On March 27th, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was put into effect, which will provide taxpayers and businesses significant tax and non-tax relief during these unprecedented times. Individuals and businesses should remain informed about the tax and non-tax implications of the legislation and The CARES Act.
WHAT INDIVIDUALS CAN EXPECT
If you haven’t filed your 2019 tax returns, don’t panic about getting them in by the usual April deadline. Pursuant to Notice 2020-18, the IRS has extended the filing deadline to July 15 and has stated that those who have already filed or plan to file in the near future can still expect to receive a refund if owed one. The notice also removes a cap on the amount of tax owed that may be postponed by the The CARES Act.
Cash Payments, Unemployment Benefits and Waiver Provisions
Single taxpayers with an adjusted gross income (AGI) of less than $75,000 a year and joint filers with an AGI of less than $150,000 can expect a credit of $1,200 or $2,400, respectively. Families with children will also receive a $500 credit per child. Credits start to phase out after those thresholds and disappear completely for individuals earning more than $99,000 and couples earning more than $198,000. The credit will be based off of tax year 2018 returns, although those who did not file in 2018 may substitute their 2019 returns to receive the credit. Those who receive Social Security benefits but don’t file with the IRS are still eligible – checks will be based on information filed by the Social Security Administration. The Secretary will conduct a public service announcement aimed at non-filers in order to provide as many Americans as possible with the credit.
With unprecedented amounts of Americans filing for unemployment, the bill allows a $600 per week addition to whatever base amount has already been set by the state. The additional $600 payments will be in effect for four months. Furthermore, CARES adds an additional 13 weeks of unemployment insurance for those needing an extension. Gig workers and freelancers will also be able to apply for unemployment through the temporary Pandemic Unemployment Assistance program.
Early withdrawal from IRAs of any amount up to $100,000 will currently not be penalized with tax consequences. Any income attributed to early withdrawal due to COVID-19 will be not be taxed as long as the account is replenished within three years from the date of withdrawal. The effect is a tax-free rollover. In addition, a waiver of required minimum distributions for certain IRAs will go into effect. CARES contains guidelines on how to qualify for tax-free treatment which include: yourself or a spouse/dependent being diagnosed with COVID-19; anyone who is unable to work because of lack of childcare; anyone who owns or operates a business that has closed, etc.
Student Loans
Student loan borrowers will be allowed a six-month deferral on making payments on their federally-backed student loans. Furthermore, borrowers will not be penalized for late payments until September 30th, nor will borrowers receive interest penalties, nor will interest continue to accrue on loans, as the interest rate will be set to 0%. President Trump also announced an option to stop paying on federal student loans for 60 days with no penalty. If your employer pays your student loans as an employee benefit, your employer can pay up to $5,250 on your student loans tax-free for this year under CARES.
Borrowers should be mindful to note that CARES does not apply to private student loans.
Charitable Deductions
The CARES Act will allow up to $300 of charitable deductions, as well as suspend the 50% of AGI limitations on deductions for 2020.
WHAT BUSINESSES CAN EXPECT
CARES provides emergency grants and forgivable loan programs to make it easier for businesses to continue to operate during this difficult time. The legislation provides changes for expenses and deductions to assist businesses in keeping employees on payroll by providing qualifying employers with a refundable payroll tax credit equal to 100% of wages paid on additional sick days allowed under the legislation.
Employment Retention Credit
CARES will establish a fully tax-refundable Employee Retention Credit which will be tied to the payment of employee wages from March 13, 2020 through December 31, 2020. This credit will be applied against the employer’s share of Social Security Taxes. The credit will be available to employers whose operations are either partially or completely halted due to COVID-19 or employers whose gross receipts have declined by 50%. For employers with less than 100 employees, all employee wages will qualify for the credit for the first $10,000 of compensation, regardless if the employer is open or closed. For employers with more than 100 employees, qualified wages include those paid to employees when they are not providing services.
Business Loan Program
The SBA 7(a) loan program will expand the ability of certain business-related loans to be granted by private banking institutions directly. Since determining repayment ability is not possible under the current economic landscape, lenders will determine whether the business was open on February 15, 2020 and had employees or independent contractors whom it paid.
The loan program also provides forgivable Small Business Administration loans to businesses with less than 500 employees. Sectors that have experienced greater financial impact from COVID-19, such as hospitality, restaurants, and certain other businesses are exempt from the employee cap. Loans cap at $10 million and span the period of February 15, 2020 to June 30, 2020. Loans may be used for payroll support to employees. Loan forgiveness will be equal to the amount spent by the borrower during an 8-week period on payroll costs, as long as the compensation does not exceed $100,000 in wages per employee. Employers should look into the specifics of loan forgiveness should they wish to take advantage of the provision.
Other loans covered under CARES include: SBA Express Loans and Emergency Economic Injury Disaster Loans.
Charitable Deductions
While a corporation’s charitable deductions are usually limited to 10% of taxable income, CARES increases this limitation to 25%. Deductions for contributions to the restaurant sector have been increased from 15% of taxable income to 25% in order to help with the harsh effects that COVID-19 has brought to the service industry.
Published by Hannah Karraker
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