CARES Act Benefits For Individuals

The Coronavirus Aid, Relief, and Economic Security act – the CARES Act – is the largest economic bill in U.S. history and was designed to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”

Spanning close to 900 pages, the comprehensive aid package covers a lot, including direct payments to Americans, expanded unemployment insurance, changes to retirement rules and billions of dollars in aid to businesses.

The CARES Act builds upon earlier versions of federal government support and is the third such bill, coming shortly after the “Coronavirus Preparedness and Response Supplemental Appropriations Act” and the “Families First Coronavirus Response Act” were approved.

Here are a few highlights that might be of interest to individuals:

Rebate for Individuals

The bill would provide a $1,200 refundable tax credit for individuals ($2,400/joint). Additionally, taxpayers with children will receive a flat $500 for each child. The rebates would not be counted as taxable income.

The rebate does phase out as follows:

• Starts to phase out at $75,000 for singles and completely gone at $99,000

• Starts to phase out at $150,000 for married joint filers and completely gone at $198,000

• Starts to phase out at $135,000 for a head of household filers

Unemployment Expansion

Unemployment insurance assistance now includes an additional $600 per week payment to each recipient for up to four months plus extend benefits to self-employed workers, independent contractors, and those with limited work history. The government will provide temporary full funding of the first week of regular unemployment for states with no waiting period and extend benefits for an additional 13 weeks through December 31, 2020.

Waiver of 10% Withdrawal Penalty

The 10% penalty for early withdrawals from IRAs and retirement accounts is being waived for 2020, subject to a maximum allowable withdrawal of $100,000.

Withdrawal amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps.

Required Minimum Distributions

For 2020, individuals expected to take Required Minimum Distributions will not be required to withdraw that amount from their IRA or retirement plan.

Coronavirus-Related Distributions

The CARES Act allows for “Coronavirus-related Distributions” which allow participants in IRAs and retirement plans the ability to take a qualifying withdrawal and pay those funds back without tax or interest over a 3-year period. The withdrawal is subject to a $100,000 limit.

There are qualifications for Coronavirus-Related Distributions, however, including:

• Personal, spouse or dependent diagnosis with COVID-19

• Quarantined, furloughed, laid off, or work hours reduced because of COVID-19

• Unable to work due to lack of childcare due to COVID-19

• Own a business that is closed or shortened hours due to COVID-19

• Other factors later specified by the IRS

Retirement Loans

For those unable to meet the Coronavirus-Related Distributions criteria, withdrawals from retirement plans in the form of a loan exists.

Generally speaking, those loans need to be repaid over 5 years and cannot exceed $50,000 or half the vested account value, whichever is less. Now, however, the amount is doubled so that one can take a loan up to $100,000 or half of the vested account value, whichever is less. The loan still needs to be repaid, but payments can be deferred up to 1 year after the loan is taken.

Your Financial Advisor

As with all federal government programs, there are rules, deadlines, and qualifications that can be difficult to decipher. The fact is that while this is by far the largest economic bill in America’s history, it is near impossible for any bill to take into account every unique situation.

So, before you go down a path that might not be in your best interest, set up a CARES Act Benefits Consultation by clicking here or email me at ivan@otbfinancialplanning.com.

This is especially important as the CARES Act is bill number three. And Washington has been talking about bill number four, which will undoubtedly bring more economic relief and changes.

A Tax-Deductible Buy-Sell Agreement

One of the critical needs of a small business is to protect against the untimely death of an owner. This is important because the family of the owner may face a large tax bill, and may not have the liquidity to pay the tax. To make matters worse, it may not be desirable for the deceased owner’s family to have a hand in running the business and surviving owner may not have enough cash for a buyout.

This problem can be solved with a well designed buy-sell agreement. Although there are a variety of ways to structure such an arrangement, the two most common approaches are the stock redemption and the cross-purchase plans. Because of leverage and tax efficiency, these plans are often funded with life insurance. Insurance can provide both the liquidity needed by the family to meet its tax obligations and the ready cash for the surviving owners to purchase the interest of the deceased shareholder.

In a stock redemption plan, the business agrees to purchase or retire the stock of a deceased stockholder. Typically, the business purchases life insurance on each stockholder to fund the arrangement. In a cross-purchase plan, the owners agree to buy the stock of a deceased partner. To fund a cross-purchase agreement, each owner buys life insurance on each of the co-owners. In both cases, life insurance guarantees that funds will be available if and when they are needed.

A frequent obstacle to funding a buy-sell arrangement is a lack of sufficient cash to pay for the required insurance. For example, in a 28% tax bracket, it takes $3,472 in pre-tax earnings to support a $2,500 life insurance premium. So, it’s not surprising that many owners ask if there is a way to deduct the cost of the insurance premium. Can this be done?

In fact, there is a way . . . by purchasing life insurance through a profit-sharing plan sponsored by the business. When properly structured, the funding of a cross-purchase plan in this manner has all the advantages of a traditional buy-sell agreement, with the added benefit of income tax leverage to reduce the owners’ out-of-pocket costs.

A Little Background. . .

The Internal Revenue Service (IRS) defines a qualified profit-sharing plan as a plan of deferred compensation. This definition creates flexibility that is not available with a qualified pension plan.

Amounts allocated to the profit-sharing account of a participant may be used to provide incidental life insurance protection for himself or anyone in whom the participant has an insurable interest [Treasury Reg. 1.401-1(b)(1) (ii)]. The IRS has agreed in private letter rulings that this regulation supports the purchase of life insurance on the life of a co-shareholder, to fund a cross-purchase agreement. (See PLRs 8108110 and 8426090.)

Generally, in designing such an arrangement the following conditions should be met:

1. The plan must be a tax-qualified profit-sharing plan.

2. The plan should allow each individual participant to direct a portion of his or her account toward the purchase of life insurance.

3. The plan should provide that participants may purchase life insurance on themselves, or on the life of any individual in whom they have an insurable interest.

4. The purchase of insurance must meet the so-called “incidental death benefit” limitations.

5. Taxable insurance costs (“PS-58 costs”) must be reported by the participant whose account is supporting the cost of the life insurance.

6. If the participant is married, the spouse of the participant should consent in writing to the use of the profit-sharing funds in this manner.

7. At death, the amount at risk under the policy may be distributed immediately to the surviving shareholder. This amount is received free of income tax and may be used to satisfy the buy-sell agreement. The cash value portion of the policy should remain in the profit-sharing plan.

The funding of a cross-purchase agreement through a profit-sharing plan in this manner may work best for small, closely-held businesses with two or three owners. But, it can work in larger businesses as well, and this approach may provide a cost-effective means of purchasing life insurance. This is an important consideration for any business that may not otherwise have the ability to fund the buy-sell plan.

If you need help setting up a buy-sell agreement, choosing appropriate insurance coverage, or help reducing your tax liability exposure, please contact us at (312) 554-5889 or at ivan@otbfinancialplanning.com.

Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

Developing a Successful Business Plan

A well-crafted business plan can be a blueprint for success. This multifaceted tool is as important to established CrossFit owners looking to grow their business as it is to budding entrepreneurs.

A business plan defines your business, outlines your goals, and lays a strong foundation for achieving them. A valuable resource for investors and lenders, a strong business plan can help you secure capital for expanding operations. As your Affiliate grows, your plan will help you respond to changes in the marketplace and fitness industry. Let’s take a closer look at three essential business plan elements: the executive summary, the business description, and the financial data.

 1. Executive Summary

First impressions are everything, and this quick snapshot of your Affiliate has the potential to attract or discourage investors. This is your opportunity to effectively summarize your company’s history and articulate your mission:

• Briefly explain the employee and management structure.
• Describe your location and facilities.
• Provide relevant financial information.
• Disclose strategic corporate relationships.
• Highlight key accomplishments.

By the end of your executive summary, you want your readers to know about your products and/or services, understand the demand for your business, and believe in your potential for success.

 2. Business Description

After a compelling introduction, it’s time to provide details. Here, it is important to accomplish the following:

• Describe your business.
• Identify your Affiliate’s niche in the marketplace.
• Demonstrate your industry knowledge.

As you know, there must be a market for your products/services, and your business plan can outline how you are going to attract and maintain that market. Ask yourself some basic questions:

• What are you selling?
• Who are your clients?
• Who is your competition?
• What makes your gym unique?

In answering these questions, demonstrate the ways in which various components of your business work in concert to accomplish your objectives. For example, how does your location support your business? What experience do you bring to your operation? What are the specialized skills of your coaches? Remember, your intent is to construct a winning approach and make your readers confident about your business.

3. Financial Data

Here, startups need to project future performance, while established Affiliates need to detail the historic performance of their companies, as well as project future earnings. Include three key financial documents:

• Income statement
• Balance sheet
• Cash flow statement

Lenders in particular may focus on your cash flow statement, which details how money is earned and spent in your business, because poor cash-flow management can sink even profitable businesses. From their perspective of the lenders, accurately projecting cash flow is essential to meeting your financial obligations. Lending aside, effective cash-flow management can benefit your business by helping you maintain liquidity, minimize your credit obligations, and minimize your interest expenses. Check out my blog on 10 Ways To Improve Your Affiliate Cashflow for more information.

The Sky’s the Limit

Think of your business plan as a building with many floors, each fulfilling a function. The function of the foundation is, of course, to present the information that can make your plan a tool for raising capital. If you shortchange this part of your plan, it’s possible that your Affiliate will barely get you off the ground.

Additional functions of a well-engineered business plan include helping you manage daily operations, make decisions in line with your ultimate objectives, and stay on track with your plans for growth.

To keep pace with change, review your plan every year and revise it, as needed. If your business plan helps your business adapt to market fluctuations, industry developments, and business advances, the sky’s the limit.

We are not permitted to offer, and no statement contained herein shall constitute, tax or legal advice. Individuals are encouraged to consult with a qualified professional before making any decisions about their personal situation.

This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.