How the stimulus CARES Act Can Help Individuals and Small Businesses

The CARES Act is an estimated $2 Trillion bill that provides aid to several different sectors of the economy. Below are some details on a few of the provisions relating to individuals and small businesses.

Individual Provisions

Stimulus Payments

The bill provides $1,200 per person in stimulus payments. For individuals making $75,000 or less, they can expect a $1,200 payment. Married couples filing a joint return who make $150,000 or less can expect a total of $2,400 between them. The bill also includes $500 per child. For single filers making more than $99,000, they won’t receive a payment. Married filers making $198,000 or more won’t get anything either. Anyone in between will get an amount in between $0 and the maximum credit depending upon how far up on the income scale they are.

The bill treats the stimulus payments as a tax credit. The first paragraph of the section on the stimulus check says that the stimulus is a tax credit for the 2020 tax year. Meaning the return that people can’t start filing until January of 2021.

The bill clarifies this later and states that the Treasury will essentially be paying this “tax credit” out to taxpayers based on either 2019 tax return figures or 2018 tax return figures. Those who have not filed 2019 taxes will have the amount calculated based on 2018 income and those who have filed 2019 returns will have the credit calculated based upon 2019 figures.

Some other income rules apply for the stimulus checks. You must have qualifying income of at least $2,500. You also need to have a valid identification number. For most, this is a social security number. Treasury has indicated that taxpayers will receive a direct deposit if the IRS has that information in their database. Treasury has indicated that they are going to open a portal of some sort on the IRS website where taxpayers that don’t have direct deposit information on-file with the IRS can enter this information.

Retirement Plan Distributions

Normally a distribution from a retirement plan before age 59 ½ is subject to a 10% penalty unless it meets an exception. The bill allows coronavirus-related distributions to taxpayers without penalty. This is limited to $100,000 in distributions. To be considered a coronavirus-related distribution, it needs to meet a few tests; 

It must be a distribution taken on or after the date of the enactment of the bill.

You or your spouse needs to have been diagnosed with COVID-19 OR you need to have experienced “adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.” 

The last part of point 2 is quite inclusive. I believe many people will fall under this category.

Even a normal retirement distribution from a traditional account that isn’t subject to penalty is included in the gross income of the taxpayer. The bill also allows some relief from this. Without this clause, you would see many people take retirement distributions during 2020 to make ends meet and then have a potentially higher tax bill than normal due to these distributions.

The bill says that any distributions taken related to COVID-19 will be included in gross income over a period of three years. If a taxpayer takes a $30,000 distribution in 2020, they will have $10,000 included in gross income for 2020-2022. This allows the taxpayer to break up the tax burden of this distribution.

Charitable Contributions

Normally, charitable contributions are only deductible if you itemize your deductions. This bill allows taxpayers who don’t itemize to deduct up to $300 of charitable contributions regardless of if they itemize deductions. These must be cash contributions. Donations of clothing to goodwill would not qualify for this deduction even though they are an itemized deduction.

Unemployment

Traditionally, self-employed individuals weren’t eligible for unemployment in most cases. The act establishes a temporary Pandemic Unemployment Assistance program through December 31, 2020. The details of how this will be administered have not been released.

Provisions for Small Businesses

Small Business Interruption Loans  

This section of the bill uses the SBA 7(a) loan program to provide financing to eligible businesses impacted by the virus. An eligible business for purposes of this program must not have more than 500 employees.  The maximum loan amount under this program is 2.5 months of payroll.   

These loans are eligible to be forgiven with some limitations.  Borrowers are allowed forgiveness of the debt in an amount equal to the cost of maintaining payroll continuity during the period beginning March 1, 2020 and ending June 30, 2020. This forgiveness starts to phase out for wages paid to employees earning over $100,000 per year.  Borrowers will be required to submit payroll tax filings and financial statements to the SBA to verify the amount to be forgiven.   

Borrowers are required to make a “good faith certification that the uncertainty of current economic conditions justifies the loan request to support the ongoing operations of the borrower and acknowledges that funds will be used to retain workers and maintain payroll.  Debt forgiveness under this provision will not be taxable to the borrower.   

 Feel free to contact our office if you have questions 701-492-9000. 

Disclaimer:

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Arrow Advisors would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.