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Relief for Individuals and Small Business Owners Affected by COVID-19

On March 27, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The relief package contains an estimated $2 trillion in tax rebates, student loan payment deferments and relief for small businesses. It also gives individuals the opportunity to dip into their retirement accounts without penalties for support during this time.

The summary below may provide relief to support your family and — if you’re a small business owner — your employees as we weather this storm. 

Recovery Rebates for Individuals and Couples 

In the next weeks to months, the U.S. Treasury Department will issue up to $1,200 to qualifying individuals and up to $2,400 to qualifying spouses who file taxes jointly. For each child under age 17, taxpayers will receive an additional $500. 

These payments are subject to AGI limits based on the last tax return you filed. If you’ve already filed your 2019 return, the Treasury Department’s AGI calculation will be based on that information. If you chose to extend your 2019 return, however, it’ll be based on your 2018 AGI.

AGI limits are:

  • Individual filers who had AGI of $75,000 or less will receive $1,200. Those with AGI of up to $99,000 will receive payments in smaller amounts — adjusted by $5 per $100 of income above the threshold. Payments will fully phase out above $99,000.
  • Heads of households with AGI of $112,500 or less will receive $1,200. The benefit fully phases out at AGI of $136,000.
  • Married couples filing joint returns with AGI of up to $150,000 will receive $2,400. The benefit fully phases out at AGI of $198,000. 

If you have direct deposit information on file with the IRS, you will receive this benefit via direct deposit, likely within the next month. If not, you should receive a check, which may not arrive until May.

If your 2018 AGI was above the threshold amount but the AGI shown on your 2019 return will be below the threshold amount — or if you reported no income in 2018 and have not yet filed your 2019 taxes — talk to your CPA about filing your 2019 taxes as soon as possible to ensure you qualify for this benefit. On the other hand, if your 2018 AGI falls within these windows but your 2019 income will not, consider delaying your tax filing. The deadline to file your federal return has been extended to July 15. 

This benefit is technically a tax credit that the U.S. government is fronting ahead of time. If you do not qualify based on your 2018 or 2019 income but your AGI falls within the boundaries described above in 2020, or if you have a child later in the year and that entitles you to more relief, you can claim the tax credit on your 2020 tax return, which you will file in early 2021. 

If you qualify based on your 2018 or 2019 AGI but your income in 2020 places you outside the qualifying AGI window, you will not have to give the money back. 

Relief for Student Loan Borrowers 

If you are paying federal student loans, payments have been suspended until Sept. 30. You do not have to make payments and interest will not accrue on the debt. You’ll simply pick up in six months where you left off. 

If you are working toward any kind of loan forgiveness, you will still receive credit for on-time payments during this period, even if you choose to stop payments. 

If you want to stop your student loan payments, contact your loan servicer as soon as possible, especially if you are seeking loan forgiveness. Otherwise, they will default to continued payments. 

Expanded Definition for HSAs and Healthcare FSAs

The CARES Act expands the definition of “qualified medical expenses” to include over-the-counter medicine and menstrual care products, meaning you can now use money from your HSA or Healthcare FSA to pay for those items. 

Additionally, the CARES Act requires health insurance plans to fully cover the cost of COVID-19 tests, regardless of your deductible.

Changes to Distributions from Retirement Accounts

If you are impacted by COVID-19, you can take penalty-free distributions of up to $100,000 from IRAs, employer-sponsored retirement plans, or a combination of both. 

“Impacted by COVID-19” is a fairly broad category. You can take these distributions for you, a spouse, or a dependent are diagnosed with the disease. You also qualify if you own a business that closes or operates under reduced hours because of the pandemic; if you are unable to work because you lack childcare as a result of the pandemic; or if you experience any other “adverse financial consequences,” including being furloughed, having your hours reduced, or being laid off. 

Normally, if you take distributions from your retirement account before age 59.5, the distributions are subject to income tax as well as a 10% penalty. You also face mandatory withholding of at least 20%. Distributions of up to $100,000 are free from both the 10% penalty as well as the mandatory withholding requirement under qualifying circumstances, though you will still have to pay income tax.

The day after you take a distribution, you have three years to roll any or all of it back into your retirement account if you do not use it. If you take a distribution but pay it back in subsequent years, you can file an amended return to get a refund for the taxes you paid on the distribution. 

Additionally, if you take a coronavirus-related distribution, you can spread the income tax payment out over the next three years. It typically makes sense to stretch income tax consequences over a period of time, but that may not be the case if you are expecting much lower income in 2020.

The CARES Act also allows for loans from your employer-sponsored retirement plan of up to $100,000. The limit is usually only $50,000. Additionally, you can delay starting repayment on the loan for up to a year. 

Finally, required minimum distributions are suspended in 2020. This applies to traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b) and Governmental 457(b) plans. Furthermore, the relief applies to both retirement account owners, themselves, as well as to beneficiaries taking stretch distributions.

If you turned 70.5 in 2019 but didn’t take an RMD, you would ordinarily be required to take two  RMDs in 2020. The CARES Act allows you to delay your first RMD until April 2020, essentially eliminating the need to take two RMDs in 2020. 

If you took your RMD recently but want to reverse it, you have 60 days from the date of the RMD to write a check or transfer the amount back into your retirement account. If you’re already outside the 60-day window, you may still be able to reverse it if you are impacted by COVID-19 according to the federal government’s definition. Consult with your CPA if you need to do this. 

If you are the beneficiary of an inherited IRA, it is not possible to reverse an RMD.

Changes to Qualified Charitable Contributions 

Charitable donations are usually an itemized deduction. But now, you can take an above-the-line deduction for charitable donations of up to $300 beginning in tax year 2020. This provision doesn’t appear to expire, meaning it will likely continue for future tax years. Note that these have to be cash donations — donations to a donor-advised fund do not count.

Additionally, there is no longer an AGI limit to deduct charitable donations made in cash. The charitable donation deduction had been limited to 60% of your AGI; that cap has been lifted. 

Unemployment Benefits 

The federal government will pay states to increase unemployment benefits by up to $600 per week for four months, on top of what states already offer. The CARES Act also extends unemployment compensation by 13 weeks. Self-employed individuals can be eligible for up to 39 weeks of unemployment benefits beginning immediately. 

If your state does not have a short-term compensation plan to help support employees who have seen cuts to their hours or pay, the CARES Act will cover 50% of the establishment costs incurred through the end of the year. 

Support for Small Business Owners 

Paycheck Protection Program

The Small Business Administration is administering the Paycheck Protection Program, a partially forgivable loan program designed to cover operations costs, including payroll, group health insurance premiums, salaries or commissions, rent, mortgage interest, utilities and more. 

Business owners with fewer than 500 employees can receive SBA 7(a) small business loans of whichever is less: Up to $10 million, or 2.5 times the average monthly payroll costs over the last 12 months (excluding annual compensation of amounts over $100,000 per person). 

Loan forgiveness is possible based on the amount business owners spend on payroll costs, rent, utilities, and group health insurance premiums during the first eight weeks of the loan period. To qualify, you must continue to employ the same number of people (although not necessarily the same individuals) from Feb. 15 until June 30, 2020 as you did during the first six weeks of 2020 or drink the same period in 2019. The forgiven loan amount is not included in taxable income. 

Borrowers must make a good-faith certification that the loan is necessary due to the uncertainty of COVID-19 by June 30. Loans have a maximum interest rate of 4% and payments can be deferred for six to 12 months, with a maximum repayment period of 10 years. 

The Employee Retention Credit 

If operations of your company have been fully or partially suspended during a quarter as a result of government regulation, or if you have a quarter in which revenue in 2020 is less than 50% of the revenue from the same quarter in 2019, you may qualify for the Employee Retention Credit. 

The credit supports businesses in paying 50% of normal wages to each employee, capped at $10,000 per employee. “Wages” include qualified healthcare expenses. 

If you have 100 or fewer employees, all wages are eligible for the credit up to that cap. If you have more than 100 employees, the credit only covers wages paid to individuals who are now considered essential employees and are working despite orders to stay at home. 

For qualifying businesses, the credit can continue until the end of 2020, or until the business either:

  • Has its first quarter where operations are not suspended by government requirement
  • Gross revenue from the current quarter exceeds 80% of gross revenue from the same quarter in 2019. 

Deferral of Payroll Tax Payment

If you did not have debt forgiven on SBA loans or as a result of the CARES Act — e.g., through the Paycheck Protection Program — you can defer payroll taxes from March 27 through the end of 2020. 

This provision allows employers to defer 50% of remaining 2020 payroll taxes until Dec. 31, 2021, and the other 50% until Dec. 31, 2022. 

Self-employed individuals can defer the employer equivalent portion of self-employment taxes to the same due dates. 

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