On Friday, March 27th, President Trump signed into law the historic $2 trillion stimulus bill (aka The CARES Act – Coronavirus Aid, Relief, and Economic Security Act). Below are highlights of this bill and how it affects everyone, including small business owners and retirees.
1. STIMULUS PAYMENTS: Individuals whose adjusted gross income (AGI) in 2019 (2018 numbers will be used if 2019 tax return hasn’t been filed yet) was $75,000 or less will receive a one-time payment of $1,200. Married couples whose AGI was $150,000 or less will get $2,400. Additionally, $500 will be received for each child under age 17. Your benefit will essentially be reduced by 5% for every dollar your AGI exceeds the thresholds above. Even those receiving Social Security will qualify for this benefit. Ultimately while the benefit is initially based on 2018 or 2019 income, the benefit is actually based on 2020 income. So if you don’t qualify for the payment based on 2018 or 2019 income but do qualify based on 2020 income, you will have to wait until April 2021 to receive the payment when you file your return. The Treasury Department states that payments may take at least one month to receive (i.e. expect to receive sometime in May).
2. STUDENT LOANS: Student loan payments have been deferred until 9/30/2020 for all Federal Loans. No interest will be charged during this deferral period. You must actively contact your federal student loan provider to pause your payments. IT WON’T HAPPEN AUTOMATICALLY! Additionally, if you are part of a student loan forgiveness program, the deferral period will actually count toward the program. This is fantastic news as it basically means you get a free 6 months worth of time applied toward the program. As a result, be sure to pause your student loan payments right away!
3. IRA CONTRIBUTIONS: The date for making 2019 IRA and Roth IRA contributions has been extended to July 15th. However, it might be best if you make these now (if you can) while the market is down b/c the market could be higher in July if the coronavirus wanes. The new deadline also applies to Health Savings Account (HSA) contributions.
4. REQUIRED MINIMUM DISTRIBUTIONS (RMD): RMD has been waived for 2020. This is welcomed relief as RMD is based on prior year-end account value (which was likely much higher than it is today). Why does this matter? Because your calculated RMD payments are much higher as a result and will be coming out of an account that is likely significantly down in value. This combination could result in your investment account not lasting as long as it would otherwise. Obviously, if you need the money, then keep taking RMD. Otherwise reduce it or outright eliminate it altogether in order to preserve your account. This provision applies to Inherited IRAs as well.
5. 401K AND IRA DISTRIBUTIONS: If you’re under age 59 1/2, you can take a 401k or IRA distribution up to $100,000 without the 10% penalty if you were “impacted” by the coronavirus. “Impacted” is defined as anyone or anyone’s spouse or dependent who has been diagnosed with the coronavirus; anyone who has experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having reduced hours; anyone unable to work because they lack childcare as a result of the disease; anyone who owns a business that has closed or operates with reduced hours as a result of the disease; or any other reason deemed okay by the IRS.
6. UNEMPLOYMENT COMPENSATION: Unemployment compensation has been increased $600 per week and the benefit period has been extended by 13 weeks.
7. SMALL BUSINESS LOANS: Small businesses with up to 500 employees will be eligible to receive loans up to the lesser of $10 million or 2.5 times average monthly payroll costs (based on 2019 payroll – excluding any salary amounts over $100k). Proceeds of the loan can be used to pay for payroll costs, group health insurance premiums (and other healthcare costs), salaries / commissions, rent, mortgage interest, utilities, and other business interest incurred prior to 2/15/2020. The loan will actually be forgiven if the money is spent during the first 8 weeks after the loan is made for payroll costs, rent, electricity, gas, water, transportation, telephone, internet access, or group health insurance premiums (and other healthcare costs). However, in order to receive loan forgiveness, the business must maintain the same number of employees from 2/15/2020 through 6/30/2020 as it did over the same time period in 2019 or from 1/1/2020 through 2/29/2020. If this requirement is not met, then the amount of forgiveness will be reduced. It is not clear if this restriction will apply to those business that needed to immediately lay off people during the time frames mentioned. Perhaps they could rehire the laid off employees to comply with the mandate. The maximum interest rate for the loans is 4% with a maximum maturity of 10 years. Loans must be applied for by 6/30/2020 and loan payments can be deferred for up to one year.. Eligibility is based on a good faith certification by the employer that the loan is actually necessary due to the uncertainty of current economic conditions caused by the coronavirus.
8. SMALL BUSINESS DEFERRAL OF PAYROLL TAXES: Small businesses can defer 50% of 2020 payroll taxes (taxes incurred from 3/27/20 until 12/31/2020) until 12/31/2021 with the other 50% deferred until 12/31/2022. Employers are not eligible if they receive a Small Business Loan that is forgiven as described above. This provision applies to self-employed people as well, not just employees.
9. SMALL BUSINESS EMPLOYEE RETENTION TAX CREDIT: Small businesses may qualify to receive a tax credit if they don’t take a loan as described above. In order to qualify for the credit, operations of the business must have been fully or partially suspended during a quarter if required by the government or if revenue in 2020 is 50% less for that quarter compared to the same quarter in 2019. The credit will be in place until the earlier of 12/31/2020, the date the government allows the company to reopen, or the date gross revenue from the current quarter exceeds 80% of the gross revenue from the same calendar quarter in 2019. If a business qualifies, the credit is equal to 50% of wages paid to each employee up to a maximum of $10,000 of wages per employee. Wages include not only income, but also qualified health care expenses paid by the employer.
Hopefully, this bill (even though I don’t agree with all of it) will help to get our economy back on track! Please feel free to post any comments or questions below. I’ll do my best to get to them during this unusually busy time!
Brad E.S. Tinnon, Owner
CERTIFIED FINANCIAL PLANNER™