A new law signed by President Trump on March 27 provides a variety of tax and financial relief measures to help Americans during the coronavirus (COVID-19) pandemic. This article explains some of the tax relief for individuals in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Individual cash payments

Under the new law, an eligible individual will receive a cash payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing jointly) plus $500 for each qualifying child. Eligibility is based on adjusted gross income (AGI).

Individuals who have no income, as well as those whose income comes entirely from Social Security benefits, are also eligible for the payment.

The AGI thresholds will be based on 2019 tax returns, or 2018 returns if you haven’t yet filed your 2019 returns. For those who don’t qualify on their most recently filed tax returns, there may be another option to receive some money. An individual who isn’t an eligible individual for 2019 may be eligible for 2020. The IRS won’t send cash payments to him or her. Instead, the individual will be able to claim the credit when filing a 2020 return.

The income thresholds

The amount of the payment is reduced by 5% of AGI in excess of:

• $150,000 for a joint return,
• $112,500 for a head of household, and
• $75,000 for all other taxpayers.

But there is a ceiling that leaves some taxpayers ineligible for a payment. Under the rules, the payment is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the payment is completely phased out when AGI exceeds $146,500.

Most eligible individuals won’t have to take any action to receive a cash payment from the IRS. The payment may be made into a bank account if a taxpayer filed electronically and provided bank account information. Otherwise, the IRS will mail the payment to the last known address.

Other tax provisions

There are several other tax-related provisions in the CARES Act. For example, a distribution from a qualified retirement plan won’t be subject to the 10% additional tax if you’re under age 59 ½ — as long as the distribution is related to COVID-19. And the new law allows charitable deductions, beginning in 2020, for up $300 even if a taxpayer doesn’t itemize deductions.

Stay tuned

These are only a few of the tax breaks in the CARES Act. We’ll cover additional topics in coming weeks. In the meantime, please contact us if you have any questions about your situation.

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No one said estate planning is easy, and this is especially true if you have a “blended family.” The good news is that there are two trust types — a qualified terminable interest property (QTIP) trust and an irrevocable life insurance trust (ILIT) — that can provide for your children from a previous marriage while also taking care of your current spouse and any children from your current marriage.

QTIP trust

At minimum, you should have a will in place that specifies how your wealth should be distributed. Otherwise, a significant portion of your estate may go to your children from a previous marriage — even if they’re now adults and don’t need the assets as much as your current spouse and any other children.

To implement your wishes for wealth distribution, you may find it helpful to establish a QTIP trust. This trust qualifies for the estate tax marital deduction, meaning that assets you transfer to the trust aren’t taxed when you die, and the entire amount is available for your spouse’s support. But unlike an ordinary marital trust, a QTIP trust can provide your spouse with income for life while preserving the principal for your children (from either your current or previous marriage, or from both) or other beneficiaries.

When your spouse dies, though, the trust assets will be subject to tax as part of his or her estate, even if the assets are to pass to your children as instructed in your will.

ILIT

In some cases — particularly when one spouse is considerably younger than the other — a QTIP trust may not be the best solution. That’s because the children from a first marriage, who may be much older than those from the second marriage, may have to wait years until the younger spouse dies and they can receive their inheritance.

In situations like this, an ILIT may be a better solution. The ILIT purchases life insurance on the older spouse, who makes annual exclusion gifts to the trust to cover the premiums. If the ILIT is designed properly, there won’t be any estate tax on the insurance proceeds.

When the older spouse dies, the trust collects the death benefit and pays it out to the children from the first marriage. The older children receive their inheritance immediately, and the other assets remain available to provide for the younger spouse and children.

Discuss your plans

Before choosing any estate planning approach, discuss your plans with your loved ones. Even if your plan is inherently fair, it may not be perceived that way without an explanation. In addition, consider the consequences of different wealth transfer strategies. QTIP trusts and ILITs are only two of the many tools available to control the distribution of your wealth in a way that minimizes taxes and maximizes benefits for everyone involved. Contact us with any questions.

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The Coronavirus Aid, Relief and Economic Security Act (CARES Act) allocates nearly $350 billion to a new lending program through the Small Business Administration (SBA), aimed at helping employers cover their payrolls during the coronavirus (COVID-19) pandemic. The loans under the Paycheck Protection Program (PPP) are subject to 100% forgiveness if certain criteria are satisfied, and neither the government nor lenders will impose fees.

The program is open to virtually every U.S. small business — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. It’s available through June 30, 2020, but on a “first-come, first-served” basis. The U.S. Treasury Department is urging businesses to apply promptly.

Eligible borrowers

The PPP generally is available to small organizations with fewer than 500 employees. The term “employees” includes full-time, part-time and any other status workers.

For businesses in the accommodation and food services sector, the 500-employee threshold is applied on a per physical location basis. The SBA’s normal affiliation rules also don’t apply to companies that receive financial assistance from an SBA-licensed Small Business Investment Company or certain franchises.

Loan requirements

The SBA is waiving its usual requirements for loans. Businesses need not provide personal guarantees or collateral — or demonstrate the inability to obtain some or all of the loan funds from other sources (also known as the Credit Elsewhere requirement).

Instead, borrowers must certify in good faith all of the following:

• They were operating on February 15, 2020, and had employees for whom they paid salaries and payroll taxes or paid independent contractors, as reported on Form 1099-MISC,
• Current economic uncertainty makes the loan necessary to continue ongoing operations,
• The funds will be used to retain workers and maintain payroll, or to make mortgage interest, rent and utility payments for eight weeks (75% of loan proceeds must be used for payroll costs),
• They don’t have, and won’t receive, another loan under the PPP, and
• The number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments and covered rent payments and utilities.

Independent contractors, sole proprietors and self-employed individuals must provide additional documentation, such as payroll processor records, payroll tax filings, Form 1099s and, for sole proprietors, income and expenses.

Note that, in the days leading up to the opening of the application process, some banks expressed concern that a lack of guidance could result in significant delays in issuing loans. The Treasury Department didn’t release its interim final rule until the evening before the program began accepting applications, so lags in funding may occur.

Loan amounts and terms

Eligible businesses can obtain loans for 2 1/2 months of their average monthly payroll costs plus the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020 (less the amount of any advance under an EIDL COVID-19 loan, which doesn’t have to be repaid). Seasonal or new businesses will use different applicable time periods for the calculation.

Loans are subject to a $10 million cap. Payroll costs are limited to $100,000 annualized for each employee; amounts above that must be excluded from the calculation. Independent contractors who have the ability to apply for a PPP loan on their own don’t count for purposes of a borrower’s payroll.

Payroll costs include compensation, cash tips, severance, employee benefits (including leave), and state and local taxes on compensation. For sole proprietors, independent contractors and self-employed individuals, payroll includes wages, commissions, income and net earnings from self-employment.

Payroll excludes payroll and income taxes and compensation paid to employees who don’t live in the United States. It also doesn’t include qualified sick or family leave wages paid under the recent Families First Coronavirus Response Act.

The loans carry a fixed interest rate of only 1% and, although the CARES Act provided for terms of up to 10 years, will run for two years. All payments are deferred for six months, but interest will continue to accrue. Borrowers can pre-pay without penalties or fees.

Loan forgiveness

Businesses can qualify for loan forgiveness for amounts used for payroll costs, mortgage interest, and rent and utility payments over the eight weeks after receiving the loan. While the CARES Act provides that a borrower can spend up to 50% of loan proceeds on nonpayroll costs and still qualify for forgiveness, the final regulations indicate that no more than 25% of the loan proceeds can be used for such costs and benefit from forgiveness.

Borrowers also must maintain staff and payroll to qualify for full forgiveness. Loan forgiveness will be reduced if salaries and wages are reduced by more than 25% for any employee who made less than $100,000 annualized in 2019. Businesses will have until June 30, 2020, to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020.

Businesses can submit a request for forgiveness to their lenders. Requests must include documents verifying the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. Lenders must make forgiveness decisions within 60 days.

Act now!

The application process for eligible small businesses and sole proprietors began April 3, 2020, and independent contractors and self-employed individuals can begin to apply on April 10, 2020. Businesses might be able to expedite the process by seeking loans from financial institutions where they have existing lending relationships. Contact us for additional information.

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Real-Time Strategic Planning (RTSP) offers not-for-profits a fluid approach to identifying, understanding and acting on challenges and opportunities to advance their missions. Is this process right for your organization? Let’s take a look.

What is it, exactly?

RTSP was first introduced by nonprofit consultant David La Piana as “a coordinated set of actions designed to create and sustain a competitive advantage in achieving a nonprofit’s mission.” A successful nonprofit plan requires three levels of strategy: organizational, programmatic and operational, using these building blocks of strategy formation:

1. Understand your identity. Ask the following: What is your organization’s mission and impact? What do you do (programs and services), where (geographic scope) and for whom (constituents, clients or customers)? And how do you pay for it?

2. Identify your competitive advantage. What strengths do you leverage to differentiate your organization from others and compete effectively for resources and clients? This step requires analyzing other organizations in the same geographic area that offer similar programs, to similar constituents, with similar funding sources.

3. Know how you’ll make decisions. Develop a “strategy screen” composed of the criteria you’ll use to choose courses of actions. A strategy screen might consider, for example, if an option advances your mission and enhances your competitive advantage. It also considers if you have the capacity to carry out and pay for the option.

4. Define the right strategic questions. Many questions naturally arise when presented with an opportunity, but they aren’t all strategic. Identify the strategic questions that must be answered now and sort operational questions (for example, “Will we be able to hire more employees to execute our plan?”) from strategic questions (“What are the implications for our mission?”).

What about “competitive advantage?”

One of the most important components of RTSP is competitive advantage. In general, competitive advantage is the ability to advance your mission by 1) using a unique asset — or strength — no competitor in your area possesses, or 2) having outstanding execution of programs or services. Your competitive advantage must be something clients and funders value, for example:

• Accessible locations or specialized property that enhances program delivery,
• A robust, diversified funding base,
• Great name recognition and reputation, and
• Powerful partnerships and a well-connected board of directors.

To make comparative judgments, of course, you need to identify and understand your competitors and their strengths. “Competitor” in this context isn’t necessarily a negative term. Your competitors often are organizations you collaborate with. Nonetheless, you’re also likely competing for donors, media coverage, board members, employees, volunteers or clients.

Continuing process

Nonprofits that implement RTSP have the tools to align their daily actions with their organization’s overall strategy and can work toward having a clear vision of their long-term direction. Contact us for more information.

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