As the Coronavirus (COVID-19) spreads rapidly across the U.S. with the number of positive cases of COVID-19 exceeding that of China, the everyday lives of Americans have been impacted significantly. The U.S. economy has been hit hard, with school closures, lockdown of non-essential services in some states, high unemployment claims and an overall decrease in demand for non-essential goods and services.
Over the past few weeks the U.S. government had put aside bi-partisan differences and worked together to come up with financial relief measures to help both individuals and businesses cope with these hardships. On March 27th, the U.S. President signed the unprecedented and highest emergency aid stimulus package in American history thereby passing into law the « Coronavirus Aid, Relief and Economic Security Act, (« CARES Act ») ». In addition to the stimulus package several other measures have been enacted, such as the extension of U.S. Federal income tax filing and payment deadlines for individuals, trusts and corporations.
Summarized below are some of the key aid relief for both individuals and businesses as part of the $2 Trillion package. However, please note that the CARES Act contains numerous other tax and non-tax relief measures impacting both individuals and businesses.
Recovery Rebates / Economic impact payments for Individuals
One of the most important measures of the CARES Act is the recovery rebates that all eligible U.S. persons, subject to income threshold, would receive provided that they have filed their 2018 or 2019 personal income tax returns. The rebate doesn’t apply to nonresident aliens of the U.S.
The allowed credit is $1,2001 ($2,400 for joint filers), plus $500 for each qualifying child, for the first taxable year beginning in 2020. Eligible individuals with adjusted gross income of up to $75,000 ($150,000 for married couples) will receive the full credit. The credit is reduced as the individual’s adjusted gross income exceeds $75,000 ($150,000 for joint filers) and is completely phased out when the adjusted gross income is over $99,000 ($198,000 for joint filers).
According to the IRS, the payment will be calculated automatically by the IRS over the next 3 weeks and sent out to eligible individuals. For individuals who have already filed their 2019 tax return, the IRS will use that to calculate the amount of payment, however, if 2019 was not filed, the IRS will use 2018 to calculate the payment. The payments will be directly deposited to the taxpayers account, if there is no direct deposit information on file, IRS will be creating a secure portal to allow individuals to provide their direct deposit banking information so that payment can be deposited instead of waiting for the check in the mail.
Individuals who generally are not required to file a return, such low-income taxpayers, senior citizens, Social Security recipients, are still eligible to receive the rebate by completing a simple return. The IRS will be providing further guidelines on what type of simple return to file and what should be included on the returns.
Retirement Plans – Waiver of early withdrawal penalty/excise tax from Retirement Plans
The CARES Act has temporarily waived the 10% early withdrawal/excise tax on distributions, up to $100,000, received from eligible retirement plans for Coronavirus related purposes, such as, if the individual or his/her spouse or dependent were diagnosed with the virus or the individual sustained financial hardship due to the virus. This applies to distributions received from January 1, 2020 to December 31, 2020. The distribution can either be ratably included into income over 3 years or the individual may elect to have the entire distribution included in income in the current year.
Retirement Plans – Temporary Waiver of Required Minimum Distribution Rules for certain retirement plans
Generally, an individual who is 72 or older is required to take minimum distribution from their retirement plans or IRA accounts. This mandatory required minimum distribution is waived for 2020 and individuals are not mandated to take any distribution from their retirement plans in 2020.
Payroll Taxes – Delay in payment of employer / self-employed payroll taxes
Under the CARES Act, employers and self-employed individuals can delay payment of the employer share of FICA obligations through the end of 2020. Fifty percent of any deferred payroll taxes must be paid by December 31, 2021 and the remainder by December 31, 2022.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
Under the small business provision of the CARES Act, eligible employers would receive refundable payroll tax credits equal to 50% of qualified wages paid to an employee. Eligible employers are those whose operations have been fully or partially suspended by government mandate due to COVID-19 or who had a 50% reduction in gross receipts / revenue in comparison to the prior year. This provision also applies to non-profit organizations but does not apply to government agencies.
Businesses that receive assistance under the Paycheck Protection Program (described below) will not be eligible for the credit
Business relief – Paycheck Protection Program Loans
One of the key goals of the CARES Act and the stimulus package is to help small businesses to continue paying their employees. The Paycheck Protection Program (PPP) is designed to provide loans to small businesses, including non-profits, self-employed individuals (with less than 500 employees) up to $10 million, to cover the costs of keeping employees on payroll. Small businesses can apply for the loan if they have suffered hardship due to COVID-19 from February 15, 2020 to June 30, 2020.
The loan amount must be used to cover eligible payroll costs as well as costs of maintaining the business (e.g., rent, utilities). Eligible payroll costs include salary/wages/commission, vacation / sick leave payments, retirement benefits, and group health benefits. It is important to note that the loan amount cannot be used to cover owner compensation, or compensation of an employee whose principle place of residence is outside of the U.S.
Some or 100% of loan can be forgiven provided certain parameters are met, which includes maintaining the same/similar staff level for the 8-week forgiveness period. The total forgiven amount is calculated as the total cost of payroll, rent, utilities and interest for the 8-week forgiveness period. The 8-week forgiveness period is calculated from the day the loan is funded. The amount not forgiven, would be carried forward as a loan with maximum term of 10 years and interest rate of 4%.
We have only covered some of the key U.S. Federal relief measures, as a result of the passing of the CARES Act. In addition to the Federal relief measures, many U.S. states have also announced their own relief/aid measure to cope with the impact of COVID-19 on their residents and businesses.
Please feel free to contact our U.S. tax specialists for any further details.
1All currency amounts in the update are in U.S. dollars.