On March 27, 2020, the House and Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under this massive bill, there will be $1,200 direct payments to individuals. Qualified dependents increase the payments to families by $500 per qualifying child.
There are multiple rules on the direct payments to individuals. The payments by the IRS will generally be based upon your 2018 or 2019 income tax returns.
- Joint Return – A married couple will receive a payment of $2,400.
- Children – Each dependent child qualifies for a $500 amount. There are no limits to the number of dependent children. The definition of a dependent follows the IRS guideline that you must provide one half of the support and the child must live with you for one half of the year. Adopted and foster children also qualify.
- Limits on Individuals or Married Couples – The $1,200 check to individuals starts to be phased out at $75,000 of income for single filers and is completely eliminated for single filers with incomes over $99,000. For married couples, the $2,400 payment is phased out between incomes of $150,000 and $198,000.
- Direct Deposit – The IRS will deposit the check in your bank account if you have provided the routing information and account number on your 2018 or 2019 tax return.
- New Child in 2019 – If you added a new child in 2019, it is desirable to file your 2019 return to receive the $500 credit for the dependent. If you do not receive the credit this year, there will be a $500 credit when you file your 2020 tax return.
- Payment Timing – The last time rebate checks were distributed was in 2009. It required two months for the IRS to process the checks after the passage of the bill. IRS Commissioner Chuck Rettig has stated his goal is to distribute the checks within three weeks. It is probable that the IRS will issue the checks within three to six weeks after March 27, 2020.
Senate Finance Committee Chairman Chuck Grassley (R–IA) was one of the principal drafters of the CARES Act. Grassley was supportive of the plan to send checks to Americans. He stated, "This bill would send a recovery check to most Americans for at least $1,200. A typical family of four would be eligible for $3,400. Seniors, veterans, the unemployed and low–income Americans would be eligible too. This would help workers, families and small businesses absorb some of the financial impact of the coronavirus."
With millions of Americans in lockdown and rising unemployment, direct checks will help many individuals to continue their normal lifestyle. The federal government hopes to increase testing and tracing of the coronavirus with the goal of returning to a more normal existence in the near future. Center for Disease Control doctors on the Presidential Healthcare Panel caution that it is not easy to determine how long it will be before we return to normal.
CARES Act – Benefits for Individuals
In addition to cash payments to individuals, the CARES Act includes tax, retirement, unemployment, charitable giving and student loan benefits.
- Cash Gifts – Individuals may deduct $300 above-the-line. This charitable deduction enables a taxpayer who is one of the 90% who take the standard deduction to also benefit from his or her charitable gifts. The $300 above-the-line deduction must be gifts of cash by a nonitemizer, and may not be to a donor advised fund or supporting organization.
- 100% Charitable Deduction Limit – The usual deduction limit for cash gifts to public charities is 60% of adjusted gross income (AGI). For 2020, gifts of cash to charity (excluding donor advised funds and supporting organizations) are deductible to 100% of AGI. The gift may be for any charitable purpose and is not limited to gifts for Coronavirus relief.
- $100,000 IRA Rollover – IRA owners may withdraw up to $100,000 and recontribute that amount to their IRA within three years. The $100,000 IRA rollover is limited to certain circumstances that involve the coronavirus. The IRA owner must have COVID–19, a spouse or dependent must be diagnosed with COVID–19, the business of the IRA owner must have been closed or damaged due to COVID–19, the IRA owner must have been laid off due to COVID–19, or the individual must be unable to work and perform required child care that is related to COVID–19. There is no pre-age 59½ penalty tax on the $100,000 IRA withdrawal and recontribution. If the traditional IRA withdrawal is not recontributed within three years, it will be subject to income tax. Some employer plans may permit this withdrawal and recontribution. If so, the employees may also benefit from this three-year rollover.
- Required Minimum Distribution (RMD) Waiver – The RMD is waived for IRA and other qualified retirement plan owners for the year 2020. This provision will permit IRA and other qualified retirement plan owners to retain funds in their IRAs. Because the markets declined substantially after the current RMD was calculated based on the plan value on December 31, 2019, Congress determined that it was beneficial to waive the RMD for 2020. Loyal donors may still wish to use IRA funds to make a qualified charitable distribution (QCD). The QCD is available up to $100,000 for individuals who are over age 70½.
- Student Loans – Students who have federally insured loans may benefit from a six-month period with no payments. Some students will qualify for payment relief even if they are benefiting from the Public Student Loan Forgiveness Program. This program is available to certain individuals in public or nonprofit work. The student loans are not forgiven, but there will be no interest or penalty during the six-month period.
- Unemployment Benefits – There were 3.28 million unemployment claims for the week of March 15 to 21. This was over four times the previous record number. Unemployed workers included those from restaurants, hotels, airlines and other service industries. The CARES Act will add $600 per week to state unemployment benefits for up to 4 months. Many states pay unemployment benefits for 26 weeks. The combined federal and state unemployment payments could be over $1,000 per week for the 4 months. Unemployed workers could receive the state benefits for an additional ten weeks.
CARES Act – Benefits for Nonprofits
While the CARES Act business benefits are primarily focused on small businesses, many benefits are also helpful for nonprofits. These include loan–grants, a payroll tax credit, loans with low interest rates, $10,000 emergency checks and deferred payment of payroll taxes.
- Small Business Administration (SBA) Loans – Nonprofits with less than 500 employees could receive SBA loans of up to $10 million. If the nonprofit maintains staff levels from March 1, 2020 to June 30, 2020, the SBA loan is forgiven and becomes a grant. The SBA loan may cover payroll, benefits and facility costs.
- Payroll Tax Credit – If the nonprofit is an ongoing entity and its revenue for 2020 is less than 50% of the revenue for the first quarter for 2019, it can qualify for a payroll tax credit of $5,000 per employee. The credit ceases when revenue passes 80% of the same quarter for 2019. There is a restriction that precludes a nonprofit from receiving both the payroll tax credit benefit and the SBA loan forgiveness.
- Midsized Nonprofit Loans – The Industry Stabilization Fund provides loans to nonprofits with 500 to 10,000 employees. The loans are not forgiven, but have a maximum interest rate of 2%. To qualify for the loan, the nonprofit must maintain staff levels at 90% of its historic level.
- Emergency Checks – The Economic Injury, Disaster Loans are available with no creditworthiness standards. Nonprofits may be qualified recipients of a $10,000 check. The federal government should issue the check within three days after the application is submitted.
- Deferred Payroll Payments – Nonprofits may delay payroll tax payments for 2020. While the payment is delayed, 50% is payable by December 31, 2021, and the remaining 50% must be paid on or before December 31, 2022. The deferred payroll payments are also not permitted if the nonprofit has received debt forgiveness on an SBA loan.
The CARES Act is a massive bill with major benefits for many nonprofits. These benefits will be particularly important for small nonprofits with less than 500 employees. The majority of small nonprofits lack endowments or substantial financial reserves. Many have only one month of cash reserve. The SBA loans with forgiveness are likely to be attractive for these small nonprofits. The federal government will need to promptly publish guidelines and regulations for the CARES Act provisions. Small nonprofits need prompt guidance for the SBA loans that could transition into grants.
Applicable Federal Rate of 1.2% for April -- Rev. Rul. 2020-9; 2020-15 IRB 1 (18 Mar 2020)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2020. The AFR under Section 7520 for the month of April is 1.2%. The rates for March of 1.8% or February of 2.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.