Economic Stimulus and the CARES ACT: Impact on Individuals, Families, and Small Businesses

As many of you know, the government has been taking steps to address the coronavirus pandemic on multiple fronts. On the medical side, state and local officials have implemented a wide range of policies to encourage and even enforce social distancing. The federal government has the ability to deploy the Defense Production Act, which will compel private industry to utilize its resources to manufacture personal protective equipment (PPEs), ventilators and any other tools deemed necessary to fight the virus.

On the economic front, the Federal Reserve has been weaponizing its monetary powers to protect the economy from the unprecedented impact of the coronavirus. Congress is getting into the fight as well. In response to the global pandemic, our lawmakers in Washington D.C. passed the Coronavirus Aid, Relief and Economic Security Act (CARES) of 2020. This is a nearly $2 trillion stimulus package aimed to provide relief to American families and support for small businesses, all of whom are being impacted in multiple ways.

The situation is still very fluid, and we anticipate that it will continue to be such for quite some time. However, what we are seeing now are a number of factors that will help to mitigate some of the uncertainty and market volatility. Namely, increasing data and action from the government, including the CARES Act.

The bill itself is 335 pages and covers a lot. We are going to highlight what we believe to be the most important components of the CARES Act for our clients.

Impact on Families & Individuals

The most notable impact of the CARES Act on families and individuals comes in the form of direct payments and access to retirement accounts. The bill also provides people greater incentive to donate to charity.

IMPACT: You will likely be getting a direct payment from the government.

The CARES Act provides for economic relief to families in several ways. First and foremost is in the form of direct payments to the general public. The section of the bill, Recovery Rebates for Individuals, stipulates that the federal government will send up to $1,200 to an individual and $500 for a child under age 17. For example, a married couple filing a joint tax-return with two children under the age of 17 will qualify for up to $3,400.

There is an earnings threshold, however, that reduces the payment. For every $100 of income in excess of the limit, the rebate will be reduced by $5. The applicable AGI threshold amounts are as follows:

• Married Joint: $150,000
• Head of Household: $112,500
• All Other Filers: $75,000

Threshold numbers will ultimately be based on a person’s 2020 tax return, but the government will use 2018 and 2019 returns to determine the amount of money to be sent out. Individuals who receive too much (those whose 2020 earnings cause them to exceed the threshold) will ultimately have to give back in the form of a tax payment the overpaid amount.

IMPACT: You don’t have to take your 2020 RMD.

The bill effectively suspends Required Minimum Distributions (RMD’s) for 2020. In normal circumstances, individuals over the age of 72 must make a withdrawal from their IRA or 401(k) each year and pay taxes on the income. Just as we encourage our clients to stay disciplined in the face of down markets, Congress recognized the negative impact that would take place if a person were forced to sell equities out of their portfolio while the market is down in order to satisfy their RMD.

This provision also applies to inherited IRA’s.

IMPACT: You may be able to take an early distribution from your retirement account without penalty.

For younger people, access to their retirement accounts is limited until they reach age 59 ½. The CARES Act allows for an individual impacted by the coronavirus to withdrawal up to $100,000 from their IRA or employer-sponsored retirement plan without having to pay the early withdrawal penalty.

While you will be subject to tax on the withdrawal amount, a provision in the bill allows for you to replace the money within three years and/or to distribute the reportable income over a three-year period (years 2020, 2021and 2022).

Keep in mind that this is not blanket permission to take a withdrawal for any reason. You must be able to show that the reason for distribution is coronavirus related, such that you:

• Have been diagnosed with COVID-19;
• Have a spouse or dependent who has been diagnosed with COVID-19;
• Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off or having work hours reduced because of the disease;
• Are unable to work due to lack of childcare as a result of the disease;
• Own a business that has closed or operate under reduced hours because of the disease; or
• Meet some other reason that the IRS decides to say is OK.

This would likely be an extraordinary step for most of our clients, but advisors are looking at situations that could warrant it as part of an overall plan.

IMPACT: You can completely wipe out your 2020 tax liability by donating to charity.

This one is pretty cool. Charitable donations have always been a great way to minimize a person’s tax liability, but the benefit has previously been limited to 60% of a person’s AGI. The CARES Act essentially erases the limit, allowing for cash donations to qualified charitable organizations to reach 100% of AGI. (Keep in mind that donor-advised funds are still subject to the old AGI limit).

There has never been a better time to make a difference, if you are charitably inclined.

Impact on Businesses

Small businesses are having an especially difficult time right now. With government-mandated closures forcing businesses to shut their doors, revenue streams have disappeared, but bills and payroll obligations have not. The CARES Act provides a number of relief efforts by expanding unemployment benefits and providing access to forgivable loans through the Small Business Administration (SBA).

IMPACT: Those out of work will receive increased unemployment benefits.

The relief package increases unemployment compensation by $600 per week and extends benefits by 13 weeks. States are responsible for their own unemployment insurance programs. Compensation offered by each state varies widely. This adds a degree of uniformity on top of state programs, so no matter where you live, you can be assured that you will have access to increased and extended benefits.

IMPACT: Forgivable loans are available to small businesses to help “keep the lights on”.

The CARES Act instituted the Paycheck Protection Program, which allows small businesses to secure up to $10 million in loans that are eligible for forgiveness. There are, of course, certain stipulations that must be met in order for forgiveness to occur, but these are meant to encourage employee retention. The benefits of the program itself, beyond both loan availability and forgiveness include: low interest rates (and a maximum cap of 4%), deferment of loan payments and the ability to exclude any amount forgiven from income. Loan proceeds can be used to cover such things as employee compensation, rent, utilities and group health insurance premiums.

IMPACT: Businesses will be able to defer payroll taxes

This applies to businesses as well as those who are self-employed and extends through the rest of 2020. Half of payroll tax liability can be deferred now through the end of 2021 and the other half to the end of 2022.

IMPACT: Businesses will be able claim more of their Net Operating Loss (NOL)

This one may be a little on the technical side for the purposes of this article, but it is certainly worth having a discussion with your CPA. Essentially, businesses can claim additional NOL and carry their NOL for 2018, 2019 and 2020 back for five years.

There are a number of provisions in the bill that we have chosen to forego mentioning at the moment but will address as we get more clarity on both implementation and impact. It is important to remember that each person’s situation is unique, and we encourage you to reach out to your advisor and/or CPA for a more in-depth discussion on steps that you may need to take.

Additional Resources:

The CARES Act: Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020

Kitces: Analyzing The CARES Act: From Rebate Checks To Small Business Relief For The Coronavirus Pandemic

New York Times: F.A.Q. on Stimulus Checks, Unemployment and the Coronavirus Plan

Tax Foundation: Congress Approves Economic Relief Plan for Individuals and Businesses