The CARES Act contains several key provisions helpful to attorneys and law firms.
On March 27th, the President signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. These rules are brand new and include significant tax and cash flow planning opportunities. These are just a few of the provisions. You should consult with your tax professional to understand the final rules and regulations and how it might affect you. I have bolded potential planning opportunities that you may want to consider:
- Individuals who had up to $75,000 in adjusted gross income in 2019 (or 2018 if 2019 is not filed) will receive a one-time payment of $1,200, while married couples with AGI up to $150,000 will get $2,400. Additionally, taxpayers will receive an additional $500 for each qualified child, while individuals and families with income above their respective thresholds will see their relief payments reduced by $50 for every $1,000 in AGI.
Delay filing your 2019 tax return if you would qualify on your 2018 tax return.
- Small businesses (up to 500 employees) are eligible for SBA 7(a) small business loans up to a maximum of the lesser of $10 million, or 2.5 times the average monthly payroll costs over the previous year (excluding amounts over $100,000 per person). The loan can be used to cover payroll, rent, utilities and group healthcare insurance premiums. The loan may be forgiven is specific criteria are followed. The loan interest is set at a maximum of 4%, making this loan incredibly affordably.
If you follow the guidelines, your loan may be 100% forgivable, making this free money to keep your employees on the payroll. Contact your local banker immediately to get started as the bankers are going to be incredibly busy helping people.
- If you do not qualify for the loan program, you may qualify for tax credits equal to 50% of wages paid to each employee, up to a maximum of $10,000 per employee. You must show a decrease in revenue in one quarter of more than 50% compared to the same quarter in 2019. The rules are very complicated, so check with your tax professional.
Small businesses may receive a credit of up to $5,000 for each employee that they pay over $10,000. You should begin to run pro-forma calculations on your revenue to determine if you qualify for this benefit.
- Required minimum distributions are waived in 2020, and taxpayers who have already taken their RMDs for 2020 have the option of returning them, if they so desire.
Consider altering your RMD payments this year to reduce your tax liability. Utilize other sources of cash flow besides IRAs.
- The 2019 IRA contribution deadline has been extended to July 15, 2020.
Consider contributing additional amounts to an IRA, including Roth IRAs. If you are not eligible due to income limitations, consider non-deductible contributions and if possible, a roth conversion strategy.
- Federal Student Loan payments can now be deferred until September 30, 2020. No interest will accrue during this time.
Check to see if your student loans qualify. They must be federal loans. Private loans do not apply, but many lenders may follow the Federal rule. Check with your lender. Also consider paying down student loans now. You will effectively be reducing your loan principal by 100% while interest is at zero percent.
- The Act provides for special “coronavirus-related” distributions from IRAs and employer-sponsored retirement plans of up to $100,000 that are exempt from the 10% early withdrawal penalty, can be repaid over a three year period and are includable in taxable income over a three year period to the extent not repaid. A coronavirus-related distribution means a distribution made on or after January 1, 2020 and before December 31 and generally may not exceed $100,000 in total for an individual. The term “coronavirus-related” distribution means any distribution from an eligible retirement plan made to an individual:
- who has been diagnosed with COVID-19 (as confirmed by a CDC-approved test),
- whose spouse or dependent is diagnosed with COVID-19, or
- who experiences adverse financial consequences as a result of being quarantined, being 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 Act permits the Plan Administrator to rely on the participant’s certification that they qualify for the distribution.
If you need cash flow now, you can take a non-taxable distribution without penalty and repay it within a 3 year period.
- 401(K) loans have a temporary increase in the loan limit of up to the lesser of $100,000 or 100% of the participant’s vested account. (The usual limit is the lesser of $50,000 or 50% of the participant’s vested account balance). This provision applies to loans made during the next 180 days.
Consider a 401(k) loan carefully and use some cash flow modeling software to determine if this is in your best interest. This is very tempting, but probably not a good time to take a 401(k) loan.
- Any loan payment due on any outstanding loan between now and December 31, 2020 is delayed for one year. The five-year repayment timeframe is extended for one year and interest continues to accrue on the loan during the delay period.
If you currently have an outstanding 401(K) loan, contact your service company to suspend payments for all of 2020.
- $300 above the line charitable deduction- Taxpayers who do not itemize are now eligible to deduct up to $300 from a cash only contribution to a qualified charity. This does not include donor advised funds or 509(a)(3) supporting organizations.
Consider making up to a $300 charitable donation to help out your community. This is new if you do not itemize.
- The AGI limitation on qualified cash contributions to charity (for those who itemize) has been temporarily increased to a maximum of 100% of AGI. In essence, one could wipe out their entire tax liability for 2020 by donating cash to charity.
If you have cash available you can significantly reduce your current tax liability. Utilize some cash flow planning software to determine how much this can help.
Self-employed individuals may be eligible for pandemic unemployment insurance. If you are self-employed, you now may be eligible for some unemployment benefits which has never happened before.
As you can see, the provisions in this new bill can be incredibly helpful to you, your business, and your family. The rules are complicated and be sure to follow them in order to be eligible for these benefits.
Our team at Envision Wealth Management is ready to help you and your business. If you would like to speak with me and brainstorm how this new law can help you, I am available for 15 minute phone calls here: