The unprecedented stimulus package has passed. But how exactly does it work?
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The unprecedented stimulus package has passed. But how exactly does it work?

With all of the information spiraling around the media regarding this stimulus, one question still seems to be on everyone's mind: How exactly will this plan be executed? The short version answer is through the IRS. I will provide a simple overview for how the $1,200 per person ($2,400 for married couples) will be put into your hands, and briefly explain other advanced provisions towards the end.

A quick preface: fear not; This will not be managed like the heavily-backlogged state UI (Unemployment Insurance) process. The IRS is very fit to handle this, being the arbiter of the nation's tax collection service. So think of this more-or-less as the same procedure you are familiar with, when you are refunded or pay taxes to the federal government.

Overview

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, (H.R. 748), which passed the Senate on March 25th in a 96-0 vote, authorizes $2 trillion in aid to help the economy due to the COVID-19 pandemic. Among other provisions, the bill provides direct instructions to the IRS on how to handle the distribution of $507 billion of "recovery rebates" to millions of Americans, by adding a new code section to the Internal Revenue Code (SEC. 6428. 2020 RECOVERY REBATES FOR INDIVIDUALS).

Process

The IRS will look at your 2019 tax return. If you have not yet filed your 2019 tax return (due to deadlines for both paying and filing now being pushed back to July 15th 2020. See: my previous article on the matter) then they will look at your 2018 return. If you collected Social Security benefits, the IRS will determine your eligibility based on your Form SSA-1099. If you did not make any income either year, the IRS has asked that you file a simple tax return in order to receive the benefit. If you have not filed your return(s) - and you should have - I would get that filed ASAP to qualify for the benefit.

Eligibility and Phase-out Rules

Once eligibility has been determined, the IRS will cut you a check for $1,200 ($2,400 for married filers) and $500 per each qualifying child.

Phase-out rules are based on AGI (Adjusted Gross Income). A "phase out" means your rebate will be systematically reduced above a certain income amount, while a "total phase out" means you will get nothing above a certain income amount. AGI is basically your gross income plus or minus small adjustments (i.e. dividends, capital gains, interest income etc.) but before deductions and credits. If you need an idea of what your AGI looks like, it is line 7 on the 1040 form. The phase out applies if you income is above the following number, based on your filing status:

  • For Single filers, if your AGI is above $75,000 (Total phase out at $99,000 with no children)
  • For Head of Household filers, if your AGI is above $112,500 (Total phase out at $136,500 with no children)
  • For Joint Filers, if your AGI is above $150,000 (Total phase out at $198,000 with no children)

Phase out calculation is as follows: Once you go over these amounts, you lose $5 of the stimulus payment per every $100 your AGI exceeds the given threshold. To use an example to illustrate this, let's say that you are a single filer with no children, and your AGI ends up being $75,700. You are $700 over the phaseout amount. Therefore, since every $100 over is $5 shaved off your stimulus payout, this is how you would calculate it:

  • 7 multiplied by $5 = $35. $1,200 (the single filer amount paid out) - $35 phase out amount = $1,165 total take-home stimulus amount for an AGI of $75,700.

Who is not eligible?

Quite simply, it is any of these taxpayers:

  1. Those who exceed the threshold and phaseout
  2. Anyone without a valid SSN
  3. Anyone who can be claimed under the $500 rule (dependent)
  4. Nonresident Aliens
  5. Estates and Trusts (since they are not "taxpayers" per se)

Payment (*UPDATED AS OF MARCH 30TH*)

The IRS will be using the direct deposit bank information from whichever return they have on their system (either 2018 or 2019 as discussed above). If you did not put any direct deposit information on either return - which is common for those who owe - or prefer getting a check by mail, the IRS will have an online portal in the coming weeks to provide the IRS with your most up-to-date bank account information. This is optional, as you will still receive a check by mail to the address on file in the worst case scenario, or if you choose not to use this portal.

Final Words

The IRS estimates that this stimulus package will impact roughly 83% of taxpayers. The IRS has also wanted us tax professionals to make two points very clear. First, these payments are not taxable. Underlined, italicized and bolded. This is not a bonus or UI payment. This is a cash payment that will not be taxed. Second, a common question received is "well what if I owe the IRS? Typically they take any refund money and apply it to a balance due". Congress has made it clear this money is to be untouched by IRS balances due. Now, if you take this money and put it into an account where you are on an existing payment plan and the IRS withdraws from it, that's on you. But this cannot and will not be automatically applied to any taxes owed. Period. Lastly, Secretary Mnuchin said he wants payments to start being disbursed around April 7th, so expect this process to start slow-rolling two-ish weeks from now. Realistically, May is when most people will start seeing their rebates come in.

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BUSINESS TOPICS AND ADVANCED TAX TOPICS DISCUSSED IN THE CARES ACT

The aforementioned covers the basics of what most Americans will be impacted by. The following will cover CARES Act provisions for business entities and advanced taxation topics that will impact some Americans. (Author's note: I am not an expert on SBA loans, so I do not feel qualified enough to speak on that subject. Just make a mental note that there are a few topics in here that I have not covered. Consider this a general overview and not a complete assessment).

Payroll Tax Credit Refunds

Per the "Families First Coronavirus Response Act", (P.L. 116-127), the CARES Act provides for advance refunding of the payroll tax credits. This includes a requirement to utilize the credit for paid sick leave and required family leave. The IRS will provide forms for this. Also, so long as this was due to the payroll tax credit being anticipated, under Sec. 3111(a) or 3221(a) the IRS will waive penalties for any failure to properly deposit payroll taxes per depositing obligations. Further, companies can now defer payment of their 2020 payroll taxes to the IRS until the end of 2022. However, in order to take advantage of this benefit, companies will have to pay 50% payroll taxes owed by the end of 2021 and the remaining 50% by the end of 2022.

A note to businesses: Payroll taxes are heavily scrutinized by the IRS. If there is any question regarding if this is being done correctly, speak to a tax professional and / or reference SEC. 2202 and SEC. 4607 of the bill.

Employee Retention Credit

Businesses can now take a credit of 50% of qualified wages (up to $10,000) per employee against employment taxes if the business had to close due to COVID-19. The business must meet certain guidelines to be considered for this. Per the legislation:

"The operation of that trade or business is either:

  1. Fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19; or
  2. Receiving gross receipts, for at least one calendar quarter, that are less than 50 percent of the gross receipts received during the same calendar quarter(s) in the prior year. This period of significant decline in gross receipts is recognized until the gross receipts for a calendar quarter are greater than 80 percent of gross receipts for the same calendar quarter in the prior year"

Business Interest Limitation

For TY2019 and TY2020, Sec 163(j) has been amended to change the adjustable taxable income percentage from 30% to 50%. This means that businesses are allowed to deduct interest expenses up to 50% of taxable income.

Corporate AMT

The Corporate Alternative Minimum Tax was repealed with the TCJA - however - Corporate AMT credits were made available up until 2021. This has now been amended to allow the credit to be accelerated to recover said credits as a means of obtaining additional cash flow.

Excess Loss Limitations

The TCJA under Section 461(l) limited excess business losses for non-corporate taxpayers (pass-through entities) if the amount of the loss exceeded $250,000 ($500,000 for MFJ). This is now repealed by the CARES Act, meaning larger losses are now temporarily allowed.

NOLs

The CARES Act repeals the 80% income limitation for net operating loss deductions prior to 2021. For losses incurred in 2018, 2019, and 2020, a five-year carry-back is now allowed, which was previously disallowed under the TCJA.


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You can read the entirety of the bill here: https://www.congress.gov/bill/116th-congress/senate-bill/3548/text#toc-idC62A2A4676F44E44B6A0D677C490FD17

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