The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed into law on Friday, March 27th. This act is the third phase of legislation passed in recent weeks specifically addressing the ongoing coronavirus (COVID-19) pandemic. The CARES Act provides $2 trillion of emergency relief to individuals, businesses, state and local governments, and hospitals. This article summarizes the most pertinent aspects specifically related to individuals and small businesses.
For Individuals and Families
The most prominent elements of the CARES Act for individuals and families are:
Recovery Rebates (cash payments): The recovery rebates provide a one-time cash payment up to $1,200 per individual ($2,400 per couple), depending on income level (defined as adjusted gross income, or AGI). The rebate also includes an additional $500 per child.
- Income limitations – Individuals earning over $75,000/year ($150,000/year if married filing jointly) will receive a reduced or no rebate.
- The rebate amount is determined based on your latest filed tax return (2019 or 2018).
Expanded Unemployment Insurance: The CARES Act bolsters Unemployment Compensation (UC) insurance by $600 per week to cover gaps in income not usually covered by UC. It specifically:
- expands unemployment insurance to furloughed/reduced hours employees;
- eliminates 1-week waiting period of UC benefits; and
- expands coverage period to 13 weeks.
RMDs Suspended for 2020: Required Minimum Distributions (RMDs) are not required in 2020 for defined contribution plans, applying to 401(k)s, 403(b)s, and IRAs.
- The RMD suspension applies to both retirement account owners and beneficiaries.
- If you have already taken your 2020 RMD and do not need it, please consult your financial advisor as soon as possible.
- While RMDs are not required in 2020, voluntary distributions are still allowed, including Qualified Charitable Distributions (QCDs) for individuals older than 70 ½.
Loans & Distributions from Retirement Accounts: While plan sponsors can choose whether to adopt these provisions, for those in urgent need of money, retirement accounts can be a source of last resort. The CARES Act eases the burden of accessing these funds by:
- providing a waiver of the 10% early distribution penalty on amounts up to $100,000; and by
- increasing the maximum loan amount from employer-sponsored retirement plans from $50,000 to $100,000. Additionally, repayments of the loan may be delayed.
Charitable Contributions: The CARES Act increases the tax deduction limit for cash contributions to public charities from 60% of income (AGI) to 100% of AGI in 2020.
- For 2020, this provision effectively suspends the normal income limitation on cash contributions to qualified public charities.
- Important note: this provision only applies to cash contributions and not to contributions of stock, real estate, or any other non-cash item. The Act specifically prohibits such contributions from funding either Donor-Advised Funds (DAFs) or 509(a)(3) “supporting organizations.”
Coordinate with your financial and tax advisors for additional details and personalized planning.
Qualified Expenses for HSAs and FSAs: The definition of “qualified medical expenses” is expanded to include over-the-counter medicines and menstrual care products for Health Savings Accounts (HSAs) and for healthcare Flexible Spending Accounts (FSAs).
2019 IRA & HSA Contribution Deadline Extended to July 15: While not specifically addressed in the CARES Act, it is worth mentioning the IRS recently clarified that the deadline for IRA and HSA contributions for the 2019 tax year is extended to July 15, 2020 (same as the extended 2019 federal tax deadline). So, it is not too late to make a 2019 contribution!
For Small Businesses & Small Business Owners
The CARES Act will provide over $370 billion to small businesses and small business owners.
Forgivable SBA Loan Program (the Paycheck Protection Program): $349 billion is allocated for loans to businesses and to nonprofit entities with fewer than 500 employees (other rules and exceptions apply).
- The program is administered by your bank or financial institution and guaranteed by the Small Business Administration (SBA).
- Each business may receive a loan up to 2.5 times monthly payroll (limited to $10 million).
- Loans can be used for business operations to include payroll, healthcare, other compensation, mortgage/rent, utilities, and interest on other debt obligations.
- Loans may be completely or partially forgiven if used within a certain timeframe and if employment and wages are maintained (other rules apply).
Expanded SBA Disaster Loan Program: The CARES Act expands the current SBA Disaster Loan Program to a broader scope of businesses and deems that all states qualify for this loan program based on the economic damage sustained from COVID-19.
Net Operating Losses (NOL): The CARES Act expands the use of net operating losses and excess farm losses experienced in tax years 2018, 2019, and 2020, potentially accelerating the tax benefits of such losses.
For additional details and tax-related coverage related to the small business provisions in the CARES Act, please click here to read our companion documents, which provide additional details and the application process for the SBA loans. Click here to read the CARES Act in its entirety.
Warren Averett Asset Management is neither a law firm nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. Please contact your advisor to address your unique circumstance.