The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020 and has a lot of economic benefits for small businesses, freelancers, and individuals in the wake of COVID-19.
This bill is big, and we’re only going to be discussing a few aspects of it below. Please keep in mind that the explanations are intended to be conveyed in the simplest way. There is likely additional information not discussed below and/or requirements that would need to be met in order to qualify. We recommend discussing with a professional in order to determine how your circumstances apply.
- Stimulus Checks – direct payments from the government
- Unemployment Benefits – expanded to include freelancers and increased weekly payments
- The Paycheck Protection Program – loans with possible forgiveness
- Economic Injury Disaster Loans $10,000 Grant – EIDL loans are not new, but the $10,000 grant aspect is!
- Comparing the PPP Loans and the EIDL Loans – now that there are 2 types of SBA loans on the table, it’s important to compare them
- Delayed Payroll Taxes for Businesses – payments for social security can be delayed to free up cash flow
- Employee Retention Credits for Businesses – refundable payroll tax credits for certain businesses
- Penalties Waived on Retirement Account Distributions – if you need to tap into your 401k or IRA, the penalties are waived
- Charitable Contributions Deduction – donations to charity will be deductible to more individuals now
- Deduction for Student Loans for Businesses – student loan payments up to $5,250 could be a business deduction
The stimulus checks will be based on your 2019 tax info – if you have not filed 2019, then it will be based on 2018. The number that will be used to determine benefits is your Adjusted Gross Income (AGI). You can find this number on line 8b on 2019’s form or line 7 for 2018’s form.
- If you filed single and your AGI was $75,000 or less, you’re eligible for $1,200. If you made more than $75,000, you will receive a reduced amount up to an AGI of $99,000. This benefit totally phases out (aka, no check at all) once your income reaches $99,000.
- If you filed married filing joint and your AGI was $150,000 or less, you’re eligible for $2,400. If you and your spouse made more than $150,000, you will receive a reduced amount up to an AGI of $198,000. This benefit totally phases out (aka, no check at all) once your income reaches $198,000.
- If you filed as head of household and your AGI was $112,500, you’re eligible for $1,200. If you made more than $112,500, you will receive a reduced amount up to an AGI of $136,500. This benefit totally phases out (aka, no check at all) once your income reaches $136,500.
- Those filing married filing joint or head of household will also receive an additional $500 per child under 17.
You can calculate exactly how much you’ll get here.
I am so happy to announce that unemployment benefits have been extended to more people and increased by $600/week. #thankyoubernie
Prior to the act, you were only able to get unemployment benefits if you had a W-2 job. Now, freelancers, gig workers, and short-term workers (ie, they didn’t work long enough to become eligible for benefits) are eligible. (!!!)
The Paycheck Protection Program (PPP)
The Paycheck Protection Program is a new SBA loan that includes forgiveness if the proceeds are used for payroll, rent, and other qualified expenses. Please click the link to read more, as this program deserves it’s own post. 🙂
SBA Economic Injury Disaster Loans & $10,000 Grant
If you apply for an EIDL (Economic Injury Disaster Loan), you can request an advance of $10,000 on the loan. This advance turns into a grant, even if you are not approved for the loan.
Part of the CARES Act was enacting this emergency grant program. As long as you are an entity eligible to apply for an EIDL, you will be able to request an advance on this loan, up to $10,000 and the SBA must distribute it to you within 3 days.
Comparing the PPP Loan and the EIDL Loan
Assuming only one loan can be taken out, it’s important to determine which loan you want to pursue, the PPP or the EIDL. See below for a very simple comparison between the two. The SBA has counselor’s available that can help you weigh your options and we’d be happy to help as well.
|Loan Amount||Based on economic needs, up to $2m||250% of payroll average over 12 months, up to $10m|
|Forgiveness||A $10,000 advance would be forgiven, even if the loan is denied as long as the recipient did not also receive a PPP loan||The entire amount of the loan could be forgiven as long as it’s used for qualified expenses. If an EIDL grant is received in addition to PPP, the grant would need to be paid back|
|Term||Up to 30 years||2 years with payments deferred for 6 months (interest will accrue during this time)|
|Rate||Up to 3.75%||0.50%|
|Fees||No Fees||No Fees|
|Eligibility||Based on creditworthiness||Must’ve been operating on 02/15/2020|
Payroll Taxes Can Be Delayed
Normally, employers are required to contribute 6.2% of the employee’s payments towards Social Security tax (with the employee contributing the other 6.2% from each paycheck). Under this new provision, employers can delay paying in the employer’s portion (6.2%) of 2020’s Social Security tax for 2 years. 50% of the total due would be due by December 31, 2021 and the balance by December 31, 2022.
If you are paying yourself a $50,000 salary, these payments would amount to $3,100 with $1,550 due at the end of 2021 and 2022.
If you are a freelancer and are not on payroll, you are still eligible for this deferral, but again, instead of it being instantaneous (similar to the Families First Act) it will most likely be a credit on your 2020 taxes towards your self-employment tax.
It’s not much, but it’s still some savings that could be used to help float yourself over the next few months if you choose to take this route. More information will be released by your payroll processing company on this provision.
Employee Retention Credits
If your business is either fully or partially suspended due to COVID-19 or your gross receipts declined by more than 50% when compared to last year, your business is eligible for this benefit.
The benefit is a payroll tax credit equal to 50% in the wages you paid during the COVID-19 crisis.
The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis.
The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19- related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employee. As long as your business has less than 100 full-time employees, all wages paid will qualify, regardless of whether your business is open for business or shut-down.
The credit is based on the first $10,000 paid of compensation, including health benefits, between March 13, 2020 and December 31, 2020.
This credit is not available if you receive a Paycheck Protection Loan.
Penalties Waived on Retirement Withdrawals
This should be a very last resort.
If you need to dip into your retirement savings (401k, Traditional IRA, SEP IRA), the 10% early withdrawal penalty will not apply. The amount you withdraw will still be taxable, but instead of it being taxable on 2020’s tax return, the tax will be spread over 3 years. Additionally, you are able to re-fund the account within 3 years and avoid the income tax on the withdrawal.
You will have to meet requirements in order to qualify for this special treatment.
Charitable Contributions Deduction
In the past, charitable contributions were only deductible if you itemized your deductions. Most people do not itemize if they do not own a home or have large amounts of itemized deductions. For the 2020 tax year, all individuals are eligible for a $300 charitable contributions deduction. Go donate some money!
Student Loans Covered by Employers
Your employer (which may be you) can pay up to $5,250 towards an employee’s (which may be you) student loans and the payment is deductible to the employer and tax-free to the employee.
In order to take advantage of this benefit, you’ll need to set-up a Qualified Educational Assistance Program within your business. No more than 5% of the benefits paid out in total for the year can be for shareholders/owners of the business or their spouses/dependents. So if you don’t have any other employees besides yourself, you wouldn’t be able to take advantage of this. If you do have other employees, it might be worth setting-up a plan and offering this benefits to all employees in your company so you can take advantage of the benefits.
Qualified Educational Assistance Programs are not new, but the ability to include student loan payments in the QEAP is new under the CARES Act.
Please reach out, we’d love to help!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Countless assumes no liability for actions taken in reliance upon the information contained herein.