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Explaining the CARES Act and the Paycheck Protection Plan

The CARES Act

The CARES Act stands for the Coronavirus Aid Relief and Economic Security Act. This is a $2 trillion emergency fiscal stimulus package that was signed into law on March 27th and is designed to aid those affected by the coronavirus pandemic. One key thing to note is the tax filing deadline has been extended until July 15th of 2020, so if you're worried about the deadline here in two weeks, you can take a deep breath. 

Recovery Rebates for Individuals 

This is the direct payments of funds to you or your family from the federal government. It will provide cash assistance to most people. There are phase outs if your income exceeds a certain threshold. For now, just know that for every $1000 over the adjusted gross income threshold, they're going to reduce your stimulus check by $50. This is a 2020 tax credit, but they are using your 2018 or 2019 tax return (most recent) to determine the amount of stimulus to provide you.

It's important to know that these payments are likely to take several weeks. You're probably not going to get them in the next couple of days. I would expect it to be over the next couple of weeks. Individuals receiving social security benefits will receive their recovery rebate in the same account in which social security benefits are deposited into. The same goes for taxpayers that have linked their account to their returns. If you are not on file, things could take a bit longer via mail.

Phase Out 

The simplest example would be a single individual making less than $75,000 receiving $1,200. Each $1,000 in income above $75,000 would reduce your amount by $50. Once you make more than $99,000 in adjustable gross income (the most recent of 2018 or 2019), you're phased out completely. Hypothetically, if you made $76,000 as a single individual, you would not get a $1,200 stimulus check. You would actually get $1,150. If you're married filing jointly, you're going to get $2,400. The phase out threshold is $150,000 for married couples, so anything below that and you'll get the full $2,400. You're completely phased out at $198,000 in this case. The same thing applies here. For every $1,000 between 150 and 198, they would reduce your $2,400 by 50 dollars.

 

Example 1 – Mickey and Minnie Mouse

Facts

Benefits 

No Children

$1,200 – Mickie

Married Filing Jointly

$1,200 - Minnie

Retired (To Tinkerbell’s house according to my daughter) 

Total Benefit Amount: $2,400

 

Example 2 – Fred and Wilma Flintstone

Facts

The Math

2 Children

$180,000 - $150,000 = $30,000 excess income over the threshold.

Married Filing Jointly

$30,000 ÷ $1,000 = 30 

$180,000 AGI (Adjusted Gross Income)

30 x $50 = $1,500

Eligible Benefit $3,400

$3,400 - $1,500 = $1,900

$1,200 – Fred

Actual Benefit

$1,200 – Wilma

$1,900

$500 – Pebbles (Toddler)

 

$500 – Bamm Bamm (Toddler)

 

 

Example 3 – Betty Boop

Facts

The Math

No Children, Single, Travel Agent

$99,000 - $75,000 = $24,000 excess income over the threshold.

$99,000 Income in 2019

$24,000 ÷ $1,000 = 24

$40,000 Total Income in 2020 

24 x $50 = $1,200

Laid Off from Travel Agency – only made $10,000 from travel bookings.

$1,200 - $1,200 = $0

Re-employed later in year making $30,000

2019 Benefit

Eligible Benefit $1,200

$0

2019 Income of $99,000 was in excess of the $75,000 threshold.

2020 Benefit 

Won’t get any assistance now and must wait until she files her 2020 tax return in 2021.

$1,200- Paid in 2021 after 2020 taxes are filed 

 

Distributions on Retirement Accounts 

Coronavirus has affected distributions from retirement accounts. Examples of these accounts include: IRAs, SIMPLES (SEPs), a 401k, or any combination of these. The government is going to allow you to withdraw up to $100,000 if you have a qualifying impact. They will also exempt you from the 10% penalty if you're under age 59 ½. Normally, if you take an early withdrawal from a retirement account, there is a 10% penalty for taking it early.

You can repay that $100,000 (or less) distribution over a three-year period. For income tax purposes, they will split that evenly over '20, '21 and '22. That way, you are not taking the income tax hit on that $100,000. If you take a distribution, you will still be liable for the tax consequences or the tax liability on that. They're just going to forgive the 10% penalty for early withdrawal.

A qualifying impact would be those who are diagnosed with COVID-19, a spouse or a dependent that is diagnosed with COVID-19, or those suffering from adverse financial impacts as a result of COVID-19. If you've been quarantined, you're furloughed, you're laid off, have a spouse or dependent that have been quarantined or laid off. It could also be for any other reason the IRS deems valid.

Required Minimum Distributions (RMDs) 

Each year, once you are 72 years old, the government makes you take a distribution out of your retirement accounts. This is called a required minimum distribution. It is money that has never been taxed and was put back into your retirement savings pretax. At 72 years old, the IRS wants you to start taking some form of distribution so they can generate tax revenue. Because of the COVID-19 pandemic, the IRS is going to suspend RMD distributions for both account owners and beneficiaries taking a stretch contribution. If you inherited a beneficiary account from someone that had to take an RMD and are still required to take it, they're going to suspend that for 2020. You can still take the RMD if you want, but it is not required.

Secondly, if you've already taken the RMD and it's not needed, but because it's required, you took it maybe in the first quarter of this year, you can actually put it back in as long as you do it within 60 days. They'll just need to be coded as a rollover and you can deposit it right back into the IRA account since you are not required to take it for this year. That's a onetime suspension on not having to take that RMD.

Student Loans 

This will affect a lot of younger people, but even older people are starting to have loans that they co-signed on. The federal government has suspended required payments through September 30th, 2020. You are not required to make a payment for the next six months by the IRS. They also said that students will not accrue interest during that timeframe. If you're in a student loan forgiveness program, this six-month period will still count towards your payments. This has a good impact for those people that need the student loan forgiveness or are working for a nonprofit that may be eligible for forgiveness. Again, you cannot miss out on these six months and you don't have to make your payment.

Just because the student loan payments are not required, doesn't mean you should not call your service provider and stop your payments. A lot of my clients have payments set on automatic draft and these payments service their student loans on a monthly basis. If you do not stop that, payments will still be made. They do not have voluntarily stop.

Unemployment Benefits 

This is a special pandemic unemployment assistance program. This also applies to self-employed individuals who are generally not eligible. Other individuals who are ineligible for regular unemployment, extended unemployment, pandemic unemployment insurance, or run out of such insurance will be eligible for up to 39 weeks of benefits via this provision. Traditionally self-employed people will be eligible under the CARES Act for up to 39 weeks of benefits. The first week of unemployment generally serves as a waiting period in which you don't get any benefit for the first week. The CARES Act offers to pay states to provide unemployment immediately without the normal one week waiting period. If you are laid off, instead of having to wait a week, you can now get benefits immediately.

The CARES Act also gives states the ability to increase their unemployment benefit. You'll file your unemployment benefits through your state; and they can give up to $600 extra each week for up to four months. The $600 a week will be paid by the federal government. If you reach the maximum amount of unemployment compensation provided by state law, which is 26 weeks, the CARES Act will allow for an additional 13 weeks. This gives you potentially 39 weeks.

Payroll Protection Program

We’ve been getting questions about the small business paycheck protection program. The protection program is a loan designed to provide direct incentive for small business to keep their workers on payroll. This is designed to try to get us through the next eight weeks of this pandemic. Hopefully doors for the small businesses can start opening around the country and we can get back to business as usual. No one knows how long this will last, but it’s a good place to start. The application was open for submission on April 3rd, 2020. Loans can be made for up to two months of your average monthly payroll costs from the last year, plus an additional 25% of that amount.

Take your payroll over the last 12 months and divide it by 12. That'll give you a monthly average. You add two of those months together and then you tack on another 25% onto that.

It is unique that the SBA will forgive loans if employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest or utilities. This paycheck protection program will be available through June 30th, 2020. This program is available for small businesses with less than 500 employees, private nonprofit organizations, 501(c)(3)s, and veteran organizations. Sole proprietors, independent contractors, and self-employed people. This probably has the largest direct benefit to businesses allowing them to keep employees on the payroll and the loans being totally forgiven if they meet the requirements.

You can apply through any existing SBA 7A lender, meaning most banks can it. Call your bank or credit union to confirm. The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent and utilities, like we talked about. For the loan to be forgiven, by our research, at least 75% of the forgiven amount must've been used for payroll. Loan payments will be deferred for six months. You also don't have to put up any assets as collateral and you don't have to do a personal guarantee on this loan.

See the links below for more information. Please confirm with your lender that this is the most recent up to date information. This is moving very rapidly and information changes quickly. 

PPP Fact Sheet

COVID-19 Economic Injury Disaster Loan Application

Coronavirus (COVID-19): Small Business Guidance & Loan Resources

You may also call the Tennessee branch of the Small Business Administration at (615) 736-5881.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Consult the appropriate professional prior to making any financial decision.