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.

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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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The New COVID-19 Law Provides Businesses with More Relief

On March 27, President Trump signed into law another coronavirus (COVID-19) law, which provides extensive relief for businesses and employers. Here are some of the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). 

Employee retention credit

The new law provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.

Employer eligibility. The credit is available to employers with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.

The credit isn’t available to employers receiving Small Business Interruption Loans under the new law.

Wage eligibility. For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether an employee is furloughed. For employers with more than 100 full-time employees last year, only the wages of furloughed employees or those with reduced hours as a result of closure or reduced gross receipts are eligible for the credit.

No credit is available with respect to an employee for whom the employer claims a Work Opportunity Tax Credit.

The term “wages” includes health benefits and is capped at the first $10,000 paid by an employer to an eligible employee. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.

The IRS has authority to advance payments to eligible employers and to waive penalties for employers who don’t deposit applicable payroll taxes in anticipation of receiving the credit.

Payroll and self-employment tax payment delay

Employers must withhold Social Security taxes from wages paid to employees. Self-employed individuals are subject to self-employment tax.

The CARES Act allows eligible taxpayers to defer paying the employer portion of Social Security taxes through December 31, 2020. Instead, employers can pay 50% of the amounts by December 31, 2021 and the remaining 50% by December 31, 2022.

Self-employed people receive similar relief under the law.

Temporary repeal of taxable income limit for NOLs

Currently, the net operating loss (NOL) deduction is equal to the lesser of 1) the aggregate of the NOL carryovers and NOL carrybacks, or 2) 80% of taxable income computed without regard to the deduction allowed. In other words, NOLs are generally subject to a taxable-income limit and can’t fully offset income.

The CARES Act temporarily removes the taxable income limit to allow an NOL to fully offset income. The new law also modifies the rules related to NOL carrybacks.

Interest expense deduction temporarily increased

The Tax Cuts and Jobs Act (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.

The CARES Act temporarily and retroactively increases the limit on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. There are special rules for partnerships.

Bonus depreciation for qualified improvement property

The TCJA amended the tax code to allow 100% additional first-year bonus depreciation deductions for certain qualified property. The TCJA eliminated definitions for 1) qualified leasehold improvement property, 2) qualified restaurant property, and 3) qualified retail improvement property. It replaced them with one category called qualified improvement property (QIP). A general 15-year recovery period was intended to have been provided for QIP. However, that period failed to be reflected in the language of the TCJA. Therefore, under the TCJA, QIP falls into the 39-year recovery period for nonresidential rental property, making it ineligible for 100% bonus depreciation.

The CARES Act provides a technical correction to the TCJA, and specifically designates QIP as 15-year property for depreciation purposes. This makes QIP eligible for 100% bonus depreciation. The provision is effective for property placed in service after December 31, 2017.

Careful planning required

This article only explains some of the relief available to businesses. Additional relief is provided to individuals. Be aware that other rules and limits may apply to the tax breaks described here. Contact us if you have questions about your situation.

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Keeping American Workers Paid and Employed Act

Paycheck Protection Program (Loans)

The CARES Act bill includes language to provide small businesses the 'Paycheck Protection Program', which would provide cash-flow assistance to eligible businesses to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc. during this emergency. This would be accomplished through a government-guaranteed small business (SBA) loan program with relaxed terms and the possibility of loan forgiveness according to stipulated criteria.

Who Qualifies?

Under this provision, a small business, 501(c)(3) nonprofit, or a 501(c)(19) veteran's organization could qualify, provided it does not have more than 500 employees, or has a number of employees consistent with the applicable size standard for the industry per the Small Business Act. The provision includes sole-proprietors, independent contractors, and other self-employed individuals as parties eligible for the loan program. Businesses in the hospitality and dining industries with more than one physical location that employ no more than 500 employees per physical location in the "accommodation and food services" sector are eligible, but must not exceed a gross annual receipts threshold. Organizations must make a good faith certification that the uncertainty of current economic conditions makes it necessary for the loan request to support ongoing operations. Furthermore, the organization must acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.

What is the covered loan period?

The covered loan period is February 15, 2020 through June 30, 2020.

What are the loan terms and amounts?

The provision establishes the loan amount based on a formula of the average total monthly payments for payroll costs incurred during the 1-year period before the date on which the loan is made multiplied by 2.5, up to a maximum amount of $10 million. Repayment of the loan is up to 10 years; however lenders are required to defer payment of principal, interest and fees for a period of at least 6 months, but not exceeding one year. The government guarantee of loans made is increased to 100 percent through December 31, 2020, at which point the guarantee percentage returns to 75 percent for loans exceeding $150,000 and 85 percent for loans equal to or less than $150,000.

What are the allowable uses?

Under the provision, loans are eligible to be used for payroll support, including employee salaries (which includes compensation to sole proprietors and independent contractors), paid sick or medical leave, insurance premiums, mortgage, rent and utility payments. Employee salaries, commissions and tips may not exceed $100,000 on an annual basis per employee or $45,000 for the covered period.

What are the associated costs?

There is no fee to the borrower and the provision sets a maximum interest rate of four percent. In addition, the provision ensures borrowers are not charged any prepayment fees. No collateral or personal guarantee is permitted to be required for a loan.

What is the loan forgiveness?

Recipients are eligible for forgiveness of the loan in an amount equal to the sum of payroll costs, interest payments on mortgage obligations, rent and utilities incurred during the covered period. Forgiveness will not exceed the loan principal amount. The amount of loan forgiveness will be reduced in accordance with any reduction in the number of employees or employee salaries during the covered period.

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