CARES Act

The Coronavirus Aid, Relief and Economic Security (CARES) Act, the third item of federal legislation enacted in response to the unprecedented COVID-19 pandemic, was passed by Congress on March 27th and swiftly signed into law the same day.

The scope of the relief bill is far-reaching, providing financial assistance through channels ranging from additional funding for medical institutions to emergency grants for small businesses to targeted relief via federal tax law changes. These tax law changes, many of which were given retroactive effect, will help taxpayers and businesses cope with cash flow issues over the coming weeks and months by reducing the tax burden and/or providing a larger refund than would be allowed under pre-CARES Act law.

In this article, we are focusing on the individual provisions within the law.

Charitable Contribution Deductions

Taxpayers that do not itemize can now take a new $300 above-the-line tax deduction for charitable contributions. The contribution must be made in cash to a qualified organization to qualify. Taxpayers that do itemize will benefit from increased limits on charitable contributions. The previous limitation of 60% of modified adjusted gross income doesn't apply to cash contributions made, generally, to public charities in 2020. No connection between the contributions and COVID-19 activities is required. Contributions to a supporting organization or a donor-advised fund do not qualify for either of these deductions.

Permissible Withdrawals from Retirement Plan Funds

The CARES Act allows participants of qualified retirement plans (including individual retirement accounts (IRAs)) to withdraw up to $100,000 from qualified retirement accounts for COVID-19 related purposes without incurring the 10% penalty on early distributions.  Any individual who receives such a COVID-19-related distribution may repay the distribution to the eligible retirement plan or IRA within three years of taking the distribution, in one or more contributions.

If the participant or IRA owner does not intend to repay the withdrawal, they may elect to include the withdrawal in income ratably over a three-year period beginning with the year in which the distribution was taken.  

COVID-19 related reasons include distributions from January 1, 2020, through December 31, 2020, to an individual (a) diagnosed with COVID-19, (b) whose spouse or dependent is diagnosed with the virus, or (c) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, working reduced hours, being unable to work due to lack of child care, closing or reducing hours of a business, or other factors as determined by the Treasury Department.

Retirement Plan Loans Expanded  

Prior to the CARES Act, retirement plan loans were capped at the lesser of (i) $50,000; or (ii) the greater of fifty percent (50%) of the participant's vested accrued benefit or $10,000.  But effective March 27, 2020, through December 31, 2020, participants may elect to take a plan loan in an amount up to the lesser of (i) $100,000; or (ii) the greater of one hundred percent (100%) of the participant's vested accrued benefit or $10,000.  The Act also delays the loan repayment date by one year for any loans with due dates between March 27, 2020, and December 31, 2020.

In order to take advantage of these expanded loan amounts and loan payment deferrals, the individual must be a qualified individual who was: (a) diagnosed with COVID-19, (b) whose spouse or dependent is diagnosed with the virus, or (c) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, working reduced hours, being unable to work due to lack of child care, closing or reducing hours of a business, or other factors as determined by the Treasury Department.

If an employer maintains a qualified retirement plan with a loan option, the plan must be amended to adopt these loan expansion provisions by December 31, 2022, to maintain its qualified status.

Required Minimum Distributions Suspended

The CARES Act temporarily suspends all required minimum distributions due from qualified retirement plans and individual retirement accounts in calendar year 2020.  Specifically, any required minimum distributions due from January 1, 2020, through December 31, 2020, are waived.  This includes distributions that would have been required by April 1, 2020, due to the account owner's having turned age 70 1/2 in 2019.

IRAs and HSAs

Individual taxpayers are allowed to make contributions to an IRA for 2019 until July 15, 2020. 

You may also make contributions to your health savings account ("HSA") or Archer Medical Savings Account ("MSA") for 2019 at any time up to July 15, 2020. 

Student Loans

Borrowers with federal student loans are permitted to defer payments penalty free until September 30, 2020. Borrowers who are not in default will automatically have their interest rate set to 0% for at least 60 days.

HSA and MSA Accounts

For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren't paid under a prescription (i.e. - "over the counter" medications). And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.

Excess Business Losses 

The limitation imposed by the Tax Cuts and Jobs Act of 2017 (TCJA) on the deduction of excess business losses will not apply for tax years 2018-2020. The excess business loss is the excess of the taxpayer's aggregate trade or business deductions for the year over the sum of the taxpayer's aggregate trade or business gross income or gain plus $250,000 (single) or $500,000 (jointly). This change suggests filing an amended return if this limitation was applied on a tax return for 2018 or 2019.

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Employee Retention Credit

The Treasury Department and the Internal Revenue Service have launched the Employee Retention Credit, designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19, for a maximum credit of $5,000 per employee.

Does my business qualify to receive the Employee Retention Credit?

The credit is available to all employers regardless of size, including tax-exempt organizations. There are only a few exceptions: State and local governments and their instrumentalities, self-employed individuals and small businesses receiving Small Business Interruption Loans under the Paycheck Protection Program (PPP).

Qualifying employers must fall into one of two categories:

  1. The employer's business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  2. The employer's gross receipts are below 50% of the comparable quarter in 2019. Once the employer's gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

These measures are calculated each calendar quarter.

How is the credit calculated?

The amount of the credit is 50% of qualifying wages (including health plan expenses) paid up to $10,000 in total, so that the maximum credit for qualified wages paid to any employee is $5,000. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit.

How do I know which wages qualify?

Qualifying wages are based on the average number of a business's employees in 2019.

Employers with less than 100 employees: For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed.  If the employees worked full time and were paid for full time work, the employer still receives the credit.

Employers with more than 100 employees: For employers who had more than 100 employees on average in 2019, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

Are any wages not eligible?

Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus, nor for wages taken into account for the employer credit for paid family and medical leave. No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee.

I am an eligible employer. How do I receive my credit?

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

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CARES ACT Changes Retirement Plan and Charitable Contribution Rules

As we all try to keep ourselves, our loved ones, and our communities safe from the coronavirus (COVID-19) pandemic, you may be wondering about some of the recent tax changes that were part of a tax law passed on March 27.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act contains a variety of relief, notably the “economic impact payments” that will be made to people under a certain income threshold. But the law also makes some changes to retirement plan rules and provides a new tax break for some people who contribute to charity.

Waiver of 10% early distribution penalty

IRAs and employer sponsored retirement plans are established to be long-term retirement planning accounts. As such, the IRS imposes a penalty tax of an additional 10% if funds are distributed before reaching age 59½. (However, there are some exceptions to this rule.)

Under the CARES Act, the additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with COVID-19 or is economically harmed by it. Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread-out.

Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.

Waiver of required distribution rules

Depending on when you were born, you generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts — including traditional IRAs, SEP accounts and 401(k)s — when you reach age 70½ or 72. These distributions also are subject to federal and state income taxes. (However, you don’t need to take RMDs from Roth IRAs.)

Under the CARES Act, RMDs that otherwise would have to be made in 2020 from defined contribution plans and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70½ in 2019.

New charitable deduction tax breaks

The CARES Act makes significant liberalizations to the rules governing charitable deductions including:

  • Individuals can claim a $300 “above-the-line” deduction for cash contributions made, generally, to public charities in 2020. This rule means that taxpayers claiming the standard deduction and not itemizing deductions can claim a limited charitable deduction.
  • The limit on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020. Instead, an individual’s eligible contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 is required.

Far beyond

The CARES Act goes far beyond what is described here. The new law contains many different types of tax and financial relief meant to help individuals and businesses cope with the fallout.

© 2020

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Pandemic Unemployment Assistance (PUA)/Compensation Programs

The CARES Act provides for federal funding for unemployment assistance to individuals directly and indirectly affected by COVID-19, and expands coverage to include individuals who are not typically eligible for unemployment assistance such as independent contractors, the self-employed and those with limited work histories.

Who is a covered individual?

The law covers individuals who cannot work because: they have been diagnosed with Covid-19 and cannot work; they need to care for a family member who has been diagnosed with Covid-19; they need to care for a family member whose school, day care or care facility has been shut down because of Covid-19; they are in a self-quarantine, health provider-ordered quarantine or cannot get to work because of a quarantine; they were about to start a new job and cannot because of Covid-19; or they had to quit because of the above situations. It will also cover employees whose employer shut down because of Covid-19. Workers are not eligible for PUA if they can either telework with pay or are receiving paid sick days or paid leave.

Who is eligible due to the program expansion?

The program has been expanded to include self-employed individuals, part-time employees, freelancers, gig workers, and independent contractors. Individuals already receiving unemployment benefits are eligible for an increase in benefits for up to 18 weeks. Individuals who have exhausted their unemployment insurance benefits and are not eligible for emergency unemployment compensation are eligible. Individuals who are able to telework with pay and who are receiving paid sick leave or other paid benefits are not eligible for assistance.

How much?

Under this provision, the benefit is equal to the amount that would normally be provided under state law plus an additional $600 through July 31, 2020. For self-employed and individuals not normally eligible, the benefit amount is equal to one-half of the state's average weekly UI benefit. The extra $600 per week provided by the government will last up to 4 months.  This benefit will be taxable like regular unemployment benefits.

Is there a waiting period?

No; the federal government will provide temporary funding of the first week of regular unemployment for states with no waiting period.

How long will I receive benefits?

Most states provide 26 weeks of benefits. This bill will provide an additional 13 weeks for participating states, a sum of up to 39  weeks in most states. Benefits cannot exceed 39 weeks.

When will I receive it?

Benefits are available immediately (i.e., no one-week waiting period). The increased (extra $600) benefit would be available from the date the state enters into an agreement until July 31, 2020.

How do I apply?

In order to apply for unemployment, you should fill out an application through your state's unemployment website.  

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Families First Coronavirus Response Act: Employer Paid Leave Requirements

The Families First Coronavirus Response Act (FFCRA or Act) requires covered employers to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. This Act is effective April 1, 2020. Each covered employer must post in a conspicuous place on its premises a notice of FFCRA requirements. We have provided an image of the poster the Department of Labor has provided below which provides the FFCRA requirements. This poster can be found at: https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf

A covered employer is defined as certain public employers, and private employers with fewer than 500 employees. Small businesses with fewer than 50 employees may qualify for exemption from the requirement to provide leave due to school closings or child care unavailability if the leave requirements would jeopardize the viability of the business as a going concern. 

As always, please contact us if you have any questions.

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