On March 30, 2020, Congress approved a relief plan in response to the COVID-19 pandemic and its economic repercussions. You can read the original bill in full here. This plan is called the CARES Act, short for “Coronavirus Aid, Relief, and Economic Security Act.”
Where laws and legislation are concerned, we’re certainly not strangers. Whether it’s navigating the tax reform changes of 2018 or long-standing financial and legal options such as the SDIRA or the 1031 Exchange, REI Nation is always diligent in helping our investors navigate the murky waters of legal jargon.
For example: A Quick Guide to Tax Benefits Every Real Estate Investor Should Know
We know there are a lot of questions surrounding the CARES Act — and not just regarding the individual $1200 stipend Americans can expect! No, for those of us with small businesses and investments, there are bigger questions that demand an answer.
Before we dive in, we should note: this is not legal advice. We recommend, before taking action based on the CARES Act, that you consult your financial or investment advisors on a one-on-one basis. Our intent is to present a summary of key points to be considered within the CARES Act.
If you are interested in a summary of the full CARES Act, we recommend this article from the National Law Review.
With that said, let’s jump into a few specifics that are of particular note for investors, both for your use and for clarification as to their application.
3 Key Provisions in the CARES Act
For your reference, here is a quick breakdown of the allocation of the $2 trillion CARES Act package:
- $250 billion set aside for rebates to individuals and families (at $1,200 per adult, $500 per child in accordance with qualifying income brackets)
- $377 billion in small business loans
- $260 billion in unemployment insurance benefits
- $500 billion in loans for affected companies
- $150 billion to assist states and local governments
- $150 billion for hospitals to utilize for equipment and infrastructure
Waivers Regarding Qualified Retirement Accounts
Under the CARES Act, the 10 percent penalty for early withdrawal from a qualified retirement account (such as a 401k) has been waived for amounts up to $100,000. In addition, the income tax applied to said withdrawals can be drawn out over a three-year period, easing the tax burden on those who access their retirement funds.
In addition, the law doubles the amount that 401k-holders can take out loans on said account — up to $100,000 or 100 percent of the account’s balance. The balance must be returned to the account within three years.
That said, it is generally not recommended to tamper with one’s retirement savings. In cases where your emergency savings are running low and you find yourself needing a hardship withdrawal, the law creates an expanded avenue for aid.
However, for most Americans, tapping into one’s 401k is not generally advised.
Additionally, the RMD (required minimum distributions) for owners of inherited IRAs and retirees has been suspended for 2020. This will help retirees recoup their investment while easing the impact of associated taxes.
Emergency Small-Business Loans
One of the biggest provisions within the CARES Act is that of emergency loans for small businesses (those with 500 or fewer employees). The amount that can be taken out is limited to 2.5 times average monthly payroll expenses, up to $10 million.
Of note, sole-proprietors, independent contractors, and other self-employed individuals also qualify for these emergency loans.
It should be noted that there are specific requirements that go along with these small business loans, as well as the loans given to larger entities. Loans may be forgiven in part if businesses meet certain conditions during the first eight weeks related to payroll expenses, rent, mortgage interest, and utilities. These loans are ultimately designed to preserve employment, so a cut in payroll will result in reduced loan forgiveness.
If you are interested in obtaining an emergency loan, consult a professional for all of the guidelines, limitations, and rules that apply.
Tax Deductions & Provisions
Initially, real estate investors may be excited to hear that the CARES Act also affects depreciation limits. However, we must clarify exactly what (and who) these altered tax laws affect:
The CARES Act corrects the issues with the 2017 Tax Cuts and Jobs Act that created a 39-year depreciation period for “qualified improvement property.” This new provision allows for immediate depreciation. Not only that, but the correction is retroactive, meaning it can be applied in amended tax returns for 2019 and 2018 as well as 2020.
That said, “qualified improvement property” only refers to non-residential properties (for reference, the depreciation period for residential property is 27.5 years). Those in the retail, restaurant, and hotel sectors are poised to benefit most from the correction.
Ultimately, only the top percentage of investors (the top one percent of taxpayers) are likely to benefit from the change.
Naturally, these are far from the only provisions within the CARES Act. There are provisions for local governments, non-profits, corporations, and individuals. That’s why we recommend talking with legal and financial professionals who can more completely explain and plan next steps with you based on your situation. There’s just too much to go into!
Lastly, it should be noted that the CARES Act is not the end-all, be-all solution to the coronavirus crisis. There is the possibility of further stimulus packages in the future. The CARES Act itself was not the first legislative response to the crisis, and it is unlikely to be the last.
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