What’s in the CARES Act?

With America facing a crisis of historic proportions amid the COVID-19 pandemic, the president recently signed the $2 trillion federal aid package to provide economic support to families, business owners, and even the self-employed.

While there’s been a great deal of coverage about the CARES (Coronavirus Aid, Relief, and Economic Security) Act in the media, I wanted to take some time to walk through the most important parts of the stimulus package, highlighting elements that I think will be most relevant and helpful to each of you.

Support for Families and Individuals 

As has been widely discussed, the stimulus package includes one-time payments for eligible families and individuals. Here’s how that will work. 

The money is available to legal residents –  those who are not claimed as a dependent on someone else’s tax return (or eligible to be claimed on someone else’s return) and those who don’t earn too much money each year.

So, what does that look like? Here’s a more detailed breakdown:

  • Single-filing taxpayers who had adjusted gross income (AGI) less than $75,000 in 2019 (or if you have not yet filed your 2019 tax return, the IRS will look at your 2018 earnings) will be eligible for a full payment of $1,200.  
  • Couples who file jointly with AGI less than $150,000 will get $2,400. 
  • Individuals who file as “head of household” with AGI $112,500 or less will get $1,200. 
  • The check amount decreases by $5 for every $100 of AGI that exceeds the limits listed above. 
  • The payments are not available to individuals making over $99,000 or head of household filers who earn $146,500 or more. The money is also not available to couples who have no children and earn $198,000 or more.
  • Qualifying households that have a child under the age of 17 will receive an additional $500 per child.  If you’re a family of four, you’ll be eligible for a maximum of $3,400.

This Nerd’s Eye View illustration offers a great overview: 

CARES Act 2020

From Michael Kitces at Nerd’s Eye View; reprinted with permission.

Receiving Your Payments

If you have received federal tax refunds directly to your bank account in recent years or you receive Social Security payments directly to your bank account, the IRS has your direct deposit information on file and your credit will be sent to that account. These electronic funds transfers are expected in the next few weeks. 

If the IRS does not have your direct deposit information, then your funds will be mailed to you in a check. For mailed checks, it could take a month or two to receive your funds.  

Support for Small Businesses and the Self-Employed

The $2 trillion federal aid package includes a number of important measures specifically designed to support small businesses including earmarking $350 billion for federally guaranteed loans for this hard-hit sector.

As part of the stimulus measures, small businesses can apply for loans under the “Paycheck Protection Program” that can be partially forgivable if they’re affected by COVID-19. The Paycheck Protection Program is designed to do exactly that: keep people employed. 

The Small Business Administration will be charged with supervising the program, but the loans will actually be administered by banks and other lenders to speed up the process.

The loans will be available to companies that meet certain requirements. For instance, the loans are designed for companies that have 500 or fewer employees. In addition, portions of the loan that are used to pay for up to 8 weeks of payroll, rent, mortgage interest, and utility expenses can be forgiven, meaning you will never have to pay that portion back. Any remainder that is not forgiven will be amortized over ten years.

Loans will be available for as much as $10 million and any portion that is not forgiven will have an interest rate of up to 4%. There will also be an expedited origination process.

The stimulus package also includes a fully refundable tax credit for eligible employers equal to 50 percent of qualified wages (wages paid after 3/12/20 and before 1/1/21) up to $10,000  Therefore, the maximum credit for wages paid to an employee is $5,000. This is designed to further encourage businesses to retain employees. This tax credit is not available if you use the Paycheck Protection Program.

As a business owner, you can also carry back 2018–2020 losses up to five years, on up to 100% of taxable income from these same years.

Additionally, the bill has provided a delay in employer-side 2020 payroll taxes for businesses and self-employed individuals until 2021 and 2022. 

Expanded Unemployment Insurance 

Another important element of the package is its expansion of unemployment insurance to include those who don’t typically qualify, such as independent contractors. 

While this group is often referred to as gig economy workers, in reality, independent contractors encompass far more than simply those who perhaps drive for Uber, Lyft or Instacart. It encompasses many small sole proprietors and other self-employed individuals. It’s no secret that this group of workers has been among the hardest hit.

Workers in this category will benefit from a number of measures in the bill. For the first time, self-employed individuals will be able to apply for unemployment benefits. The provisions include an extension of the duration of regular unemployment benefits from the usual 26 weeks to as much as 39 weeks. Plus, the Act offers incentives for states to establish “short-time compensation programs” for individuals whose hours are reduced. 

Also, importantly, the aid package created a new Federal Pandemic Unemployment Compensation benefit of $600 per week on top of regular unemployment benefits, which are administered by state governments. This additional payment is currently earmarked to last through the end of July. The waiting period to qualify for unemployment insurance has also been eliminated.

Provisions Related to Retirement Accounts and Streams of Income

Your ability to contribute to a 2019 IRA or Roth IRA has been extended for an extra three months under the stimulus package, which is good news if you haven’t yet made those important contributions.

In addition, for those who are over age 72, Required Minimum Distributions for 2020 have been entirely suspended.

Also, notably, those who are financially struggling right now have the option to borrow up to $100,000 from a workplace retirement plan and can delay payments on the loan for one year.

Finally, the 10% standard penalty for non-qualified early withdrawal in 2020 by those under 59½ has been waived for coronavirus-related IRA or 401(k) distributions of up to $100,000.  Distributions will still be considered income and, therefore, subject to regular income tax. Taxpayers will have three years to pay the related tax or to put the funds back into the account.

Evolving Landscape

As the impacts of COVID-19 continue to unfold, the government may roll out more measures designed to assist Americans. 

There has been some talk of perhaps sending additional stimulus checks for instance. I will continue to keep you updated on anything that might be useful and as always, I’m here to help you navigate through this uncertain time.

Sources:

H.R. 748: Coronavirus Aid, Relief, and Economic Security Act

Forbes, Your Guide To The Federal Stimulus Package

Forbes, Trump Signs $2 Trillion Coronavirus Relief Bill Into Law, Largest Aid Package In U.S. History

Market Watch, Here’s what the historic $2 trillion coronavirus stimulus package will do to help small businesses

CNET, Coronavirus relief: $2 trillion package gives benefits to gig workers

 

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