Federal COVID-19 Economic Stimulus Program – Round Two

After weeks of deliberation and intrigue, the second major COVID-19 fiscal stimulus legislation was approved by Congress and signed into law shortly before the end of 2020.  Known as the Consolidated Appropriations Act of 2021, it is 5,593 pages in length.  While the expenditures approved have come under great criticism, it is important to note that a considerable portion of the legislation represents approval for “normal” budget appropriations. In fairness to Congress, earmarked programs for alleviating the devastating economic effects of COVID-19 were created.  Extraordinary carve outs were approved for state and local communities to deal with the pandemic, funds were targeted for hard hit industries such as air and cruise lines, and massive aid was extended to health service providers to continue their efforts to combat the virus.  This letter will focus on the specific provisions of the law that impact the financial planning and wealth management landscape.

From a personal financial planning aspect, there are a few provisions that will entail a wholesale change from the 2020 rules purposed to alleviate the potentially negative financial aspects of COVID-19.  First, required minimum distributions (RMDs) from qualified accounts (IRAs, 401ks, etc.) have been completely reinstated.  Further, the student loan payment holiday, which was extended until January 31, has not been renewed.  January 1, 2021 also saw the end of the special $100,000 loan provisions from retirement plans for people financially harmed by COVID-19, payable over a three-year period with no tax or penalty.  However, this same loan provision is extended to anyone suffering economically in a declared federal disaster zone.  One notable enhancement of the CARES Act in the new bill includes a provision allowing married couples to deduct up to $600 in charitable donations to a 501c3 organization even if the taxpayer does not itemize (up from $300 in 2020).

One of the most Googled search items in December 2020 was “how much will my stimulus check be?” We now have the answer:  to be rapidly distributed, tax free direct deposits and checks will be $600 per person for single filers with adjusted gross income (AGI) below $75,000, heads of households with AGI under $112,000, and those filing married jointly with AGI below $150,000. There are marked differences between this round of financial relief and the direct payments under the CARES Act passed in the earlier throes of the pandemic.  The previous legislation awarded $1,200 to individuals and $500 for each dependent (which was paid out to the parent).  This time each qualified individual will receive $600.  For example, a single parent of two children under the age of 17 would receive $1,800 (3 x $600). A married couple with four children would receive $3,600 (6 x $600).  A phaseout schedule will be implemented over the AGI thresholds: for every $100 in extra income over the limit, the benefit will be reduced by $5 per person in the household up to the point where it is eliminated.  For example, an individual with an extra $100 in AGI will see their $600 reduced by $5, whereas the couple above will see a reduction of $30.

As it seems with almost any directive coming out of Washington, the rules for eligibility beyond the standard AGI limits and qualified dependent status seem illogical.  Unlike the CARES Act relief checks, which were based on either 2018 or 2019 tax filings, the new criteria will be applied to 2019 and 2020 tax filings in ways people won’t expect.  For example, the application of eligibility is straightforward in the following situations.  If your income in 2019 and 2020 is under the threshold, with phaseouts, you are entitled to a payment.  If your income is over the phased out AGI levels in 2019 and 2020, you get nothing.  However, if your income was low enough in 2019 to receive a payment, but too high in 2020 (perhaps you started a business selling surgical masks last year and made millions), you still will receive a check and you are not obligated to return itIf your income was too high in 2019 but is under the threshold for this round of stimulus checks, you will receive a credit on your 2020 taxes in lieu of a check.

If a check is received for a person who passed away in 2020, the payment does not have to be returned.  However, if the payment is generated in 2021 and a person passes away before they receive the payment, the funds must be returnedAlso, if a child dependent receives a check based on wages from work (say a summer job), those funds must be returned.  If a child dependent was under the age of 17 in 2020 allowing the parents to receive $500 for that child from the first round of stimulus, and the child is now 17 and the parents receive a payment for that child under this second round, the funds do not have to be returned.  For children born in 2020, their parents will get a tax credit of $600 on their 2020 filing. 

Two other major features of the legislation address unemployment benefits and financial assistance to small businesses, the latter aspect of the law most but not entirely equated with the well-known Paycheck Protection Program (PPP) loans.

For unemployment, an additional weekly sum of $300 will supplement the state allotted payments and the period for collecting benefits has been extended by 11 weeks, to a maximum of 50 weeks in certain circumstances.  Individual states set their own limits for unemployment benefits and for most out of work and collecting, normal payments range between $300 and $600.  Still, there are large discrepancies between individual states throughout the country.  For example, Mississippians can expect to receive a maximum unemployment check from the state of $235.  Massachusetts tops out at $1,220.  Sole proprietors, including gig workers, will continue to be allowed to file for unemployment benefits, a new feature of unemployment assistance introduced by the original CARES Act, albeit this time with some added wrinkles for those who work “regular” jobs and perform gig work to supplement their income.  Many applicants for the extended unemployment assistance will be required to file new paperwork as part of a measure to reduce the unemployment fraud that seemed so prevalent in 2020.

A new round of PPP loans has been authorized with more stringent rules designed to focus primarily on smaller businesses and the most hard-hit industries.  Thankfully, the new PPP loans will only be made to entities demonstrating a clearly quantified negative impact to profitability (if you are feeling bad for Tom Brady and TB12, please feel free to send a check directly to that organization).  The criteria is simple.  If a business can show one quarter of profitability in 2020 that was 25% lower than the corresponding 2019 quarter (for example the second quarter of 2020 compared the second quarter of 2019), a potentially forgivable loan will be extended.  Other helpful rules designed to ensure fairness include a maximum loan of $2 million (down from $10 million in the original legislation) and special provisions for “accommodation” industries, such as restaurants and hotels, that will allow for greater monetary assistance through the program.  Since this is in some ways an entirely new loan/grant program, new expenses have been included in the formula for reimbursement, including software, worker protection costs (such as plexiglass dividers, masks, sanitizers, etc.) and for remediation of physical property damage (it has been speculated that this is designed to help business owners who suffered vandalism losses related to the social unrest during 2020).  Still, because this program is designed to protect employee pay and to preserve jobs, at least 60% of the loan proceeds must be earmarked for that purpose through direct income payments.  However, payroll amounts can now include expenses related to group life insurance, group disability, vision, and/or group dental insurance, which expands eligibility to certain benefit costs that are outside an employee’s paycheck.  Also, the first program covered expenses incurred during a limited 8-week period, but the new bill expands it to a minimum of 8 weeks and a maximum of 24 weeks.  In a nod to the preference of helping smaller entities, businesses with more than 300 employees (down from 500 under the first PPP) cannot apply.  As additional points of interest, the ability of 501c3 non-profit entities to apply for loans has been expanded and no business that has applied for bankruptcy protection can apply.  Interestingly although not unexpected, any business substantially owned more than 20% by an organization under the administration of the Chinese government need not apply (this is the only foreign country cited in the bill).

To further clarify, there are now two PPP programs.  PPP1 and PPP2 have many rules in common but there have been newly created rules that will only be applicable to PPP2, including some of the limitations described above.  Recipients of PPP1 loans are eligible for PPP2 loans if they meet the criteria.  However, first time applicants must apply for the new and improved PPP1 loans first.  In fact, some have referred to the new PPP loan program as the “second draw” loan in that a business must have received and spent PPP1 loans before they can apply for PPP2 loans.

Again, as with the stimulus checks, there are some nuances to the program that may raise eyebrows.  First, business expenses paid through either PPP loans, whether forgivable or not (the vast majority are expected to be the former) can also be deducted on the business’s tax return (some have characterized this as double dipping).  Secondly, for loans under $150,000, lenders are specifically forbidden from asking for additional documentation from borrowers to prove hardship.  In fact, for loans under that amount, the forgiveness application has been shortened to a one-page document with no back up materials required.  While this does not preclude a possible audit by the Small Business Administration (SBA), it is clear that the lenders, primarily banks, will have no discretion to challenge dubious and potentially fraudulent loans of less than $150,000 under the Act.

Of course, the bill wouldn’t be complete without a number of other provisions that would seem to have nothing to do with COVID-19 (beyond the other PPP, Pet Pork Projects, thrown in by both parties).  For instance, the tax deduction of student loan interest and other qualified education costs have been eliminated in favor of expansion of educational tax credit programs, such as the American Opportunity Tax Credit and the Lifetime Learning Credit (which may be more beneficial overall for taxpayers due to the changes to the two latter programs).  Employers are now allowed to give employees $5,250 annually tax free (including exempted from FICA levies) to put towards student loan payments.  The Free Application for Federal Student Aid (FAFSA) has been greatly simplified with two thirds less questions and a more transparent formula to determine how much a family can afford for college costs.  Going into effect in 2023, it will undoubtedly improve the mental well-being of parents of college bound students.  For employees contributing to company flexible spending accounts (FSAs), the mad scramble to deplete the account every year has been replaced by more liberal rules and the ability to make contribution changes throughout the year, instead of once annually (but only until 2022).  Note that an employer must amend its FSA program in order for its employees to utilize these new leniencies. A large number of energy tax credits were extended into 2021 as well as the deductibility of mortgage insurance premiums.  For 2020 tax purposes, the definition of deductible teacher expenses has been amended to include personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of COVID–19.

As with any voluminous legislation, it is wholly expected that federal agencies responsible for implementing the rules will publish clarifying guidelines where there is uncertainty.  As well, Congress (especially a new one) can always be expected to pass new legislation to either amend the recently passed legislation or introduce new measures to offset the incredible disruption throughout the country due to COVID-19.  As such, we at Peak Financial Management will continue to monitor these developments and communicate new initiatives that are impactful to our clients.  As always, if you have any questions about the new bill, your finances, and anything else we can help with, we are always available.



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