On Friday, March 27th President Trump signed into law the CARES Act (Coronavirus Aid, Relief, and Economic Security).  This act is aimed to provide relief to individuals and small businesses that were negatively impacted by the COVID-19 pandemic.  In this blog post, we want to outline the 5 most notable provisions that will impact individuals and small businesses.

1. Recovery Rebate for Individuals – individuals and families that meet certain income criteria will receive direct payments from the federal government. The CARES act provides direct payments of $1,200 to each individual (married couples are eligible for $2,400).  Taxpayers will also receive an additional $500 for each child under the age of 17.  Here is the catch.  This amount is reduced depending on your adjusted gross income from your 2019 tax return (or 2018 tax return if you have not yet filed your 2019 return).  For those filing their taxes as a single individual, you will receive the full $1,200 if your adjusted gross income (AGI) was under $75,000 in 2019 (or 2018 if you have not filed your 2019 return).  For married couples, this number jumps to $2,400 (if your adjusted gross income is under $150,000).  For those with income above these thresholds you may still receive an adjusted payment.  For every $100 that your adjusted gross income is above these thresholds, your payment will be reduced by $5.  It is completely phased out for single individuals with AGI above $99,000 ($198,000 for married filers).

What if your income in 2020 will be/has been substantially reduced due to COVID-19 related issues?  Let’s say an individual had an AGI of $100,000 in 2019 but lost their job due to COVID-19 related circumstances.  More likely than not that this person’s adjusted gross income would be under the $99,000 threshold in 2020.  The good news is that this person could still receive relief from the government in the form of a refundable tax credit on their 2020 tax return.  For example, if your income were to drop below $75,000 in 2020 (but your income in 2019 was above the aforementioned $99,000 threshold) you would receive the full $1,200 as a refundable tax credit on your 2020 tax return.  While you won’t get the immediate cash flow relief others get, all is not lost for those who have had some income variation over the last few years.

One other provision in the CARES act makes it so that the relief rebate check cannot be clawed back.  In other words, if your income was $75,000 in 2019, and you received the full $1,200, the government cannot come after your if your income increases above these thresholds in 2020.

2. Coronavirus-Related Distributions – the CARES act creates a provision that changed many aspects of qualified retirement plans such as IRA’s and 401(k)’s. Specifically, if you, your spouse, or dependent, are diagnosed with COVID-19 or have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or have reduced hours then the 10% penalty on early distributions from your IRA or 401(k) is waived.  Also, the income from these distributions (and thus the income taxes owed) will be split evenly over the next three years (unless you elect to include all the income on your 2020 tax return).

Another provision in the CARES bill waived the Required Minimum Distributions on retirement accounts during 2020.  This provision covers traditional IRAs, 401(k) plans, 403(b) plans, and even beneficiary IRAs.  This was put in place so people wouldn’t be forced to sell stocks after the steep market decline and could significantly lower 2020 taxes.

3. Paycheck Protection Program – it is no surprise that there were many provisions in the CARES act relating to small businesses. Small business owners have been greatly impacted by government actions in response to COVID-19, and this has had a ripple effect on the employees of small businesses.  To provide relief to small businesses, the Small Business Association (SBA), is fully guaranteeing loans to small businesses (the SBA had typically only guaranteed a percentage of the loan to a small business).  Also, the government will forgive 100% of the amounts spent on payroll costs (excluding prorated amounts for individuals with compensation over $100,000), rent, certain utilities, and group health insurance premiums.  However, there is a catch.  The business must have the same number of employees from February 15, 2020 – June 30, 2020, as they did during that same period last year (or from 1/1/2020 – 2/15/2020).  Also, no employee with compensation under $100,000 may have a reduction of more than 25% of the compensation from the most recent quarter.

To be eligible for this loan, the business must have less than 500 employees and must also give a good-faith certification that the loan is necessary due to the uncertainly of current economic conditions caused by COVID-19.  The maximum amount of this loan equals the lesser of $10 Million or 2.5X the average monthly payroll costs (excluding employee compensation over $100,000).  These loans also have a maximum duration of 10-years and a maximum interest rate of 4%.  One other positive is that initial payments on the loans will be deferred for 6-12 months.

In addition to small business loan forgiveness, the CARES act has also expanded provisions for Net Operating Loss deductions and created tax credits for businesses who have seen their revenues dip below certain thresholds.

4. Unemployment Compensation – the CARES act expanded and enhanced state unemployment programs in several ways. The CARES act created a “Pandemic Unemployment Insurance” program for workers who do not qualify for state unemployment insurance (i.e. self-employed individuals).  The CARES act also created a “bonus check” provision in which state unemployment benefits are bumped up by $600/week.  This $600/week is in addition to your state’s unemployment benefit.  Another provision in the CARES act waives the initial waiting period before you can claim unemployment benefits (the federal government will actually pay the first week of unemployment benefits for those affected).  Finally, the CARES act provides for 13 extra weeks of unemployment insurance for those that have been negatively impacted by the pandemic.

5. Student Loan Provisions – the CARES act includes a few provisions that will provide relief to student loan borrowers. The most notable provision is that no payments on Federal student loans are required until after September 30, 2020.  Also, during this time, no interest will accrue on this debt.  The caveat is that you must proactively stop your payments.  Therefore, if you are set up on autopay, you will need to proactively cancel your autopay until after September 30, 2020.  Another notable provision is that these next 6 months will still count towards loan forgiveness programs, such as PSLF, although no payments are required.

While there are over 300 pages to this bill, we wanted to outline the common provisions that will have an impact on many individuals and small businesses.  If you would like to discuss how the CARES bill may impact your financial situation please contact us here.