The CARES Act and Tax Filing Extension

Recently, there were two key orders from the federal government in response to the COVID-19 pandemic: the extension of the tax filing and payment deadlines, and the CARES Act.  Let’s take a look.

Extension of Tax Filing and Payment Due Date

On March 21^st, it was announced that the tax filing deadline (in addition to the previously announced extension of tax payment due date) was extended to July 15, 2020.  This extension applies to all individuals, and all entities with a normal tax return due date of April 15^th.  Businesses or other entities with filing dates other than April 15^th are not granted an extension.

The IRS provided guidance on many frequently asked questions soon after, including the following topics:

• IRA contributions: The deadline for Traditional and Roth IRA contributions for 2019 has been extended to July 15^th.   
• Estimated tax payments: Estimated payments originally due on April 15^th are now due on July 15^th.  There is currently no extension on the due date of second quarter estimated tax payments, which remain due June 15^th.
• Contributions to Health Savings Accounts or Medical Savings Accounts: For 2019, contributions to health or medical savings accounts may be made any time until the July 15^th

CARES Act

On March 27^th, the president signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law, providing stimulus directly to American individuals and loan availability to businesses.  First, we will cover the provisions impacting individuals, then we will provide a broad outline on how this impacts businesses.

Rebate checks:

Perhaps a misnomer, the rebate checks certain citizens will receive will actually be a credit against 2020 income taxes.  The amount received will be based on adjusted gross income (AGI) from 2019 tax return if filed, or 2018 tax return if filed, or Social Security reported income.  The amounts expected to be received and requirements are outlined below:

• $1,200 single, $2,400 married, $500 per child under 17 [no maximum number of children]
• Total amount family could receive is phased out for AGI over $75,000 single and $150,000 married. Reduction of $50 for every $1,000 over the thresholds. 
• Phase out table:

When filing 2020 income tax return:

• If too little credit was given based on 2020 AGI, the difference will be credited against 2020 taxes.
• If too much was given, the difference will apparently be forgiven. However, additional guidance is needed to clarify this.
• Checks are scheduled to start going out the week of April 12th, and it’s expected to take about two months for all to be delivered. If the IRS has an individual or family’s banking information, electronic deposits will happen more rapidly, otherwise paper checks will be mailed. 

Retirement Plans:

Regarding retirement plan accounts (401(k)s, 403(b)s, IRAs, etc.), one of the main provisions that will provide citizens additional access to capital is a waiver of the 10% early withdrawal penalty for withdrawals prior to 59½ by individuals:

• Diagnosed with SRS-DCOV-2 or COVID-19 by test approved by CDC, or
• Whose spouse or dependent is diagnosed with one of the above viruses, or
• Who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off, or having to work reduced hours, or being unable to work due to child care.

In addition to the waiver of any early withdrawal penalty, if a withdrawal is taken due to one of the above conditions, income tax on the withdrawal amount can be spread over three years beginning with 2020.  Additionally, such withdrawals can be re-contributed to the retirement account within three years to avoid recognition of income.

For eligible participants, the loan limit from qualified plans is increased from $50,000 to $100,000 (to a maximum of 100% of the account) for 6 months following final enactment of the Act.  Loan payments can be delayed for up to 12 months.

Also, all required minimum distributions (RMDs) from qualified plans and IRAs are waived for 2020.   For 2020 RMDs already taken, if within the past 60 days, they can be rolled back into the plan. 

Federal Student Loans:

With many young people that were already struggling to make their federal student loan payments, there are several provisions that should provide some relief.  Note: These provisions only apply to the federal student loan program.  The CARES Act provides for:

• The ability for borrowers to pause their federal student loan payments until September 30, 2020.
• No interest to be charged on loans through September 30, 2020.
• Those that choose to pause their payments, this time will be counted toward all loan forgiveness programs.
• Employers to be able to pay up to $5,250 of an employee’s student loan payments without it being taxed as compensation to the recipient.

Charitable Contributions:

Finally, the government wants to continue to encourage individuals to make charitable contributions, especially during this unprecedented time of economic uncertainty.  As such, the Act provides for:

• Up to $300 in charitable contributions which can be deducted above the line to reduce AGI. This applies UNLESS the taxpayer elects to itemize deductions.
• Cash charitable contributions can be deducted up to 100% of AGI for 2020. Any excess can be carried forward for five years.

Paycheck Protection Program:

As an incentive for businesses to keep their current payroll, the federal government is rolling out what they call the Paycheck Protections Program (PPP).  This program will provide loans through Small Business Administration (SBA) lenders, which can potentially be forgiven under certain circumstances.

For businesses (corporations, self-employed, and non-profits) with fewer than 500 employees, the maximum loan is the lesser of 2.5 times the average monthly payroll costs for the previous 12-months as of the date of the loan, or $10 million.  Payroll costs include wages, commissions, salaries to employee or independent contractor, tips or equivalent, payments for vacation or leaves, payments for group health care benefits including premiums.  These loans are for two years at a maximum 1% interest.

Loans used to cover payroll costs (including group medical), interest on mortgage obligations, rent and utilities for the eight week period from the date of the loan will be forgiven.  Forgiveness will be reduced if the head count is reduced, based on the average number of full-time employees during the 8 weeks from the date of the loan.

Employee retention tax credits:

Available to all employers impacted by the pandemic and who do not take out a loan as a part of the PPP, the employee retention tax credit is equal to 50% of wages paid per employee per quarter up to $10,000 in wages paid.

Employer Payroll Tax:

All employers and self-employed individuals who do not take out a loan as a part of the PPP may defer the payment of the employer share of Social Security taxes incurred between 3/27/2020 and 12/31/2020.

• 50% of the amount is due on 12/31/2021.
• 50% of the amount is due on 12/31/2022.

Corporate Charitable Deductions: 

Similar to the provisions impacting individuals, the government also wants to induce charitable contributions by businesses.  As such, the current 10% limit on Corp charitable deductions has been raised to 25%.

With the fluid nature of the global pandemic and our local, state and national responses, we will do our best to keep you updated.  We are here to assist in any way we can.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.