Over the past month, Congress has passed several substantial relief packages in response to the COVID-19 pandemic. These measures are not only unprecedented, they are mind blowing and budget busting for years to come. The Congressional Budget Office (CBO) in late April estimated that the cost of the relief enacted so far will bring our annual federal budget deficit this year to $3.7 trillion, an increase of $2.7 trillion from the prior forecast of $1 trillion, and drive our public debt to GDP ratio over 100% for the first time since the end of WWII, crossing what had been regarded as a “red line” for stable economies. So, why was this done and what’s in it for you?
(Watch Robert Duquette, CPA, MBA, professor of practice in the department of accounting at Lehigh University's College of Business talk about individual recovery rebates, expanded unemployment insurance payments, and other personal income tax benefits provided for in the CARES Act in light of the coronavirus pandemic.)
There were good reasons. The CBO projected that unemployment will hit a high of 16% in the 3rd quarter this year (compared to a high of 10% during the Great Recession), and that GDP will drop about 12% in the 2nd quarter, i.e. an annual contraction rate of 40%, before beginning to bounce back a bit in the 3rd quarter. Therefore, the COVID-19 relief measures already passed, and several more being debated, are viewed as absolutely and critically necessary to help individuals, families, small and large businesses survive the financial shock of being shut down during the crisis, and to serve as a safety net and foundation to restart the economy as soon as possible. (There will of course be post COVID-19 implications regarding our ability to sustain future national debt levels, and there will be additional pressures on the Social Security and Medicare Trust funds from the economic contraction. That however will have to be addressed at another time.)
So, what’s in all this that perhaps you can use to get cash in your pocket soon? Not only is there upfront cash that you may be entitled to, but there are also several provisions applicable to businesses, including family owned businesses, that are retroactive and will allow taxpayers to file amended tax returns, possibly to years when tax rates were much higher, and generate even more immediate cash.
Here is a brief summary of the most significant tax related provisions in the legislation thus far.
1. Individual Recovery Rebates:
- Amount: A $1200 tax credit for individuals, or $2,400 for married couples, plus $500 per qualifying child (i.e. dependent under age 17). To receive the credit, the taxpayer must have filed a tax return for 2018 or 2019, or be receiving Social Security or veteran’s benefits.
- When: To be issued “as rapidly as possible”, most by the end of April, either through direct deposit or by mail, depending on whether or not the IRS has the taxpayer’s bank account information.
- Ineligible taxpayers: Not available to estates, trusts, nonresidents, taxpayers who can be claimed as a dependent by another taxpayer, or to taxpayers without a Social Security number or those married to such taxpayers.
- Phase out of amount: The rebate is phased out for single filers by 5% of their AGI (adjusted gross income) above $75,000; for joint returns by 5% of their AGI above $150,000, and for head of households by 5% of their AGI above $112,500.
- What if AGI changes: The rebate is actually an advance on a tax credit that you may claim on your 2020 tax return based on 2020 AGI. Therefore, if your 2020 income is lower than in the 2019 or 2018 return used to establish the amount of the rebate, then you may be refunded any appropriate additional amount in 2021. Also, if your 2020 AGI comes in higher than the 2018 or 2019 AGI used by the IRS to establish your rebate, it appears that any credit overpayment will not have to be paid back.
2. Expanded Unemployment Insurance Benefits:
- An extra $600 per week: States are instructed to increase by $600 per week what they otherwise would have paid to an eligible recipient, for four months beginning April 1st through July 31st.
- Extension of number of weeks: Regular benefits are extended 13 weeks. For most states such as Pa, NY, NJ, and Ct, that means that regular unemployment benefits will be paid for a total of 39 weeks.
- There is a substantial expansion for who is eligible: The new law not only includes everyone affected by their employer’s shutdown, or stay at home orders, but also includes the self-employed, independent contractors, “gig” workers, those with a limited work history, part time employees, the partially unemployed, those who must stay home because their children’s school shut down, and anyone affected by COVID-19 directly or indirectly through their household.
3. Paycheck Protection Program (PPP): (An advance that can be forgiven!)
- What is this: Assuming the funds are still available, this program is intended to advance eligible businesses to cover certain eligible expenses incurred during the period February 15, 2020 through June 30, 2020.
- Eligible businesses: Self-employed, sole proprietors, independent contractors, and small businesses with fewer than 500 employees.
- To cover what: These businesses can apply for and receive loans to cover the following: payroll (including a two month pro rata portion of last year’s net earnings from self-employment, capped at $100,000 per year per employee, mortgage interest payments, rent, utilities, and interest costs on other loans. The loan applications will not require collateral or personal guarantees.
- The maximum loan amount: 2.5 X the average monthly payroll costs in the prior year, not to exceed $100,000 annually per employee, up to a maximum of $10 million.
- The loan will generally be forgiven upon furnishing appropriate documentation of covered expenses incurred and payments made in the first 8 weeks after loan origination, and documentation is provided that demonstrates that the loan was used at least 75% for funding employee wages. The forgiveness is reduced to the extent that employees were not retained, or payroll costs were reduced by more than 25%.
- Repayment terms if not forgiven: The SBA has announced that any unforgiven loan balance will generally be repaid with a maximum term of 10 years, at 1% interest rate, starting 6 months after the loan disbursement, and due within 2 years of the loan date.
- FAQs: The Treasury has recently released guidance which addresses many questions for this program.
4. Various Personal Income Tax Provisions
- Extended Filing dates: An extension of the original April 15th deadline for all individual, gift, business tax return filings of all types, related tax liability payments, estimated payments, and IRA contribution deadlines, until July 15th.
- Retirement accounts: The 10% penalty on early withdrawal distributions of up to $100,000 is waived if related to COVID-19; the 20% withholding tax on distributions is suspended; and the maximum loan amount has been increased to $100,000. Although distributions are still subject to income tax, the federal income tax can be payable over three years.
- Charitable contributions: A new $300 “above the line” (i.e. non-itemized) deduction for contributions to public charities and an increased limit for 2020 cash contributions to public charities for itemizers from 60% of AGI to generally 100% of AGI.
5. Various Family Business Income Tax Provisions
- A 50% payroll tax credit: It is per employee on up to $10,000 of wages paid per eligible quarter during the crisis. For businesses with more than an average of 100 employees in 2019, the credit can be claimed for workers retained but not currently working due to the crisis. For a business with an average of 100 or fewer employees in 2019, the credit can be claimed on all employees, working or not working. The first eligible quarter for the credit is one in which gross receipts are less than 50 percent of gross receipts for the same calendar quarter in the prior year. The credit ends in the first quarter on which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in the prior year. The credit expires at the end of 2020.
- Sick and Family Leave tax credits: There are also tax credits for up to 100% of paid, qualifying sick and family leave payments for a period of time.
- A deferment of the 6.2% employer share of the Social Security tax: The deferred tax is to be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
- An immediate expensing of qualified real estate improvements: Businesses are now allowed to immediately write off 100% of the costs associated with “qualified improvement property” to the interior of nonresidential real estate, instead of having to depreciate those improvements over the 39-year life of the building, similar to the current rule allowing such immediate expensing for machinery and equipment. This provision is also retroactive to 2018 and 2019 and may provide taxpayers with another opportunity to amend their prior year return to generate cash back.
- Business Losses: And finally, potentially most valuable for 2020, losses from pass through businesses (other than passive losses) can now be used without limitation against any other type of income in the same year, and then be carried back up to 5 years against income in higher tax rate years. The prior limitation rules were originally $250,000 for singles and $500,000 for joint returns before inflation adjustments, with the excess having to be carried over and limited to 80% of adjusted taxable income). This benefit applies not only to 2020 losses, but also retroactively to excess business losses in 2018 and 2019. (Taxpayers should determine if this could apply and if so, consider amending prior year returns and carryback excess losses to years in which their tax rate was probably higher.)
The above is only a general summary of many complex provisions, each with their own defining terms and details beyond the scope of this article. Taxpayers are advised to seek the guidance of a tax professional in determining the extent to which any of these provisions may apply, other clarifying details, impact on their tax planning, how these provisions may interact with the taxpayer’s other tax or business matters, and what action steps should be taken to take advantage of any other matters identified herein. Hopefully, you have read something here which can help you or your family financially survive this historic period a little better.
The information contained in this article is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice, or opinion provided by the author to the reader to be relied upon in connection with a specific situation or client, or to recommend a final decision about the above matters, nor is the information intended to be construed as written advice subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230. This material may not be applicable to the reader's specific circumstances and may require consideration of other factors if any action is to be contemplated. The reader should contact his or her tax and legal professionals before taking any action based upon this information. The author assumes no obligation to inform the reader of any changes in tax authorities or other factors that could affect the information contained herein.
Robert Duquette, CPA, MBA, is Professor of Practice in the College of Business at Lehigh University, and a retired EY senior tax partner. He has served on the Pennsylvania Institute of CPAs Federal Tax Committee for the past 30 years, focusing on federal tax reform and the national debt. Much of the above content was reprinted with the permission of the PICPA from an earlier article authored by Prof. Duquette, and updated here.
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