On Friday, March 27, the House and Senate agreed on a stimulus package to mitigate the impact of the COVID-19 pandemic. President Trump is expected to quickly sign into law the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act. [Update: President Trump officially signed the CARES Act into law Friday afternoon].
Almost every Christmas tree grower will benefit from the $2 trillion+ stimulus law, through individual stimulus payments, penalty-free retirement account distributions, federal SBA loans, and payroll programs.
Individual Stimulus Payments
One of the most-discussed aspects of the stimulus package has been nontaxable, direct cash payments to Americans, formally called a “2020 Recovery Rebate for Individuals.”
Calculating the Recovery Rebate
To calculate the Recovery Rebate amount, the IRS will look at a grower’s most recent tax return (2019 if filed; if not yet filed, 2018). The payment amount will be determined based on filing status and number of children under age 17. A grower will receive a Recovery Rebate of $1,200 if single or $2,400 if married, plus $500 for each child under the age of 17.
However, like most tax benefits, the Recovery Rebate is phased-out based on Adjusted Gross Income (AGI). Once a grower’s AGI exceeds $75,000 if single, or $150,000 if married, the stimulus payment is reduced $5 for each $100 the AGI is over the applicable threshold.
A single grower with no children under 17 does not receive a cash payment once their AGI exceeds $99,000. A married couple with no children under 17 does not receive a cash payment once their AGI exceeds $198,000. If a grower has children under 17, the limitations effectively increase before the entire stimulus payment is phased out.
Advance Payment of 2020 Credit
The stimulus payments are actually an advance payment of a tax credit that will be computed on a grower’s 2020 individual tax return. This means a grower could receive an even larger stimulus payment if their income decreases from 2019 to 2020; the excess would be an additional credit towards their 2020 taxes. If a grower’s income increases from 2019 to 2020, there is currently no method for repaying any excess credit in the law, making it unlikely the IRS would require repayment.
Automatically Receive Stimulus Payment
Finally, and most importantly, growers do not have to do anything to receive their nontaxable, cash stimulus payment. The IRS will look at 2019 or 2018 tax returns and automatically mail a check by the end of the 2020 (or direct deposit if that option was selected on the most recently-filed tax return).
Paying Coronavirus Expenses with Retirement Accounts
Generally, amounts withdrawn from a qualified retirement plan (IRA, 401k, SEP, etc.) before age 59 ½ are subject to both income tax and a 10% early-withdrawal penalty. The CARES Act amends these rules, allowing a “coronavirus-related distribution” of up to $100,000 penalty-free (however, any applicable income tax still applies).
Eligibility for a Coronavirus-Related Distribution
In order to take a “coronavirus-related distribution” in 2020, the distribution must:
(1) be taken by an individual who is diagnosed with COVID-19 (or spouse or dependent) using a test approved by the CDC; AND
(2) the individual experiences adverse financial consequences as a result of being quarantined, furloughed, reduced work hours, laid off, or inability to work due to a lack of child care.
Avoiding Tax on Coronavirus-Related Distributions
Although a coronavirus-related distribution is still subject to income tax, a grower may avoid paying income tax on the distribution if the distribution is repaid to the qualified retirement plan within 3 years. However, if the grower decides not to repay the distribution, the law will allow any applicable income tax to be paid over 3 years.
Typically, retirement plan early-withdrawals should be used as a last resort. However, these measures soften the tax consequences, especially if a grower only needs money to get them by for a few weeks or months, and expects to be able to repay the amount within 3 years.
Small Business Loans
Paycheck Protection Loans
The CARES Act also provides funding and streamlined access to Small Business Association (SBA) “Paycheck Protection Loans” (PPL). Small businesses (including Christmas tree growers) with less than 500 employees are eligible for PPLs. These loans are fully backed by the federal government and require no personal guarantee.
The amount of the PPL is based on the amount of payroll costs paid by the grower in the previous 12 months. The purpose of a PPL is to give businesses a low interest-rate loan so they can continue paying employees during the next few months and also cover other necessary business expenses.
PPLs have a maximum length of 10 years and a maximum interest rate of 4%. Part or all of the PPL may be forgiven and never have to be repaid if the loan is used to pay certain qualifying expenses during a specified time period.
Economic Injury Disaster Loans
The CARES Act also expands access and streamlines funding to Economic Injury Disaster Loans (EIDL), another type of SBA loan. EIDLs are designed to provide working capital to businesses so they can pay debt, payroll, rent, and other necessary expenses. EIDLs are somewhat similar to PPLs, but there are a two main differences:
First, a grower must show actual economic detriment from COVID-19 to be eligible for an EIDL, in contrast to a PPL where economic detriment is presumed. Further, EIDLs do not replace lost sales or revenue, they simply provide funding to pay necessary expenses for a business to stay afloat during a disaster, such as the COVID-19 pandemic.
Second, a grower who has no employees may be eligible for an EIDL, in contrast to a PPL where employees are required. The amount of a PPL is based on the grower’s payroll over the last 12 months, while an EIDL is based on the grower’s actual economic injury.
SBA Loan Summary
PPLs are a great option for growers who have full-time employees. Growers can access a low-interest rate loan for basic expenses that may be partially forgiven. If a grower does not have any employees, they may still qualify for an EIDL to pay necessary business expenses.
The requirements for both types of loans are much more complicated than described above. Not all growers may qualify due to size, credit history, need, and other factors. A grower should discuss their individual situation with tax and lending professionals to see if they qualify and if an SBA loan makes sense for their individual situation.
Payroll Credits & Payment Deferral
Another provision of the CARES Act offers payroll tax credits for any business that is required to suspend or close due to COVID-19 and continues paying its employees despite the closure. This may not apply to most Christmas tree growers, but if a grower is forced to suspend operations temporarily and continues paying their employees, they may be eligible for this credit. However, a grower is not eligible for the payroll tax credits if a grower receives a PPL as described in the previous section.
Further, applicable payroll and 50% of self-employment taxes may also be deferred and paid over two years. Most Christmas tree growers should be able to take advantage of this deferral, as they either pay employees or pay self-employment tax themselves. This benefit will alleviate some of the burden of paying employees, as well as the 15.3% self-employment tax.
Don’t Forget About Other Ways to Save Money on Taxes
While the CARES Act offers many financial benefits to Christmas tree growers, there are still many other ways to save money on taxes that are available every year. The number one way for most growers to save thousands of tax dollars each year is to elect capital gain treatment on Christmas tree sales under IRC 631. Accelerated depreciation provisions also provide a tax benefit for most growers.
Further, the tax filing and payment deadline for 2019 tax returns was extended until July 15, 2020. Growers should use the additional time to make sure they are taking advantage of all possible tax and stimulus benefits.
Conclusion
The CARES Act offers many benefits that Christmas tree growers can take advantage of to alleviate any financial hardship incurred during the COVID-19 pandemic. The benefits described above are a summary and do not go into all detail surrounding the stimulus programs. Any grower considering taking advantage of any stimulus benefits should discuss with a knowledgeable CPA to determine if the program is right for them.
Growers should also make sure they are taking advantage of the extended tax filing and payment deadline to maximize their tax savings. There are many opportunities for growers to save thousands of tax dollars each year through a capital gain election and accelerated depreciation.
