In response to the COVID-19 pandemic, the federal government has approved a historic $2 trillion economic stimulus package to bolster the economy. Within that relief package are key provisions that are not only important to business owners, but to other taxpayers regardless of whether they have been impacted by the pandemic. The following are five provisions worth noting:
Small business loans
Nearly $350 billion in federally guaranteed loans will be made available to small businesses through the Paycheck Protection Program to cover salaries, wages, benefits, mortgage interest, rent, and utility expenses. Those loans can total 250 percent of a business’ average monthly payroll, with a maximum loan of $10 million. The loans will have a duration of up to 10 years, with a maximum interest rate of 4 percent.
“Small businesses are the backbone of the American economy. They are where most of the job creation and most of the wealth creation comes from. Protecting those businesses is a critically important policy goal,” said Bill Rudnick, Senior Partner, General Counsel and Head of Family Office Services for Cresset. “Growing businesses requires capital, both human and financial capital. This stimulus package has the potential to help with both.”
The most appealing part of this program is that the principal amount of the loan may be forgiven provided certain conditions regarding headcount and salaries are met. Importantly, the amount forgiven will be reduced if the employer does not maintain an average workforce headcount of full-time employees through the first eight weeks after the start of the loan greater than the average full-time employee headcount for the period of Feb. 15, 2019, through June 30, 2019, or through the first three months of 2020, depending on what the employer chooses.
Additionally, the amount forgiven will also be reduced if the employer reduces compensation by more than 25 percent for employees making less than $100,000 a year. There is a cure period for both headcount and salary reductions if the employer cures by June 30, 2020.
Tax credits for small businesses
The stimulus package also includes a tax credit against employment taxes for businesses that close or have their operations interrupted because of government orders related to the pandemic. The credit is equal to 50 percent of qualified wages up to $10,000 per employee, with the intent of making it easier for employers to keep workers on their payrolls and avoid layoffs.
Retirement plans – no RMDs for 2020
Certain 401(k) and individual retirement accounts typically require that plan participants over the age of 72 take annual required minimum distributions (RMDs). The stimulus action eliminates the need to take any RMDs for 2020, allowing participants to keep money in their plans rather than forcing withdrawals during a period of severe market volatility.
“For those retirees who do not need to take their RMDs to cover expenses, this will allow them to decrease their taxable income tax in 2020 and allow more money to grow in a tax-deferred account,” said Matt Teich, Managing Director, Wealth Strategy for Cresset.
An additional provision of the stimulus package temporarily lifts the limits on charitable giving of cash donations in 2020. Rather than being limited to 60 percent of adjusted gross income (AGI), taxpayers who make cash contributions to public charities may deduct up to 100 percent of AGI. “What this means is that people can potentially avoid paying income tax entirely for 2020 if they make a large enough charitable contribution,” Teich said.