How the CARES Act Affects S-Corps
WHAT’S IN THE BILL?
The primary benefits going out from this bill relate to direct payments to individuals and some corporate bailouts for essential industries somehow unable to keep cash on hand for hard times.
Individuals who reported less than $75,000 or $150,000 for married filing jointly in 2018 or 2019 will get upwards of $1200 per adult and $500 per qualified dependent under 16 years old. This is a one-time payment, though future stimulus bills are being talked about if the economy continues to struggle because of the public health measures put in place by federal and state governments.
You do not need to do any paperwork to receive your stimulus payment provided you have filed your 2018 or 2019 tax return with the IRS. This payment will not be taxed for federal income tax nor Social Security or Medicare.
Also included is expanded and extended unemployment benefits for eligible recipients. Depending on your state, this may or may not apply to S-corp officers; reach out to your account manager at Formations if you want to know more.
For small businesses, there is a Paycheck Protection Program that provides $350 billion to support loans to businesses with less than 500 employees, including self-employed and “gig economy” individuals. These loans are sized based on the average monthly payroll and could be up to 250% of that payroll amount (up to $10 million). These loans are available through the SBA and their certified lenders. Express loans can be obtained in the form of revolving lines of credit. There are also grants and small business debt relief available.
Student loan relief and changes to regulations around retirement plans are also part of the bill. Most student loan payments to federal lenders will be automatically waived, with no accrued interest, for 60 days at least. In addition, the tax penalty for early withdrawal from retirement plans in many cases is waived for those needing to dip into them to make ends meet during this time.
There should be no effect on your business or personal credit scores for taking advantage of these loans and debt forgiveness measures.
One final thing the bill does for wealthier individuals who want to give more to charity during the crisis is up the limit on the deductibility of charitable contributions: if you have at least $1 million in the income you can deduct up to $1 million in charitable contributions for 2020. You can even give more than your actual income and take the extra in 2021 as a deduction.
HOW DOES THIS AFFECT ME AND MY S-CORP?
Depending on what state you are in, your eligibility for some of the stimulus provisions will be different. In Washington state, for instance, S-corp officers are automatically opted out for unemployment payments through their company so they may not be eligible for unemployment benefits if their business closes. However, if you have been paying yourself regularly as advised every month then your business would potentially be eligible for the Paycheck Protection Program as well as SBA loans and emergency debt relief.
Most of the provisions of the bill will affect S-Corp officers though on an individual level; due to the nature of the S-Corp as a “passthrough” entity the tax liability for the company’s activities land on you, the individual taxpayer. This means you may get a stimulus check and can still get relief for student loan payments and draw from your retirement accounts without penalty.
If you live in some states you would also be eligible for expanded unemployment benefits: to be sure you can contact your account manager at Formations or the state Unemployment Insurance office itself.
WHAT DO I NEED TO DO?
First, we suggest contacting your account manager at Formations (if you are already a client of ours) or one of our customer representatives if you are wondering if Formations can help your business during this time. If we cannot help you with your specific situation we can recommend resources and partner providers that can.
We recommend that ALL individuals get their 2019 1040 filed ASAP; how fast your stimulus check will be deposited/sent is dependent on having an accurate 2019 1040 on file with the IRS, preferably with direct deposit information included. Regardless of who you do your 1040 with, we can help provide information about your s-corporation income to the right person.
Next, you should visit your state unemployment website to see the information available and if you qualify. The SBA website also has a ton of valuable information for small businesses about the relief loans and grants that can be obtained by your business.
Third, you should consider if the current situation is an opportunity for your business to improve: if you came into these hard times with disorganized bookkeeping, maybe a tax return in arrears for a year or so, or even just not doing much with the business but treading water, it may be time to consider signing onto Formations. If you’re already an LLC, it may not be too late to convert to an S-Corp for 2019, show income from the business as compensation, and qualify you for assistance. Formations clients have all the documentation and information necessary to provide any of the agencies and lenders that will get them their stimulus payment and/or loans and grants quickly
With so much information and uncertainty, we are here to help!
We offer free CARES Act analysis and qualification to all of our current and future customers. Contact us today to see if we can answer your questions and get you the help you need.