Tax Highlights of the CARES Act

The President signed The Coronavirus Aid, Relief and Economic Security Act (CARES) into law on March 27, 2020.  This letter summarizes the highlights of this $2.2 trillion bipartisan Act which provides relief for small businesses and individuals.

Individual Tax Relief

Recovery Rebate:

Eligible US taxpayers will be sent a one-time payment of up to $1,200 ($2,400 for married filers), plus an additional $500 for every child under age 17. The rebate amount will be gradually reduced for single filers with a adjusted gross income (AGI) above $75,000, joint filers with an AGI above $150,000, and head-of-household filers with an AGI above $112,500. The rebate amount is completely phased-out when the AGI for each filing status exceeds $99,000, $198,000 and $146,500 respectively. College students and older teens who are dependent on their parents for more than half their support are not eligible, even if they earn a little money on the side.

If a taxpayer receives a rebate during 2020 that is less than the credit to which the taxpayer is entitled, the taxpayer will be able to claim the balance of the credit when filing for 2020. If, on the other hand, the rebate received is greater than the credit to which the taxpayer is entitled, the taxpayer won't have to pay back the excess (i.e., there is no claw-back).

The rebate will be sent either by direct deposit or by check.

Retirement:

Required minimum distributions (RMD) are suspended for 2020.

 

The 10% early withdrawal penalty is waived for any eligible taxpayer who takes a coronavirus-related distribution up to $100,000 from an eligible retirement plan before December 31, 2020. An eligible taxpayer is one who has been diagnosed with SAR-CoV-2 or COVID-19 virus or whose spouse or dependent has been diagnosed with SAR-CoV-2 or COVID-19 virus or who experiences adverse financial consequences from being quarantined, furloughed or laid off or who has had his or her work hours reduced, or who is unable to work due to lack of child care. 

The Act also allows the taxpayer to elect to include the distribution in income in 2020 or include it ratably over a three year period. Furthermore, the distribution will not be subject to tax if it is contributed back to an eligible retirement account within three years from the date the distribution is received.

In addition, the limit for retirement plan loans has been temporarily raised from the normal $50,000 to $100,000, while the current rule that loans may not exceed half of a 401(k) participant’s vested account balance has been waived.

Charitable deduction:

The Act creates an above-the-line charitable deduction for 2020 not to exceed $300. This allows an individual to claim a deduction for a charitable contribution, even if the individual does not itemize deduction.

The Act also increases the 60% AGI limitation to 100% for qualified cash contributions made to charities in 2020. For this purpose contributions to donor advised funds are not considered to be qualified cash contributions.

Business Tax Relief

Employee Retention Credit:

Similar to the Paid Leave Credit granted to employers under the Families First Coronavirus Response Act signed into law on March 18, 2020, the CARES Act grants eligible employers a credit against payroll taxes equal to 50% of qualified wages (including healthcare benefits) up to $10,000 per employee.

Payroll Tax Deferral:

In order to free up employers' cash flow, the Act defers the due date for payment of employer payroll taxes. Such taxes due from 3/27/2020 through 12/31/2020 are deferred and are payable over the next two years – 50% due 12/31/2021 and the remaining 50% due 12/31/2022. 

50% of self-employment taxes also qualify for the same deferral.

Payroll Tax Advance Refund Credit:

The Act provides for advance refunding of the payroll tax credits for paid sick live credit and paid family leave credit enacted last week in the Families First Coronavirus Response Act. Forms and instructions of how to implement the credit will be issued by IRS.

Business Losses:

The Act allows for a five-year carryback of net operating losses arising in 2018, 2019, or 2020 by a business. Businesses will be able to amend tax returns for tax years dating back to 2013 in order to take advantage of the carryback.

The Act also suspends business loss limitation rules applicable to sole proprietors and passthrough entities and would apply to tax years beginning in 2018, 2019 and 2020.

Additionally, the Act allows for NOLs arising before 1/1/2021 to fully offset income which means NOLs can be used to offset 100% of taxable income in tax years 2019 and 2020 (i.e., the Act suspends the TCJA limit of 80% of taxable income).

Qualified Improvement Property:

The Act makes a long-awaited technical correction for Qualified Improvement Property under Sec 168 by making it 15-year property eligible for 100% bonus depreciation. 

This change is retroactive to 9/27/2017 and allows taxpayers the opportunity to file amended tax returns for 2017, 2018 and 2019 to take advantage of the accelerated depreciation deductions.

Limitation on Business Interest Expense:

The Act temporarily increases the limitation imposed by the TCJA on interest deductions by temporarily increasing the 30% adjusted taxable income threshold to 50% and also allows the taxpayer to use 2019 ATI in lieu of 2020 ATI for purposes of calculating the 2020 limitation.

We understand you may have many questions regarding The CARES Act and other relief provisions. We will be sending another email with information about SBA programs. In the meantime, please contact us with any questions and concerns that you may have.