[Editor’s Note]: This is a guest post written written by Adam Cmejla, CFP®, one of our sponsorship partners. Aaron and Dat are extremely strict about guest requirements in that they must be educational and informative to our readers. Every guest post is vetted, read and upheld to the highest standards of ODsonFinance. Your trust is the most valuable factor to us. We like having experts in their field write on our website, because honestly, Aaron and Dat don't know everything! Enjoy and give us feedback!
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed into law on March 27th and ushered in over $2 trillion in economic stimulus funds. To put this into perspective, $2 trillion is equal to about 10% of US GDP (gross domestic product; the way we measure how much our economy produces in goods and services annually). To think of it another way, one trillion seconds equals about 31,709 YEARS!!
Ok, enough with the comparisons and perspectives. Here’s what you need to know (and what you’ll learn) from this article:
- How much you’re eligible to receive as an individual
- How access to retirement funds have changed
- Required Minimum Distributions (for those ODs > age 70)
- Changes to unemployment insurance (tease: self-employed/1099 ODs will benefit!)
- Small business help – Paycheck Protection Program (including how much is 100% forgivable tax-free)
- Economic Injury Disaster Loan Program
- Employee retention credits
- Deferring payment of your 2020 payroll taxes
- Use of NOLs (net operating losses)
- Student loan payment deferrals
- Begin the application process with the SBA
Important note: this article is meant to be a “30,000-foot view” of the Act and not dive into the weeds too much. I know you’re all busy and may be looking for the TL/DR version of the bill and how it applies to an optometry practice. If you want to dig into the weeds of the bill, the link above will take you to the bill and, where appropriate, I may link to outside resources.
Recovery rebates are being issued to almost every individual (it’s estimated that over 90% of taxpayers will see relief). From a technical aspect, this is being provided as a credit against 2020 income taxes as a refundable tax credit. Relief will be provided in the following ways:
- $1,200 for individuals, $2,400 for married couples plus an additional $500 per child under age 17
- Phase-out of this benefit is based on AGI (Adjusted Gross Income) and will be based on 2018’s tax return unless 2019’s return has already been filed.
Phaseout limits are as follows:
- $150,000 for MFJ (Married Filing Jointly)
- $112,500 for Heads of Household
- $75,000 for all others (single filers, etc.)
- Rebates are phased out at $5 per $100 of additional income over the thresholds
The dissemination of these funds will commence ASAP, but it’s been widely discussed by tax and financial professionals that, because of the complex logistics involved, most people won’t see any rebates from the government until mid-April at the extreme earliest but most likely sometime in May. Those individuals receiving Social Security benefits will have their rebate sent to them in the same manner/along with their Social Security benefit. Everyone else will have their benefit either direct deposited into the bank account that was used to pay taxes or receive a refund for their 2018 or 2019 tax return or, if no electronic bank information is on file with the IRS from your previous return, the check will be sent to the address on record with the IRS.
PROACTIVE PLANNING TIPS:
- (1) If your 2018 income was > phaseouts listed above and (2) you anticipate that your 2019 income will be lower than 2018 (below the phaseouts), file your returns ASAP to ensure you maximize benefits. The final numbers will come from what the IRS has on file for you.
- If you’ve moved, update your address with the IRS using Form 8822
- If you’ve closed the bank account that you used for 2018 or 2019’s tax return, determine if you can re-open that account
Changes to Retirement Assets and Plans
The Act also contains provisions allowing individuals to prematurely tap into retirement savings. Traditionally, when hardship withdrawals were made from qualified plans (like a 401k) before the age of 59 1/2, you had to pay a 10% penalty on top of ordinary income taxes. The Act allows you to do the following:
- Allows you to access up to $100,000 from a combination of IRAs and/or employer-sponsored plans.
- It removes the 10% penalty for early, pre-59.5 distributions
- There is NO mandatory 20% withholding from an employer-sponsored plan
- This can be paid back into the plan over three years, basically allowing you to “slow roll” over the funds back into your plan (previously, any distribution from an IRA or qualified plan needed to be “put back” within 60 days).
- Should you choose NOT to pay it back, the distribution (and thus the tax generated from the distribution) will be spread over three tax return years: 2020, 2021, and 2022 by default. However, one does have the option of accelerating the distribution all in 2020. This may be advantageous based on anticipated income in 2021 and 2022–talk to your planning and tax team to determine what’s best for you.
- The distribution must be made in 2020
- The distribution was deemed necessary for the following reasons: because of a dx with COVID-19, a spouse or dependent was dx with COVID-19, you’ve experienced an adverse financial consequence because of being quarantined, furloughed, laid off, or work hours have been reduced because of the dz, or you are unable to work because you need to provide child care for your child(ren), you own a business that closed or operated under reduced hours because of the dz, or you meet some other guidance that will be released by the IRS at a later date
In addition, the Act also allows for more favorable treatment of loans made from 401ks:
- The max loan amount has increased to $100,000 (up from $50,000)
- Participants can now take 100% of their vested balance
- Loan payments can be deferred for up to one year from the date following the day that the loan was disbursed.
Required Minimum Distributions
I’m not going to spend a whole lot of time on this one, but it’s still worth covering the basics. The rules mandating Required Minimum Distributions from retirement accounts have been waived for 2020. If you’ve already taken your RMDs, you do have the option of putting them back into the account(s) that they were taken from (with the exception of inherited IRAs…if you’ve already distributed from that account, that’s a one-way street…no ability to put back).
Changes to unemployment insurance
This is a big one that will impact pretty much every OD in some manner, including those that have been “self-employed” by IRS definitions as 1099 contracted ODs.
First, the Act creates the Pandemic Unemployment Assistance fund, which are the funds that will provide unemployment insurance (UI) benefits to those that are self employed. (Editor’s note: this was largely put in place to provide benefits to the ever-expanding “gig” economy.) This benefit will be eligible for up to 39 weeks of benefits.
Second, the federal government will pick up the tab on the first week of UI benefits. It’s common that once a claim is approved that the claimant will have to go the first week without benefits. However, for someone losing work due to COVID-19, the federal government will subsidize the states’ cost of providing that first week of benefits.
Third (and this is a BIG one), regular UI benefits will get a healthy “bump” of $600 per week for up to four months of coverage! The average UI benefit administered across the country is about $385 per week, so this increase could amount to an average increase of ~150% in UI benefits. Another important note is that states CANNOT offset their obligation by the federal government subsidy. In other words, it’s “both” and not “either or.”
Fourth, unemployment compensation is extended by 13 weeks. Typically, unemployment benefits provided by states run about 26 weeks. If someone is still out of work due to COVID-19, the bill provides another 13 weeks (one quarter) of UI benefits.
Fifth, the Act creates a program to allow for states to create “short-time” compensation programs. These programs are designed to “bridge the gap” in pay between someone’s full-time earnings and what they are currently earning due to a reduction in work. Traditionally these individuals have not had the ability to apply for UNemployment benefits because they were still employed, thus caught in a gap. PLANNING TIP: if you’ve kept on some of your staff but had to reduce their hours, it will now be possible for them to be “made whole.”
Keep in mind that while part of the CARES Act addresses unemployment insurance benefits, the qualification and administration of benefits still lies with each state, so you’ll have to check with your state’s guidance on the final say.
Small business stimulus help – Paycheck Protection Program
For all the practice owners out there, this is where the real benefits start to come into play. Knowing that working capital is key during these times, the government basically enabled the SBA to facilitate the flow of funds from the government to businesses and use approved financial institutions to assist in the underwriting and funding process. Here are the key provisions of the program:
- The loan is fully guaranteed by the SBA and is issued by approved lenders
- It must be applied for no later than June 30, 2020. Planning tip: it takes a while to apply; start now.)
- Maximum loan amount equals the lesser of 2.5x average monthly payroll costs of the previous year or $10 million. IMPORTANT NOTE: salary amounts >$100,000 per person must be EXCLUDED from total compensation. Said another way, only the first $100,000 of someone’s salary can be included in this calculation.
- Must be a small business with <500 employees (shouldn’t be a problem for everyone reading this article)
- Must sign a “good faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”
- Must “acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments
Here’s a potentially huge benefit of this part of the Act: some or all of the amount borrowed can be forgiven with non-recourse. The amount that’s eligible to be forgiven is the amount spent within the first 8 weeks on:
- Payroll costs (excluding payroll amounts in excess of $100,000 annually)
- Rent (lease must be in force prior to 2/15/2020)–NOT mortgage payments (can’t prepay your mortgage; can only pay interest that’s accrued on the mortgage)
- Utilities (electric, gas, water, transportation, phone, internet)…all in service before 2/15/2020
- Group health insurance premiums and other healthcare costs
- Interest on any other debt that was incurred before 2/15/2020
There are a few important items to note:
- Any debt that’s forgiven under these terms is forgiven TAX FREE! Usually, any debt that’s forgiven (sans student loan borrows working for loan forgiveness under PSLF) is realized as income on that year’s tax return. Not so with this provision of the Act.
- Payroll costs EXCLUDE any benefits that were paid under either provision of the Families First Coronavirus Response Act (because you’re already getting a tax benefit for those wages paid out)
- For any part of the loan that is NOT forgivable (and thus has to be paid back), the max duration of the loan is 10 years and the MAXIMUM interest rate is 4%
- Initial payments will be deferred for 6 – 12 months (additional guidance forthcoming within 30 days)
Of course, there is no free lunch. There are strings attached. The following conditions must be met in order to qualify for partial or full loan forgiveness:
- You must have the same number of employees from 2/15/2020 – 6/30/2020 as you did when compared to EITHER (1) the same period in 2019 or (2) 1/1/2020 – 2/15/2020
- For all employees earning <$100,000, you cannot have reduced their pay by more than 25% compared to the most recent quarter
For those of you that have made reductions in your staff prior to the passage of this Act, you do have the ability to qualify for forgiveness, but with the following caveats and conditions
- From the period beginning on February 15, 2020 and ending April 26, 2020 you reduced the number of employees
- Not later than June 30, 2020, you rehire them back into the practice at their pre-terminated status and pay rate
Additional guidance on this will be shared by the SBA and Treasury within 30 days. As this is a brand new loan option, the logistics have not been released, though financial relationships I’ve been in touch with have indicated that it’s “full steam ahead” for them to roll this out as quickly as possible (within the coming days).
It’s also important to know that there’s no cost to the borrower for these loans–any service fees generated will be subsidized and paid directly by the SBA.
Expansion to the Economic Injury Disaster Loan (EIDL) program
The EIDL has always been in force but the CARES Act dramatically expands the program. The important difference between the PPP (listed above) and the EIDL is that there are NO FORGIVENESS OPTIONS under the EIDL.
If you’ve already applied for a loan under the EIDL, know that you can contact your lender and ask that your application be “refinanced” under the PPP so that you’re able to take advantage of the forgiveness options.
Here are some of the other basics about the characteristics and qualifying standards for EIDL loans:
- Eligibility period is from 1/1/2020 – 12/31/2020
- Must have <500 employees
- Has been EXPANDED to include sole proprietors or 1099-independent contractors
- Loan amount is for a max of $2 million
- Personal guarantees are not required for loans up to $200,000; personal guarantees required for >20% for loans >$200,000
- Fixed interest rate of 3.75% (low!) and up to a 30 year term
- BIGGEST BENEFIT: applicants can request an IMMEDIATE advance of up to $10,000 (payable within 3 days).
Planning tip/Adam’s opinion: The biggest reason that an OD would want to consider the EIDL program is if they need IMMEDIATE access to capital, as the $10,000 advance mentioned above is, in essence, a grant that does NOT have to be repaid, even if the loan is denied. However, given that most of the expenses incurred by a practice (rent, salaries/wages, borrowing costs, utilities, etc.) qualify for forgiveness under the PPP, an OD will have more favorable lending/forgiveness options under the PPP outlined here. Action item: if you’ve already applied for a loan under the EIDL, consider refinancing under PPP.
Employee retention credits
In order to qualify for employee retention credits, the “operation of the trade or business described…is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19.”
My professional opinion is that, as it applies to optometry practice owners, this is a vague area of the law. “…limiting commerce…” is about the only part that’s applicable to an optometry practice, and even then it doesn’t necessarily “fit” with the rest of the definition listed above. There’s nothing in this part of the Act that stipulates healthcare professionals or “essential” businesses as was mentioned in the previous Families First Coronavirus Act passed a couple of weeks ago.
Having said that, I’ll still share the details and you can conclude with your own set of advisors whether these benefits can be applied to your practice. In short:
- In addition to meeting the aforementioned definition, you must also have had a quarter with at least a 50% drop in revenue from the same quarter in 2019
If you qualify, then you are able to claim a new credit against payroll taxes, equivalent to the following:
- 50% of wages (including costs of healthcare expenses) paid to each employee, up to a max credit of $10,000 of wages per person
For more details on this part of the Act, search for Section 2301 within the Act.
Deferral of payment of payroll taxes
The government is giving ALL OF US extra time to make our quarterly payroll taxes (employer portion of Social Security and Medicare taxes). All employers will be able to defer ALL of their payroll taxes, with 50% of the total due by 12/31/2021 and the remaining 50% due 12/31/2022.
More flexibility around Net Operating Losses (NOLs)
In short, practice owners are allowed to “carry back” NOLs from 2018, 2019, and 2020 to be carried back up to five years, thus allowing a business owner to go back to previous returns, amend those returns, and claim a refund on once-disallowed NOLs to provide additional funds to weather the COVID-19 storm. Another provision allows a taxpayer to offset 100% of their taxable income (up from 80% of their taxable income). This is an area that should be discussed at length with your CPA and tax team as they will have the details on whether this makes sense for you or not.
Practically speaking, this would be something to begin working on ASAP if you qualify, since the turnaround time on refunds could be extended given the confluence of events consuming government resources.
Student Loan Deferrals
This is a big part of the Act that will impact many ODs regardless of their professional status (practice owner, associate/W2 employee, or 1099 contractor.
The Act mandates that all Federal student loan payments are deferred until 9/30/2020, with no payments due or interest accruing during that time.
Notably, this only includes federal Direct loans. It does NOT apply to those ODs that may have FFEL (Federal Family Education Loans) or Health Professions loans. In order to qualify for this deferment, one would have to consolidate to Direct loans. BE AWARE: any consolidation of loans “restarts” any payment clocks, so if you’ve been working towards loan forgiveness under FFEL or health professions, you may want to think twice.
Unfortunately, the Act left those that have refinanced their federal loans with a private lender out in the cold. There’s nothing in the Act that provides any relief. Most private lenders are offering forbearance of payments with easy qualification, but interest will still accrue.
Special Note for borrowers working towards PSLF: The reason that it’s so advantageous, especially for PSLF, is because the Act stipulates that the (effectively) $0, no-interest payments from now until 9/30/2020 WILL STILL COUNT towards the 120 payments required to qualify for PSLF forgiveness.
Proactive planning tip: you MUST initiate the call to your services and request that your loan payments stop until 9/30/2020. This will NOT be done automatically. Given the massive influx of calls that servicers will likely experience, I can’t say it will be an easy process, but it’s a no-brainer for those of you that are paying back federal loans.
Bonus Planning Strategy: If you are a practice owner paying back student loans, consider allocating/”coding” $5,250 to yourself as student loan repayment on your wages and compensation. The Act expanded the criteria that employers can use to give employees tax-free funds for current education to include student loan payments. At the very least use it for yourself and also have a conversation with anyone on your team that is paying back student loans to determine if they would prefer to receive tax-free funds to help with student loan payments (honestly, who’d say no to that proposition!?) Two important notes: (1) the $5,250 is cumulative for student loans AND higher education; no double-dipping, and (2) the funds must be paid and received by 12/31/2020.
At just over 800 pages of text, this article is by no way inclusive of everything considered within the Act, but I believe it covers the very important, urgent, and impactful provisions that will impact optometrists and practice owners in both the short- and long-term. As always, we encourage you to consult your own advisory team to determine the best strategies for your situation. If you feel like you’re doing this alone or don’t feel confident in your current financial team, we’d welcome the chance to have a call with you and see if we can help.
The only thing that seems to be constant with life right now is change. We’ll continue to do what we can to serve the optometry community well through these fluctuating times.