It has been a difficult past several weeks globally with this Covid-19 virus impacting every one of us and touching our community in so many ways. While we are still in the midst of this pandemic, it will pass and at some point we shall be able to begin to feel some normalcy and return to our everyday lives.  However most certainly the ramifications will be felt for some time. Our hope is that through this, our global leaders will learn we have a lot more in common than not and can come together to better prepare for the next time.

Our mantra has always been, through planning, you as a family are better able to make informed decisions and are equipped with the tools necessary to withstand situations such as this. All the time we have spent together planning has prepared us to advise you through this difficult stretch, one in which we embrace and are here for you.  

My tax partner Susan Lash combed through the CARES Act that was approved last week as we believe it is important for you to be informed as to what this may mean to you. Certainly, this means a lot for our country in terms of providing much needed funds to many families and small businesses, although we feel it will not be enough and more may be forthcoming. Please take some time to review. I apologize for the length, however you can skim over those areas that are not applicable to you.  There were a lot of areas covered and we wanted to make sure that we included the bigger items for anyone who may be interested in these areas.   If you would like to discuss further, Susan or I are here for you. We ask you send us an email with any questions you have so we can schedule a follow up call with you.    For small business owners, we would suggest moving forward sooner than later.  As you can imagine, filings for benefits could overload the system.

Thank you,

Jim Schlager

Managing Partner

The CARES Act

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The purpose of the Act is to make a significant impact on the economy by providing loan forgiveness, enhancing employment insurance, supporting small businesses, and providing federal loans to industries severely impacted by the pandemic.  It also provides tax relief and tax incentives for individuals and businesses.

Some of the major tax provisions in the CARES Act are summarized below.  It is important to note that the CARES Act and the below provisions are for federal taxes.  Each state will determine whether, and to what extent, they will follow the federal changes for purposes of their state tax system.  The US Treasury, and IRS will now begin to issuance guidance on the procedures for implementing these new provisions. 

Individual Provisions

Recovery Rebates:

• These rebates are advance refunds of credits to be claimed on the taxpayers’ 2020 tax returns that will be filed in 2021, and equal to $1,200 for individuals, $2,400 for joint filers, with a $500 credit for each child.  The amount of the rebate is phased out by $5 for every $100 in excess of the threshold amount. The threshold amount is based upon the taxpayer’s 2018 adjusted gross income (AGI) (unless a 2019 tax return has already been filed.)  The phaseout begins at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers.  The rebates phase out completely when AGI exceeds $99,000 for single taxpayers, $136,500 for heads of households, and $198,000 for joint taxpayers.  Thus, the rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of households with AGI over $136,500, or joint filers with AGI over $198,000.
• In order to be eligible for a recovery rebate, the individual cannot be (1) a nonresident alien, (2) able to be claimed as a dependent on someone else’s tax return, (3) an estate or trust, and  (4) must have a social security number for the taxpayer, spouse and all eligible children.
• The Secretary of the Treasury is directed to provide the rebate as rapidly as possible. 

Retirement Plans:

• The 10-percent penalty for early distribution of retirement funds will be waived for any self-certified, coronavirus-related distribution of up to $100,000.  For purposes of the penalty waiver, a coronavirus-related distribution is one made during 2020 to an individual (or spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus. 
• Any income attributable to an early withdrawal is subject to tax over a 3-year period instead of all at once.
• Taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions, if made within three years.
• Required Minimum Distributions will be waived for 2020, regardless of whether the taxpayer has been impacted by the pandemic.

Charitable Contributions:

• Taxpayers who do not itemize their deductions may deduct up to $300 of charitable contributions “above-the-line” on their 2020 tax return when computing Adjusted Gross Income (AGI).  This applies only to taxpayers who do not itemize their deductions and will be allowed in addition to the taxpayer’s standard deduction.
• For taxpayers who do itemize their deductions, the limitation on charitable deductions is increased.  For 2020, taxpayers can deduct contributions up to 100 percent of their AGI.
• For corporations, the deductible contribution amount for 2020 is increased to 25 percent of AGI, instead or the usual 10 percent of AGI.
• There are also provisions that provide more beneficial tax treatment for qualified contributions of food inventory.

Student Loans Paid by Employers:

• The Act provides for an exclusion of up to $5,250 from income for payments of an employee’s education loans.  The loan must have been incurred by the employee for the education of the employee.  The payment can be made to the employee or directly to the lender.  The exclusion applies only to payments made by an employer after the date of enactment and before January 1, 2021.
• This dollar limit includes any amount already paid by the employer for the employee’s quailed educational assistance (for example graduate studies).  Thus, the total tax-free amount is capped at $5,250.

Business Provisions

Employee Retention Credit:

• The CARES Act grants eligible employers a credit against employment taxes equal to 50 percent of the qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business or a significant decline in gross receipts. 
• The amount of wages, including health benefits, taken into account in computing this credit cannot exceed $10,000 per employee in total.  The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
• The credit is available to be claimed on a quarterly basis. 
• The provision contains several requirements for defining qualified wages, qualified employees, and qualified employers.  Wages used in this credit computation cannot also be used for purposes of the Families First Coronavirus Response Act (FFCRA), see below.

Payroll Tax Deferral:

• Payroll taxes due from March 27, 2020 (the date the CARES Act was signed into law) and ending on December 31, 2020, are deferred.  The 6.2 percent OASDI portion of payroll taxes incurred by employers and 50 percent of the equivalent payroll taxes incurred by self-employed persons qualify for the deferral.
• Half of the deferred payroll taxes are due on December 31, 2021 with the remaining 50 percent due on December 31, 2022.  No interest or penalties will be charged during the deferral period.

Net Operating Losses:

• The Act allows for a five-year carryback of net operating losses (NOL’s) arising in 2018, 2019, or 2020 by a business.  Taxpayers can elect to forgo the carryback.
• Net operating losses incurred in 2018-2020 that are carried forward are no longer subject to the 80 percent taxable income limitation and may now be deducted in full against income. 

Minimum Tax Credits:

• The Act will now allow a corporation to use prior-year alternative minimum tax (“AMT”) credits against regular tax immediately, rather than over a period of years as initially required by the Tax Cuts and Jobs Act (TCJA).
• A corporation may elect to claim the entire refundable minimum tax credit on its return for the 2018 tax year.

Changes to the Business Interest Expense Limitation:

• The TCJA limited the amount of allowable deductions for business interest for tax years beginning after 2017. The limitation is generally the amount of business interest income for the year plus 30 percent of the taxpayer’s adjusted taxable income (ATI) for the year.  The limitation does not apply to taxpayers with average annual gross receipts for the prior three-year period below an inflation-adjusted amount.  For 2020, this amount is $26 million or less.
• The CARES Act increases the limitation amount to 50 percent of the taxpayer’s ATI for 2019 and 2020.  In calculating the limitation for 2020, the taxpayer may elect to use its ATI from 2019. 

Temporary Removal of Excess Business Loss Rule;

• The CARES Act repeals the IRC Section 461(l) excess loss limitation which limited the ability of individuals to deduct certain trade or business losses to $250,000 ($500,000 for joint filers) each year.  The CARES Act removes this limitation through the tax year 2020. 

Qualified Improvement Property:

• This is a long-awaited technical correction for Qualified Improvement Property (QIP) to the TCJA.  The CARES Act changes QIP from 39-year property to 15-year MACRS property.  This change makes it eligible for 100 percent bonus depreciation. 
• This change is made as if included in the TCJA and, thus, it is effective for property acquired and placed in service after September 2017. 

Miscellaneous Provisions and Information

Clarification on Deadlines for IRAs, HSAs and Excess Deferral Withdrawals

The extension of the filing deadline from April 15, 2020, to July 15, 2020, also extends the deadline for individuals to make contributions to individual retirement accounts (IRAs), as well as health savings account (HSAs) and Archer medical savings accounts (MSAs). Because the due date for filing Federal income tax returns is now July 15, 2020, taxpayers may make contributions to IRAs, HSAs, and Archer MSAs for 2019 at any time up to July 15, 2020.

The extension also applies to the reporting and payment of the 10% additional tax on distributions from an IRA or other qualified retirement plan in 2019 that are included in gross income. The 10% additional tax is calculated, reported, and paid at the same time as the income tax owed on the amounts includible in gross income so the reporting and payment is extended to July 15, 2020. In contrast, excess deferrals to qualified retirement plan must still be withdrawn (including income) by the April 15, 2020, due date in order to exclude those amounts from gross income.

Paycheck Protection Loan:

• The CARES Act provides for Payroll Protection loans of up to $10 million to COVID-19 impacted businesses.  The loans are guaranteed by the Small Business Administration (no personal guarantees or collateral required)
• The CARES Act expands existing Section 7(a) of the Small Business Act for certain “Paycheck Protection Program” loans made from February 15, 2020, through June 30, 2020 (the “covered period”).  An eligible recipient may have debt on a covered loan forgiven.  The amount forgiven under this program will be excluded from gross income.
• The amount eligible for forgiveness is the sum of the following costs incurred and payments made during the covered period:
• Payroll costs;
• Payment of interest on any covered mortgage obligation;
• Payments of a covered rent obligation; and
• Covered utility payments.

• The amount forgiven is reduced if the recipient reduces its workforce or its employees’ salaries and wages.
• The loans have a maximum maturity rate of 10 years and 4 percent interest if not forgiven.

Families First Coronavirus Response Act

This act was signed into law on March 18, 2020, to provide relief to employees and small to midsized businesses. 

Employer Tax Credits

The Coronavirus Response Act requires employers with fewer than 500 employees to provide paid sick leave to employees who are forced to stay home due to quarantining or the care for a family member (qualified sick leave) or to care for a child if the school or place of care is closed (qualified family leave).

Credit for Qualified Sick Leave

In the case of sick leave wages paid by an employer to an employee, the employer may receive a refundable credit against its share of either the OASDI or the RRTA portion (as applicable) of the payroll tax. The credit can be claimed on a quarterly basis, equal to 100 percent of the amount of sick leave wages paid.

The amount of the credit is limited to $200 per day per employee. However, the credit increases to $511 per day if the employee is on leave for the following reasons:

• Is subject to a federal, state or local quarantine or isolation order related to COVID-19;
• Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
• Is experiencing symptoms of COVID-19 and seeking a medical diagnosis.

The total payroll tax credit is limited to 10 days (or 80 hours) of wages per employee.

Credit for Qualified Family Leave

A separate refundable payroll tax credit applies for family leave wages paid by an employer under the Coronavirus Response Act. The credit is 100 percent of the amount of qualified family leave wages limited to $200 per day per employee, up to an aggregate of $10,000.

Wages, for purposes of both credits, include a portion of health plan expenses properly allocable to the qualified sick and family leave wages. The paid sick and family leave requirements and the related employer tax credits are temporary. They expire on December 31, 2020.

Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or childcare unavailability (qualified family leave) where the requirements would jeopardize the ability of the business to continue.  The IRS has said the exemption will be available “on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern.”  The Department of Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

The IRS is expected to provide additional guidance on these credits soon.

Credits for Self-Employed

Self-employed persons may also benefit from the sick and family leave credits as if they were an employee of an employer (other than himself or herself). For self-employed persons, the credits are allowed against regular taxes.  The credits will be claimed on their income tax return and reduce estimated tax payments.

Credit for Qualified Sick Leave

The limit on sick leave wages is determined by multiplying the number of days the self-employed person is unable to perform services in their trade or business by the lesser of 67% of the taxpayer’s average daily self-employment income, or $200. The number of days is limited to 10 for the tax year.

The limits are increased to 100% and $511, respectively if the self-employed person is unable to perform services for the following reasons:

• Is subject to a federal, state or local quarantine or isolation order related to COVID-19;
• Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
• Is experiencing symptoms of COVID-19 and seeking a medical diagnosis.

The amount of the sick leave credit is reduced by any sick leave wages the taxpayer might receive as an employee which exceed $2,000 ($5,110 in the case of any day covered for the three reasons described above).

Credit for Qualified Family Leave

The same calculation is made for family leave wages, with days unable to perform services multiplied by the lesser of 67% of the taxpayer’s average daily self-employment income, or $200. The number of days is limited to 50 for the tax year.

The amount of the family leave credit is reduced by any family leave wages in excess of $10,000 that the taxpayer might receive as an employee.

Average Daily Self-Employment Income

The taxpayer’s average daily self-employment income is defined as the amount of net earnings from self-employment for the tax year divided by 260.

These credits expire on December 31, 2020. The IRS is expected to provide additional guidance soon.

As stated above, the various Acts provide a general framework for the relief that the government wants to provide to taxpayers.  There is still a lot more to come on these various provisions as the US Treasury and the IRS begin to issue guidance on the procedures for implementation.  We will continue to follow the progress of the implementation procedures and guidance that will be forthcoming in the next few weeks.

Sincerely,

Susan Lash, CPA

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Disclosure: The opinions expressed herein are those of Running Point Capital Advisors, LLC (“Running Point”) and are subject to change without notice. Running Point reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This should not be considered investment advice or an offer to sell any product.  Running Point is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Running Point, including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request. RP-20-04