The 2020 Cares Act is a huge piece of legislation that the US Government passed into law in response to the devastating effects of the global pandemic created by the Covid-19 viral outbreak.
The Cares Act stands for Coronavirus Aid Relief and Economic Security. It’s the largest legislation for economic relief in US history that will allocate $2.2 Trillion to support both individuals and businesses affected by the pandemic and the resulting economic downturn.
Keep in mind that there are several add-ons and amendments being made even as I publish this article. However, my team and I have spent a lot of time reading through the legislation and found that we could break the 800 page legislative document down into 9 key, digestible, and primary benefits for you, the small-to medium size business owner.
6 are personal/individual benefits and 3 are business benefits.
Primary Personal Benefits
- Recovery Rebates
The Recovery Rebate part of the CARES Act was designed to make sure that 90% of US citizens are to receive stimulus money.
So you’re thinking to yourself.. “Am I a part of the 90%?” or “How much am I getting?”
Well, basically you’ll need to find out if your AGI (Adjusted Gross Income) from your 2019 (or, if not filed, your 2018) income tax return meets these income thresholds:
We will address tax implications and tax planning opportunities in the next few articles, however, these recovery rebates will NOT be considered taxable income.
For a lot of families, this is a nice chunk of household spending cash. If your AGI is above income limit thresholds, your rebate payment gets reduced. For example, every $100 you make above the income limits and under phase out thresholds, your benefit gets reduced by 5%. But, your Recovery Rebate still gets extended out $500 per the number of dependent children under 17 that you have. Taxpayers who receive a smaller rebate than they are eligible for based on 2020 income will receive the difference after filing a 2020 tax return, but, over-payments of rebates due to a higher income in 2020 will not be clawed back.
On the other hand, if your AGI is above the thresholds in 2018 and 2019, but your AGI fell under the thresholds in 2020, you will be able to claim the rebate later.
- Healthcare & Qualified Medical Expenses
Some of the rules on Qualified Medical Expenses have reverted to the previously dismantled Affordable Care Act and expanded.
Telehealth Services like WebMD, Ask-a-Nurse, and other remote health services are now considered qualified expenses and are also covered by Medicare. This helps as it eases some pressure on our brick & mortar healthcare system. Coverage for prescriptions have been expanded from 30 days to 90 days as well.
FSAs (Flexible Spending Accounts) and HSAs (Healthcare Spending Accounts) once again will let you purchase over-the-counter medications and some personal hygiene products.
- Unemployment Compensation
With the unemployment soaring beyond historic levels, the CARES Act attempts to make the whole ordeal of applying for and receiving Unemployment Compensation more accommodating, longer lasting, and with more money available to qualified individuals.
Unemployment Insurance (UI) is a state-administered benefits program. Each state has different rules & regulations with regard to maximum amounts and length of coverage of unemployment compensation. However, the Feds have stepped in to boost support of the states by implementing certain features.
They’ve now eliminated the typical one-week waiting period to apply and receive funding. And included is an additional $600 per week payment to each recipient for up to four months, as well as extending UI benefits to self-employed workers, independent contractors, and those with limited work history. UI benefits are also extended for an additional 13 weeks through December 31, 2020 after state UI benefits end.
For the self-employed and independent contractors, this is a huge part of sustainability and the economic recovery effort. Still, how this is administered will be determined by each state.
SELF-EMPLOYMENT NOTE: Before you file for unemployment compensation, you probably should consider some of the Primary Business Benefits discussed later in this article.
- Retirement Account Distributions
Under the CARES Act, you now have unprecedented access to your retirement accounts without penalty.
Our government realizes that our economy is at major risk and millions of people are going to be in some very tough financial situations and they’ll need liquidity, or CASH FLOW.
As a business owner, you’ll need access to cash to ride this thing out. So, if you have been impacted by the Coronavirus pandemic, you’re now allowed to take up to $100,000 from your retirement accounts without the usual 10% penalty.
This can apply to your IRAs, 401Ks, 403Bs, ..etc. The normal provision requires you pay it back into your accounts within 60 days. Under the CARES Act, you have up to 3 years.
You will still have to pay taxes on your distribution, however, taxes can be paid over a 3 year period.
Loans against your 401K and 403B accounts are now allowed to be up to 100% of your vested balance as opposed to 50% limitation of your vested balance prior to the Coronavirus stimulus. And typically there was a 20% withholding from these distributions, but now that has also been waived.
Retirement Minimum Distributions (RMDs) have been basically suspended for 2020.
RMDs are government required distributions from your retirement accounts once you reach a certain age or if you’ve inherited assets from someone who is a non-spouse.
PLEASE BE VERY VERY CAREFUL. Your retirement cash assets are still is designated money for your future self.
Don’t use this as an opportunity to make poor decisions or spend frivolously. There may be some great strategic retirement & tax planning opportunities in this downturn, but as always, remember to consult with your financial and tax advisers.
- Charitable Benefits
Your Charitable contributions now are eligible for a $300 “above the line deduction”.
An above the line deduction means that a deductible item, in this case Cash Charitable contributions, will be accepted by the IRS over & above the standard deduction from your tax return. Since the 2018 Tax Reform and Jobs Act increased the standard deduction, a lot of people do not itemize deductions anymore and some charities have suffered as a result.
This piece of the legislation was put in, of course, to encourage more giving to help our favorite charities survive.
Also, previously there was a cap on charitable contributions of 60% of your AGI. But for 2020, it’s now set at 100% of your AGI . This encourages some of our more wealthier neighbors to make larger contributions as well.
- Student Loan Relief
Up until September 30, 2020, all federally-backed student loans WILL NOT be charged any interest.
This offers a lot of people with student loans some instant relief. especially those paying majority interest or interest-only payments. For those who are on a forgiveness program like medical workers and teachers for the 10 year period, this 6-month program counts toward that and gives you credit towards those payments. It’s still very important not to miss any payments after September 30th when the program ends. So, while you can still stop your automated payments for those 6 months, you MUST RESTART those payments WITHOUT INTERRUPTION after September 30th. Contact your student loan servicer for exact details.
There may be some great cash planning opportunities for this program that we’ll get into later.
Primary Business Benefits
The CARES Act was distinctly designed with the intentions of keeping Americans working and/or paid. Thus, we’re highlighting 3 pretty aggressive primary business benefits. Overall eligibility requires that you must have been in business prior to February 15th, 2020 to qualify for these following programs.
- Payroll Protection Program (PPP)
Small and medium-sized businesses have an opportunity to apply for PPP loans to receive relief funds that cover 2.5 months (250%) of your average monthly payroll.
For a lot of businesses, this can and will be considered more of a grant than a loan (forgivable loan).
Here’s how to qualify to have your loan forgiven:
There’s an application process (available until June 30th, 2020) to follow with the SBA and participating banks along with a follow up on the back end of an 8 week forgiveness coverage period to actually verify what you’ve done with the funds.
You must have less than 500 employees per location. (some industry exceptions may apply such as accommodations, hospitality, restaurants…etc.)
You must use the funds for payroll, health, rent, mortgage, and utilities.
If you have some portion that does not qualify for forgiveness, that maximum interest rate is below 4% and you won’t have to start making payments for 6 to 12 months.
Any catches? Of course.
Only the first $100,000 of anyone’s compensation qualifies. Any part of compensation above $100,000 does not qualify.
Your Financial Statements will be required. They will look at your FTE (Full Time Equivalent) to figure out how many employees you have now versus how many over the past year(s). If you’ve laid people off and/or have given substantial employee tax cuts that will be taken into account.
There is a provision in the law that allows you to quickly rehire laid-off employees and still qualify for the Payroll Protection Program.
- Employee Retention Credit
Business Owners can receive a Tax Credit against your payroll taxes up to $10,000 per employee up until the end of the year or when your business recovers 80% of your pre-coronavirus revenue.
To qualify, you must have less than 100 employees and your business must have taken a nosedive below 50% of regular revenue or your business was forced to close for the quarter.
You can NOT combine this with the Payroll Protection Program (PPP).
- Net Operating Loss (NOL)
The CARES Act changes carry-back rules of NOL to help businesses and investors find capital to survive under the current economic climate.
Businesses and Investors have bad years where revenues are down or they may have had to make major purchases resulting in negative income (or NOL). Under the previous Tax Cut and Jobs Act, the IRS changed restrictions on NOLs and eliminated the ability to go backwards and use those losses from prior operating periods.
Now businesses have the ability to what we call “harvest” by infinitely carrying-forward and/or carry-back previous years as far back as 5 years!
You can file amended returns and collect those NOLs and use them against paid taxes for a tax refund.
SPECIAL NOTE: There are also other NOL strategies that we’ve been helping clients implement over the last 5 tax seasons that could actually supercharge your cash flow or at least help you become cash flow neutral during these turbulent times.
Disclaimers and Precautions
Because this legislation is still fairly new and we still have not determined the lasting effects of the Coronavirus itself, there still are some things we just don’t know yet. Both legislators and administrators are suggesting and making changes day by day. And I’ll continue to stay on top of it.
In my work with business owners, independent contractors, and entrepreneurs, I’m having a lot of great conversations about these programs and the planning opportunities in front of them.
But, I’m also getting occasional question from random people with slightly mischievous intentions such as:
“I don’t think I qualify, but what’s another way to get that FREE money?”
“How can I get that loan I don’t have to pay back?”
“Will I get caught applying for the business loan and claiming unemployment?”
“Can I get away with…”
Here’s my words of caution: “It’s your right to do everything you can to get government recovery benefits that are legally due you, but please don’t try to game the system. Because remember this:
With the proper strategies and planning, there’s really no need to take those risks.
Conclusion
I also would encourage you to talk to your financial & tax advisers and start having the conversations to help you strategically think things through and come up with a plan that’s tailored to your unique circumstances.
This article was written to outline the 9 key benefits that you as a business owner need to know. My next article will most likely cover how to use what we’ve learned here in a more strategic way as well as achieving cash flow neutrality during this time of uncertainty.
If you are someone running a small to medium-size business, non-profit, and/or even if you are a self-employed individual, please leave a comment or question and share.
Cheers to Smarter Business Results!