The Quintessential CARES Act And Stimulus Listicle: What You Need To Know
2020 has been a colossal mess. For the first time in 100 years, we’ve encountered a NON-manmade economic crisis. The economic punch delivered by the coronavirus pandemic is staggering; dropping US GDP by the second largest decline in history, second only to the Great Depression. According to a McKinsey study, the percentage of GDP spent in stimulus is already triple the amount spent in the Great Recession.
Part of this is the massive stimulus from the CARES Act and other stimulus programs, with apparently, more to come. Here’s a quick overview of some of the stimulus programs and what to know about them.
Economic Impact Payments. Everyone who filed a 2018 or 2019 tax return and had income under a specific amount (generally $150,000 for couples or $75,000 for singles) received a tax-free check (or deposit) for somewhere between $1,200 to more than $2,400. There is talk in DC of another round of stimulus payments, with potentially a lower income threshold.
Extra Unemployment (PUA). The additional $600 a week Pandemic Unemployment Assistance (PUA) is scheduled to expire on July 31, 2020. There is movement afoot to reinstate this, possibly at a lower level. Recognize unemployment is taxable.
Foreclosure/Eviction Moratorium. The moratorium on evictions and foreclosures, expired on July 24, 2020.
Student Loans. Student loan payments are automatically stopped for the period 03/13 through 09/30/2020. Similarly, the interest rate on certain loans is set to 0%.
COVID 401(k)/IRA Withdrawals. There are special no-penalty withdrawals available for up to $100,000 (per spouse) from qualified plans and IRAs. The tax on the distribution is spread over 3 taxable years (2020, 2021, and 2022). If you pay it back by 12/31/2022, there is no tax (any taxes paid are refunded). This expires at the end of 2020.
Expanded 401(k) loans. The amount you can borrow from a 401(k) plan has been increased from $50,000 to $100,000. Recognize 401(k) loan interest is paid back to your account and is not tax deductible. Loans aren’t available for more than 5% owners.
Required Minimum Distributions (RMD) Suspension. For 2020, people are not required to take their Required Minimum Distribution (RMD) from an IRA or qualified plan. This applies to regular IRAs and inherited IRAs. Already took an RMD? You have until 08/31/2020 to pay it back and not pay taxes on it. Lots of tax planning opportunities with the RMD suspension, like Roth conversion.
Paycheck Protection Program (PPP). The big one is the Paycheck Protection Program, or PPP. It’s a good idea, allowing businesses with less than 500 employees to borrow a forgivable loan covering about 2.5 months of certain payroll and other expenses. After a few missteps, the program is still in effect with greatly broadened forgiveness provisions. Here is link to an AICPA forgiveness calculator and borrowers should note there is a short form for forgiveness as well as a comprehensive application. Make sure to get the forgiveness app in before 12/31/2020, sooner, if you can. There appears to be an appetite in DC to add more restrictions to the program.
Economic Injury Disaster Loans (EIDL). EIDL is another SBA loan program, which formerly provided an immediate grant for up to $10,000. As of the writing of this article, the $10,000 emergency grant is no longer available. You can get a PPP and EIDL, but the forgiveness is coordinated on the two programs so if you get $10,000 of EIDL forgiveness form a former loan, you reduce the PPP forgiveness by $10,000.
Payroll Taxes. The employer portion of FICA is deferred for the remainder of 2020. This allows an employer to effectively save the employer portion of payroll taxes for the employees. Many commentators warn that deferring payroll taxes does not amount to forgiveness. Given the draconian penalties associated with failing to pay the employer portion of employee payroll taxes, business owners may want to carefully discuss possible ramifications of this option with their CPA.
Employee Retention Credit. The Employee Retention Credit (ERC) gives employers a payroll tax credit for eligible employees equal to 50% of the qualified wages. The credit is limited to $5,000 per employee for all calendar quarters, paid by the employer after March 12, 2020, and before January 1, 2021, if:
- Operations were fully or partially suspended in any calendar quarter by a federal, state or local government order due to the COVID-19 virus, or
- The employer experienced a substantial decline in gross receipts during any calendar quarter beginning in the first calendar quarter of 2020.
Which employees’ wages are considered qualified wages for purposes of this credit depends upon the average number of employees of the employer during 2019. Additionally, the following wages are excluded when calculating this credit: (i) emergency paid sick leave and family leave (reimbursed under the FFCRA); and, (ii) wages reimbursed under the work opportunity credit with respect to the employee. An eligible employer who receives a covered SBA 7(a) loan (including a PPP loan) is not eligible for this credit.
NOL. The ‘Hidden Stimulus’ in the CARES Act is the reinstatement of the Net Operating Loss (NOL) carryback. Under the Tax Cuts and Jobs Act (TCJA), NOLs could only be carried forward and then only at 80%. The CARES Act allows NOLs to be carried back 5 years. This presents the interesting possibility of carrying back a loss to a higher tax-bracket year. For example, the maximum C-corp rate in 2020 is 21%, whereas in 2015 it was 35%. Used this way, the NOL would produce an instant tax refund. Combine NOLs with other provisions like full-expensing, and 2020 abounds with massive tax planning opportunities. The same applies to Excess Loss Limitations for pass-through owners. Under TCJA, these were limited, but now a pass-through owner can fully utilize losses against any other income.
QIP. Qualified Improvement Property, or QIP, was a weird ‘glitch’ in the TCJA that was subsequently fixed in the CARES Act. This provision allows certain improvements to property, like air conditioning or alarm systems to be written off over 15 years instead of being added to the basis of the property. In addition, QIP is available for bonus deprecation, so you can use it for full expensing and an immediate write-off. This could generate a NOL, which could generate an income tax refund from prior years.
Bottom Line. To say this is an interesting year would be an understatement. As an individual, perhaps it time to get ready for the ‘after stimulus’ chapter of this saga. As a business owner, it’s important that you and your CPA carefully look at the special provisions effective for this year. Time is ticking, so my advice is to start sooner rather than later. By the way, there’s an election coming up as well, which might change taxes again. If you have questions, drop me an email at email@example.com; I’ll do my best to answer them.