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The CARES Act, signed by President Trump on Friday, March 27, aims to provide emergency assistance for individuals, families, and businesses affected by the coronavirus. It provides cash for businesses and individuals, and it makes several welcome changes to rules impacting retirement plans and IRAs.

Here are some of the provisions you may need to know.

A Chicken In Almost Every Pot

A check for $1,200 will be given to all U.S. residents with adjusted gross income up to $75,000. They cannot be a dependent of another taxpayer, and need a work-eligible Social Security number. A married couple earning up to $150,000 will receive $2,400, and is eligible for an additional $500 per child. A head of household is eligible for a $1,200 check if they have an adjusted gross income up to $112,500 a year.

The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, is $146,500 for head of household filers with one child, and is $198,000 for joint filers with no children.

This benefit is available to those with no income or people on Social Security, as long as their total income does not exceed the limit and they received the Social Security benefit statement SSA-1099. The federal government will send them a payment via the usual way they get their Social Security payment.

The Internal Revenue Service will use direct deposit information from the 2019 return to send payments to bank accounts. If the IRS does not have direct deposit details for a prospect, then they will mail checks. If the 2019 tax return has not been filed, the IRS will use the 2018 tax return and use that information to determine whether the prospect meets the qualifications for a check.

Small Business Loans

One of the important cornerstones of the CARES Act is what is described in the bill as the “Paycheck Protection Program.” This provision seeks to help small businesses, nonprofits, and veterans’ organizations with 500 or fewer employees, individuals who operate under a sole proprietorship or as independent contractors, and eligible self-employed individuals to receive a covered payroll loan by leveraging the Small Business Administration’s Section 7(a) loan program.

It increases the maximum 7(a) loan amount to $10 million and expands the allowable uses of the loans to include “payroll support,” which includes paid sick or medical leave, employee salaries, mortgage payments, insurance premiums, and any other debt obligations. A key note is that allowable payroll costs do not include compensation to an individual employee in excess of an annual salary of $100,000, prorated for the covered period.

The loan period for this program starts on February 15, 2020, and ends on June 30, 2020. The program generally only covers businesses with fewer than 500 employees.

Under the Act, the lender is required to determine:

➣ Whether a business was operational on February 15, 2020

➣ Whether the business had employees to whom it paid salaries and payroll tax, or paid independent contractors

➣ Whether the business was substantially impacted by the virus

The Act states that the allowable uses of these loans include salary, wages, commissions, tips, paid leave, healthcare payments, and retirement benefit payments. Qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act are not included in the allowable uses. It also does not include any compensation of an employee whose principal place of residence is outside of the United States.

One of the most important aspects of the loans is that they are nonrecourse as long as they are used for authorized purposes. They require no personal guarantee or collateral but will require “Good Faith” certification containing the following:

➣ The current uncertainty makes the loan necessary to support ongoing operations;

➣ The funds will be used to retain works and maintain payroll or make mortgage payments, lease payments, and utility payments;

➣ There are no duplicative amounts.

Bottom of Form

➣ The interest rate during the covered period shall not exceed 4 percent

➣ The payment deferment period will be 6-12 month including principal, interest and fees

➣ The Lenders origination fees: will be reimbursed by the SBA

One of the most important aspects of the program is the way in which loan principal can be forgiven. Under the terms of the legislation, principal can be forgiven in an amount equal to the following costs incurred during the covered period of February 15, 2020 through June 30, 2020:

➣ Payroll costs

➣ Mortgage interest

➣ Rent

➣ Utilities

Any amounts forgiven will be reduced proportionally by any reduction in the number of employees retained compared to the prior year, and reduced by the pay reduction of any employee beyond 25 percent of their prior year’s compensation. Borrowers that re-hire workers who were previously laid off will not be penalized for having a reduced payroll at the beginning of the period. In addition, cancelled loans will not be included in the borrower’s taxable income.

Unemployment Benefits

With unemployment claims exceeding 3 million last week, overall unemployment benefits will dramatically expand for those out of work.

➣ Those unemployed will be eligible for an extra $600 per week in emergency federal compensation through July 31, 2020, once they are on unemployment insurance in their state, which is in addition to what they receive in state benefits. This also applies to people who were already on unemployment before the bill was enacted.

➣ People self-employed who previously did not qualify for unemployment are now covered under a new program called Pandemic Unemployment Assistance. This program provides unemployment benefits to gig workers, contractors, and others who cannot work due to the coronavirus emergency. They will receive $600 per week, plus half the average unemployment benefit in their state.

➣ People who are sick from the coronavirus or caring for someone who is sick from the virus should be eligible for assistance provided that they certify they ordinarily are able and willing to work but cannot, due to exhibiting symptoms, testing positive for the virus, or caring for a member of their family who has tested positive. This benefit may also extend to people not working due to a quarantine creating an inability to go to work.

➣ Unemployment will be extended another 13 weeks once the first 26 weeks runs out. After those 39 weeks, there may be an extended program that can provide an additional 13 to 20 weeks of unemployment compensation.

RMD Waiver

The CARES Act provides a waiver of required minimum distributions (RMDs) for 2020. This applies to IRAs, 401(k) plans, 403(b) plans, and governmental 457(b) plans. It is important to note that the waiver also applies to 2019 RMDs for those who are required to take their first RMD by April 1, 2020, if the distribution was not taken before January 1, 2020.

What if the RMDs Was Already Taken?

The relief package does not include any repayment provisions for situations where the 2019 or 2020 RMDs was already taken in 2020.  As such, the IRS may have to issue guidance on the issue of whether those taken RMDs can be put back into the IRA and effectively have the tax bill eliminated.

RMDs could be undone if they are eligible to be rolled over. To be eligible they must be rolled over within 60 days and must not have taken an IRA to IRA rollover in the last 12 months preceding the receipt of the 2020 RMD.

Qualified Plan Loans

For the 180-day period beginning on the date of enactment, the bill increases the dollar amount available for loans from qualified plans from $50,000 to $100,000 for plan loans made to qualified individuals. It also increases the percentage test limit for loans to the entire present value of the participant’s vested benefit from half the present value of the vested benefit. In addition, for loans as of, or after, the date of the CARES Act enactment, the repayment may be delayed for one year from the original due date. This applies if a loan repayment is due during the period beginning on the date of enactment and ending on December 31, 2020.

Waiver of 10% Early Distribution Penalty

The CARES Act waives the 10 percent additional tax for early distributions, provided it is associated with, “coronavirus-related distribution”, taken in 2020 for amounts not to exceed $100,000, subject to the following conditions:
➣ Coronavirus-related distributions can be taken from IRAs and retirement plans including 401(k) plans, 403(b) plans, and governmental 457(b) plans.

➣ The provision applies to individuals who have been diagnosed with “the virus SARS-CoV-2” or “coronavirus disease 2019 (COVID-19),” or for individuals whose spouses or dependents are diagnosed with the virus, or individuals who experience adverse financial consequences as a result of:

• being quarantined, being furloughed or laid off, or having reduced working hours due to the virus/disease,

• being unable to work due to lack of child care due to the virus/disease,

• closing or reducing hours of a business owned or operated by the individual due to the virus/disease,

• or other factors as determined by the Treasury.

The CARES Act allows a plan to rely on a certification provided by the participant that he or she meets the conditions for a coronavirus-related distribution.

➣ Amounts distributed may be repaid in multiple payments at any time over the three-year period, which commences on the day after the date the distribution was received. These amounts can be repaid to a qualified plan or an IRA so long as the account is one to which a rollover contribution could be made under the Internal Revenue Code.

➣ To the extent that the amounts are not repaid, the income with respect to any coronavirus-related distribution can be included ratably over the three taxable years beginning with the taxable year in which the distribution was received.

➣ Coronavirus-related distributions are deemed to meet applicable limitations on in-service withdrawals under Code sections 401(k) and 403(b). Such distributions are not required to be treated as eligible rollover distributions for purposes of the direct rollover requirement, the notice and written explanation of the direct rollover requirement, and the mandatory 20 percent income tax withholding for eligible rollover distributions.

IRA Contributions

The IRS issued Notice 2020-18 and confirmed in FAQs, issued March 24, that the contribution date for IRAs is extended to July 15, 2020, thus removing the provision from the CARES Act.

Student Loan Provisions

Student loans have been suspended for principal and interest, without penalty for federal student loans, through September 30, 2020. No interest will accrue on these loans during this suspension period.

In addition, employers may provide a student loan repayment benefit to employees on a tax-free basis for up to $5,250 annually toward an employee’s student loans, which will be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit, as well as other educational assistance such as tuition, fees, and books, that are provided by the employer under current law. The provision applies to any student loan payments made by an employer, on behalf of an employee, after the date of enactment, and before January 1, 2021.

Business Tax Relief Provisions

Charitable Contributions by Corporations: These contributions cannot exceed the excess of 25% of the business’ taxable income, which was increased from 10%, under prior law.

Employee Retention Credit: The bill created a refundable payroll tax credit, for 50 percent of wages, during the virus crisis. The credit is available to employers whose operations were fully or partially suspended, due to a coronavirus-related shut-down order, or gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when those employees are not providing services due to the coronavirus-related circumstances. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is either open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

Delay of Employer Payroll Taxes: The bill allows employers and self-employed individuals to defer payment of employer share of Social Security tax they are otherwise responsible for paying. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.

Temporary Increase in Business Interest Deduction: The bill temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020.

This document is provided for informational purposes only by Dunham & Associates Investment Counsel, Inc. solely in its capacity as a Registered Investment Adviser and should not be construed as legal and/or tax advice. Dunham & Associates Investment Counsel, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.