals.
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Individual Charity-Related Provisions
The CARES Act allows for an above-the-line deduction up to $300 for cash contributions to certain charities for those who do not itemize deductions. Also, the Act increases the limitations on deductions for “qualified contributions” by individuals who itemize by suspending the 50% of AGI limitation, meaning up to 100% of AGI may be claimed as a charitable itemized income tax deduction. A “qualified contribution” is a contribution paid in cash during calendar year 2020 to an organization described in section 170(b)(1)(A) and the taxpayer has elected the application of this section with respect to such contribution. A “qualified contribution” does not include a contribution to an organization described in section 509(a)(3) or to a donor advised fund.
Student Loan Provisions
The Act suspends student loan payments (principal and interest) through September 30, 2020 without penalty to the borrower for federal student loans. No interest will accrue on these loans during this suspension period.
In addition, employers may provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
Assistance for American Workers, Families, and Businesses
All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for a full $1,200 “rebate,” $2,400 married. In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits. Estates and trusts are not eligible for this rebate. The rebates are being treated as advance refunds of a 2020 tax credit and taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.
For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as the IRS will use a taxpayer’s 2019 tax return if filed, or in the alternative their 2018 return. This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit.
The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
These payments are expected to be made electronically if possible. However, the Act states that “Not later than 15 days after the date on which the Secretary distributed any payment to an eligible taxpayer, notice shall be sent by mail to such taxpayer’s last known address. Such notice shall indicate the method by which such payment was made, the amount of such payment, and a phone number for the appropriate point of contact at the Internal Revenue Service to report any failure to receive such payment.”
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Unemployment Insurance Provisions
The Act creates a temporary Pandemic Unemployment Assistance program through December 31, 2020 to provide payment to “covered individuals” who are not traditionally eligible for unemployment benefits, such as self-employed individuals, independent contractors, and those who have limited work history because they were unable to work as a direct result of the coronavirus public health emergency. “Covered individuals” include those who are not eligible for regular unemployment benefits and provide self-certification that the individual is otherwise able to work but for:
- being diagnosed with COVID-19
- a member of the individual’s household has been diagnosed with COVID-19
- the individual is providing care for a family member diagnosed with COVID-19
- a child is unable to attend school because it is closed due to COVID-19
- the individual is unable to get to work because of quarantine order or is self-quarantined based on health care provided advice
- the individual quit his job as a direct result of COVID-19
- the individual’s job is closed as a direct result of COVID-19, or
- is self-employed, is seeking part-time employment, does not have sufficient work history, or otherwise would not qualify for regular unemployment or extended benefits under State or Federal law or pandemic emergency unemployment compensation.
“Covered individuals” do not include individuals who have the ability to telework with pay (i.e., work from home) or who are receiving paid sick leave or other paid leave benefits. A person may receive benefits under the Pandemic Unemployment Assistance program for up to 39 weeks, which includes any week the person received regular pay or extended benefits under any federal or state program.
The Act also provides an additional $600 per week to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months. There will also be an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after state unemployment benefits are no longer available.
Business Tax Relief Provisions
Charitable Contributions by Corporations: Contributions cannot exceed the excess of 25% of the business’ taxable income, which was increased from 10% under prior law.
A Temporary Waiver of Required Minimum Distribution(RMD) Rules
IRA expert Ed Slott of Ed Slott & Co. said “waiving 2020 RMDs will help lots of people avoid a tax bill on IRA value that has vanished. If not for this relief, 2020 RMDs would be based on the account value at Dec. 31, 2019, when the Dow was around 28,000.”
The RMD waiver also applies to IRA and Roth IRA beneficiaries who have 2020 RMDs, Slott explains. “Advisors should notify clients immediately on this, so they don’t take an RMD they didn’t have to.”
RMDs are also waived for IRA owners who turned 70 1/2 in 2019 and have to take their 2019 RMD by April 1, Slott reminded. “Clients who ignored traditional advice — which I have given too! — about spreading their first two RMDs over two years (2019 and 2020) can now have their first two RMDs waived. If they have already taken any part of their first RMD in 2019, that cannot be undone or waived.”
Rules for Use of Retirement Funds
As to special rules for use of retirement funds, consistent with previous disaster-related relief, the legislation waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after Jan. 1, 2020.
In addition, the bill states that “income attributable to such distributions would be subject to tax over three years, and the taxpayer may re-contribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.”
Slott points out that the “distribution is still taxable, but the tax impact can be softened because it can be spread over three years. The funds can also be repaid within the three years.”
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Sincerely,
Margaret Sucré-Vail
AIF ® AWMA ®
