Advanced Planning Opportunities Created by the CARES Act

The COVID-19 pandemic of 2020 has affected the United States and the world in profound ways.  In an attempt to inhibit the spread of the virus from increasing exponentially and overwhelming our hospital capacity and medical system and to save lives, the majority of states have shut down all but essential businesses and asked the majority of Americans to observe recommendations to shelter-in-place and self-isolate with their immediate families.

These measures undertaken voluntarily have led to the quickest and broadest decline in economic activity that we have experienced in the United States at least since the great depression of the early 1930s.  These broad efforts have curtailed employment in many industries including those related to travel, live events, and restaurants as well as many others.  As of the end of April 2020, a bit over 30 million people had filed for initial unemployment claims just in the 6 weeks prior.

In response to the predictably severe economic impact, the United States government has taken unparalleled steps to enact fiscal and monetary measures to mitigate some of the severe economic impacts of social distancing.  Most notably, Congress passed several major legislative initiatives, including the original $2 trillion CARES Act (Coronavirus Aid, Relief and Economic Security Act) signed on March 27, 2020, which has numerous provisions to immediately help many Americans and affected businesses. Subsequently, Congress added another $484 billion in additional support in the Paycheck Protection Program and Health Care Enhancement Act which was passed on April 24, 2020 bringing total support to nearly $3 trillion.

Here are some of the notable provisions of these laws and how they are designed to benefit individuals and businesses to get through this challenging time.

Direct Payment to Americans (Stimulus Checks)

Direct payments of up to $1200 for single filers and $2400 for couples who file jointly are being sent directly to many Americans. In addition, a payment of $500 for each child under the age of 17 is also included in these direct payments.

These amounts are phased out for those with adjusted gross incomes of:

  • $75,000 to $99,000 for individual taxpayers
  • $150,000 to $198,000 for couples filing joint tax returns
  • $112,500 to $146,500 for heads of household

Direct payment checks are being sent out starting on April 15 and expected to continue to May 31. Taxpayers do not need to apply; the IRS will use information on their 2019 or 2018 tax returns to issue these support payments to all qualifying households.

Millions have already received their Economic Impact Stimulus Payments.  Some individuals may have to provide additional information to the IRS to get their payments.  The IRS has created an online resource that is updated daily to allow individuals including non-files to get and check-on the status of their stimulus payments at https://www.irs.gov/coronavirus/economic-impact-payments

Help for Small Businesses

In the original CARES act, $350 billion was set aside to provide low interest forgivable loans to small businesses to prevent layoffs and business closures during the pandemic. Companies with 500 or fewer employees who maintained their payroll during the coronavirus outbreak were offered two year loans (called Paycheck Protection Program or PPP loans).  This initial allocation for small business support ran out quickly, so the Congress extended the pool of available funds on April 24, 2020.

Businesses using the funds within 8 weeks of the date the loans were funded to cover payroll and other approved categories of expenses and could then apply for partial or complete loan forgiveness of those amounts.

Enhanced Unemployment Benefits

To assist individuals laid off or furloughed by their employers, the Cares Act allocated $250 billion to cover extra unemployment insurance payments, the Act also expanded unemployment eligibility to independent contractors and freelancers, and offered an additional $600 per week to each person filing for unemployment for an extra four months, over and above what state programs would have normally provided in unemployment pay.

This provision provides extra cash flow to affected families though the ability of some states to handle a surging volume of unemployment applications has overwhelmed their administrative capabilities at least initially.

Benefits for Individuals with Retirement Accounts

Required minimum distributions on all qualified retirement accounts are now waived for 2020.  This means that if you are over the age of 72, you do not need to take your required minimum distribution from your retirement plan account this year – this allows you to skip one year of taxes and defer the withdrawal which helps to grow the tax-free compounding of your account for one year and prevents you from having to draw money out of your account when the market as been temporarily impacted by the coronavirus crisis (assuming you don’t need the money due to economic hardship this year).

In addition, the Cares Act contains special provisions for “coronavirus-related distributions”.  You qualify for a coronavirus related distribution if:

  • If you, a spouse or dependent have been diagnosed with COVID-19 or
  • If you have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off or having work hours reduced due to COVID-19 or you have been affected by the closing of or reduced hours of a business owned or operated by the individual

Normally, individuals with retirement assets such as IRA accounts or 401k plan assets are subject to a penalty in addition to taxes due if they withdraw funds from these plans early (typically prior to age 59 ½).

In order to help families affected as outlined above who have retirement savings, the Cares Act included a provision to allow withdrawal up to $100,000 from their qualified retirement accounts, retroactive to Jan 1, 2020, without paying the 10% IRS penalty that would normally apply for early withdrawals.

Unless returned, withdrawals would still be taxed eventually, but that tax burden is allowed to be spread out over the next three years.  In addition, those taking advantage of this provision are also permitted to return the amount withdrawn from their plans within three years, in which case they could completely avoid having to pay the tax. 

If utilized, the withdrawal would be equivalent to an interest free loan to yourself as long as it was returned back into the account within three years.  In addition, the withdrawal could be taken from a 401(k) plan (if allowed) but then returned to your IRA plan effectively allowing a type of transfer for your workplace 401(k) plan to your own IRA.

If you have loans that you previously borrowed from your retirement plan, you may be able to stop making a payment on those loans for up to one year.  In addition, if your retirement plan – such as a 401k plan – allows loans then the maximum loan size has doubled (from $50,000 normally) to $100,000 until September 23, 2020.

Benefits for Student Loan Borrowers

There is good news if you have federal student loans outstanding. Payments and interest on federal student loans, including direct loans, Perkins loans and Federal Family Education Loans owned by the U.S. Department of Education, are automatically suspended from March 13 through Sept. 30, 2020. That means eligible borrowers do not have to make payments during this period.

Keep in mind, the CARES Act only applies to federal student loans. Other private student loans may still have to be paid back in a timely fashion unless the private lender makes some other direct offer of forbearance to the borrower.

Tax Deadline Extension

The IRS has delayed the tax-filing deadline for 2019 from April 15 to July 15.   This means that if you owe money, you don’t need to file your tax return until this deadline and you don’t need to make payments until then.  This extension applies to all tax filers including individuals, businesses, trusts, estates and more.  Payments will not incur additional penalties or interest up to the new deadline.  Note that since the IRA contribution deadline is the tax deadline, the above extension means that the IRA contribution deadline has also been extended.

Many states have followed suit with an equivalent extension, but some have not, so you need to check your own state deadline as well.

For the Federal extension there is no need to file an extension request; the delay to July 15 is automatic.  However, you will still need to file an extension if you need additional time beyond the July 15 automatic extended filing date.

Net Operating Loss Carryback Provision for Businesses

Under the Cares Act, a net operating loss (“NOL”) that arises in a tax year beginning in 2018, 2019 or 2020 can be carried back for five years.  The Act also allows for NOLs arising before January 1, 2021 to fully offset income.

Also, the Act removes limits enacted in 2017 whereby NOLs were limited to 80% of taxable income and could not be carried back to reduce income in prior tax periods.  By allowing carryback of losses for up to five years, the Act allows corporate tax payers to benefit from NOL carrybacks to years when the corporate tax rate was as high at 35%.  This provision may also apply to pass through entities which pass losses through to their individual owners.

This is a relatively advanced provision of the Act and impacted tax payers may be able to file amended tax returns and receive income tax refunds on taxes previously paid as a result of this provision.  If this provision applies to you, consult your tax professional as it creates significant tax planning and deduction opportunities for eligible business owners including those with substantial real estate and capital equipment assets.

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