The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020. The bill provided over $2 trillion in relief funds to American individuals and families, and businesses as well. The package was designed to stimulate the United States economy from the shock of the coronavirus pandemic, which forced many businesses to close and lay off their workers.

It provides direct economic assistance for American households, as well as loan provisions to keep small businesses open and their workers employed. Direct Economic Impact Payments of $1,200 were made to taxpayers and Social Security recipients earning less than $99,000 (individual)/$198,000 (married filing jointly), with an additional $500 per child under 17.

1. Payroll Protection Program (PPP) and Payroll Incentives

The CARES Act also established the PPP, which was implemented by the Small Business Administration (SBA) with assistance from the US Department of the Treasury. Up to $659 billion was authorized to pay up to 8 weeks of payroll, including benefits, for businesses. In addition the money could be used for mortgage/rent and utilities.

The program came in the form of loans that are forgivable if at least 75% of the money went for payroll. As long as the business maintained the same salaries and headcount as before the coronavirus pandemic occurred. The loans were provided through authorized firms such as SBA lenders and other banks and credit unions.

Companies were offered a number of incentives to maintain their payroll as well. Small businesses experiencing hardship due to the pandemic were able to use a 50% credit on up to $10,000 of wages through the end of 2020.

Plus, the Social Security tax normally due on employee wages can be deferred for two years, with half being due by the end of 2021 and the other half at the end of 2022.

2. Waived Required Minimum Distributions (RMDs)

As a reminder, RMDs are taken from traditional retirement accounts such as 401(k)s or IRAs that weren’t taxed at the time of contributions. This ensures that the money will eventually generate some tax income for Uncle Sam. Therefore, the withdrawals are federally taxed at ordinary income. Some states also levy state income tax on RMDs.

The age at which RMDs are required was recently increased from 70 ½ to age 72. Individuals who inherit these types of accounts are also required to pay RMDs.

This year, anyone who might otherwise have been required to take an RMD has that requirement waived. In other words, those who don’t need their RMDs to supplement their income for the year can forego the taxes on it in 2020.

3. Coronavirus-related distributions (CRDs)

The CARES Act also provides rules for taking up to $100,000 from a tax-deferred account without paying the normal 10% early-withdrawal penalty. Income taxes will still be due on the withdrawals, but those payments can be spread out over three years.

Anyone who has been diagnosed with COVID-19, or whose dependent or spouse was diagnosed, qualifies for a CRD. Investors who have been laid off or can’t find childcare or otherwise suffered negative financial consequences due to coronavirus are also eligible to make a CRD. This applies to business owners who have been forced to close or reduce their hours of business due to the pandemic.

Normally, when investors withdraw money from a retirement account, they have 60 days to repay it without incurring penalties or taxes. CRDs can be repaid within three years. If the money is repaid, the amount included in income during the previous years can be removed through filing a corrected return.

Any amount up to the $100,000 limit taken as a CRD will not be subject to the usual mandatory 20% withholding.

4. Tax Changes For Corporate and Pass-Through Entities

Do you own or co-own a corporation such as a C-corp or S-corp? Or a “pass-through” entity like a partnership or LLC, so-called because the income earned by the entity passes through to the owners’ tax returns? If so, you might be in luck, depending on your tax situation.

Previously, the Tax Cuts and Jobs Act (TCJA) limited pass-through owners who had business losses. They could not offset more than $250,000 individual/$500,000 MFJ of non-business losses.

  • A married business owner whose LLC had a business loss of $1,000,000 could only offset $500,000 of personal income, generated from investments or other non-business-related sources. The CARES Act eliminates the limit for 2020 so that all the business losses can be used to offset other income.
  • A similar provision was enabled in the CARES Act for corporations. Previously, business losses could be used to offset the current year’s taxes. The remainder could be carried forward to offset future income. Under the CARES Act, firms can use the losses to offset tax payments made up to five years ago.
  • The TCJA wanted to make corporate debt less attractive, so the amount a corporation could deduct for interest payments was limited to 30% of the firm’s earnings before interest, taxes, depreciation and amortization (EBITDA). The CARES Act increased the limit to 50% of EBITDA. A corporation earning $1 million previously would only have been able to deduct $30,000. But this year it will be able to take $50,000 instead.

Summary

The CARES Act provided direct payments as well as other tax benefits to many American taxpayers. You may want to check with your adviser and tax professional to determine if there’s a way for you to take advantage of them.

Give us a call at 703-425-0700 if you want to discuss.