As you’ve all heard, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. The legislation provides for $2.2 trillion in economic relief to businesses and individuals affected by the COVID-19 pandemic.
Please note that the law provides for loan provisions within the Act to support the continued employment of your workforce. Of the $2.2 trillion, nearly $350 billion has been dedicated toward a Payroll Protection Program (PPP) aimed at preventing layoffs and business closures while your employees have to stay home during the covered period (February 15, 2020, through June 30, 2020). Note that the PPP is discussed in great length here.
Furthermore, we sent out a newsletter on the Families First Coronavirus Response Act on March 25, 2020. This article can be found here.
While the information regarding CARES is beginning to flow rapidly, we thought we’d provide you with a high-level synopsis of the program.
Impact To Individuals
Recovery Rebates
Qualifying individuals are entitled to a rebate of $1,200 if single or $2,400 if married filing jointly plus $500 for each child under the age of 17. The rebates are treated as an advance refund of a 2020 tax credit. The IRS will access either your 2019 tax return, 2018 tax return or Social Security statement to determine the payment amount. In order to qualify, an individual, spouse and qualifying child must have valid social security numbers. The individual stimulus payment phases out by $5 for every $100 a taxpayer’s adjusted gross income exceeds $75,000 if single and $150,000 if married.
Qualified Retirement Plan Distributions
Distributions from a qualified retirement plan before the age of 59 ½ are typically not only taxable at ordinary income tax rates but comes with a 10% penalty with certain exceptions. Taxpayers meeting certain qualifications can take a coronavirus – related distribution of up to $100,000 in 2020 without paying the 10% penalty. Ordinary income tax would still be due, but the tax could be spread over three years. In addition, an individual may borrow up to $100,000 from their vested plan assets for the 180 day period beginning with the enactment of the Act.
Waiver of Required Minimum Distributions for Certain Retirement Plans and Accounts
There will be no minimum distribution requirement for one year for IRAs and certain defined contribution plans.
Charitable Contributions
An individual is allowed to make a cash contribution of up to $300 to certain qualifying charities and deduct the contribution no matter if they take the standard or itemized deduction. In addition, the Act changes the limit on charitable giving from 60% of adjusted gross income to 100% of adjusted gross income. Any excess contributions would be carried over for five years. For corporations, the charitable deduction limit would increase from 10% of adjusted taxable income to 25%.
Key Business Tax Implications
- Employee Retention Credit for Employers Subject to Closure Due to COVID-19
- Eligible employers may be able to claim a refundable payroll tax credit for 50% of qualified wages paid to employees during the crisis. This credit is available to:
- Those whose business operations were fully or partially suspended due to a COVID-19-related shutdown order, or
- Those whose gross receipts declined by more than 50% as compared to the prior year.
- Eligible employers may be able to claim a refundable payroll tax credit for 50% of qualified wages paid to employees during the crisis. This credit is available to:
- Delay of Payment of Employer Payroll Taxes
- Certain employers will be eligible to defer the payment of the employer portion of Social Security taxes (6.2%). The deferred taxes will be paid in two equal installments on Dec. 31, 2021, and Dec. 31, 2022.
Retroactive Treatment
The Act made several retroactive changes that could affect your 2019 tax return or potentially even your 2018 tax returns. Here’s a look at which provisions could impact 2019 and 2018 tax returns as well as several provisions that will impact your returns prospectively.
Interest limitation change
Currently, the interest expense deduction allowed is limited to the extent of 30% of adjusted taxable income. The Act increases this limit to 50% of adjusted taxable income for 2019 and 2020. If 2020 becomes a loss year for your business, the business can elect to use its 2019 adjusted taxable income in computing its 2020 limitation. Note that this does not apply to partnerships. The 30% limitation still applies to partnerships for 2019, but partners will be allowed a greater deduction of excess business interest expense on their 2020 tax returns.
Qualified Improvement Property Fix
The Act fixes a technical error in the Tax Cuts and Jobs Act of 2017 (TCJA) that required “Qualified Improvement Property” to be a 39-year property that was not eligible for bonus depreciation. The Act fixes this retroactively back to Jan. 1, 2018. Therefore, property placed in service after Dec. 31, 2017, is the 15-year property and eligible for 100% bonus depreciation. This could potentially impact prior-year tax returns.
Modifications to Net Operating Losses (NOLs)
Current tax law disallows net operating loss (NOL) carrybacks and limits the use of NOL carryforwards. This rule is suspended for 2018, 2019 and 2020 and taxpayers will be permitted to carry back NOLs for up to five years.
Net Business Loss Limitation Changes
For 2018, 2019, and 2020, business losses can offset non-business income without limitation. Previously, this limitation prohibited business losses from offsetting non-business income in excess of $500,000 ($250,000 if filing single). The limitation returns in 2021.
Corporate Alternative Minimum Tax (AMT) Credits
“C” corporations that maintained AMT credits were allowed to claim these credits over several periods, ending in 2021. “C” corporations can now claim a refund of their remaining AMT credits immediately. Guidance is forthcoming on how to submit a tentative refund claim, but such a claim must be submitted by Dec. 31, 2020.
Employer Payments on Student Loans
In 2020, an employer can pay up to $5,250 of an employee’s student loan debt on a tax-free basis. This overall limitation applies to the student loan debt payment and educational assistance combined.
We expect taxpayers to benefit from these wide-ranging provisions. Furthermore, since many of these provisions are retroactive to the 2018 tax year, there is a significant opportunity to potentially amend 2018 tax returns in certain situations to generate immediate cash refunds.
We are monitoring this Act closely, working with our clients to assist them. For more information, please reach out to your BFBA contact directly.
This article is intended for educational purposes only and is not a substitute for obtaining competent accounting, tax, legal, or financial advice from a certified public accountant, attorney, or other business advisors. You should not act upon any of the information in this article without first seeking qualified professional guidance from your business advisors on your specific circumstances. The information presented should not be construed as advice or guidance from BFBA.