Summary of Tax Provisions

Tax Provisions under the CARES Act

On Friday, the president signed into law a $2 trillion piece of legislation to help ease the burden that COVID-19 continues to create for taxpayers and businesses. There are a significant number of provisions in this stimulus package. Here we will give a brief overview of some of the tax provisions that were included. For more information, please continue to check our COVID-19 News Feed where we are posting helpful articles and links with information we believe will be helpful to you.   

Recovery Checks

The CARES Act provides a refundable tax credit for 2020 of $1,200 to individual filers with adjusted gross incomes of $75,000 or less and $2,400 to married couples filing jointly with adjusted gross incomes of $150,000 or less in the form of checks being cut directly to taxpayers. For taxpayers under these income thresholds, there is an additional $500 credit for each of their qualifying children. The credit is reduced by 5% of the taxpayer’s adjusted gross income over the thresholds. This means that for single taxpayers who made more than $99,000 and for married couples who made more than $198,000, there is no credit. Although this is a 2020 credit, the amount received will be based on the 2019 income tax return, or 2018 if your 2019 has not yet been filed, and checks are being sent between now and December 31, 2020.

Employee Retention Credit

The CARES Act provides a credit against payroll taxes through December 31, 2020 equal to 50% of certain “qualified wages” for employers that continue to pay wages when forced to suspend or significantly reduce business operations due to COVID-19. This generally applies to businesses in which operations are fully or partially suspended due to a governmental order related to COVID-19 or in which gross receipts are less than 50% of the receipts for the same calendar quarter of the prior year. However, the amount of qualified wages for calculation of the credit depend on how many employees you have. If you have more than 100 employees, qualified wages only include those paid during the time the business was shut down. If you have less than 100 employees, you may generally also count wages paid during quarters with a significant decline in revenue. The credit computation is capped at $10,000 in qualified wages paid, which means the actual credit is capped at $5,000 per employee for all calendar quarters. The credit is refundable if it exceeds the payroll tax liability. There are other limitations in place for employers who take out payroll protection loans or who receive other payroll tax credits.

Net Operating Losses

The 2017 Tax Cuts and Jobs Act made significant changes to how and when taxpayers can receive tax benefit of net operating losses. The CARES Act temporarily reverses these changes for most taxpayers. The Act allows a corporation to carry back losses occurring in 2018, 2019, and 2020 back for five years, and allows a corporation’s net operating loss to fully reduce taxable income rather than only 80%. The CARES Act also retroactively suspends the excess business loss provision for 2018 through 2020 and allows taxpayers to file an amended return for 2018 and 2019 for a refund in cases where losses were limited under the TCJA but would not be under this Act.

Business Interest Expense Limitation Threshold 

The CARES Act retroactively increases the adjusted taxable income limitation for business interest expense deductions from 30% to 50% for 2019 and 2020. For businesses that will not have income in 2020, they may be able to use 2019 adjusted taxable income in the limitation computation for 2020. The increased 50% limitation will apply to partners in a partnership only in 2020, not 2019.

Payroll Tax Payment Extension

The CARES Act generally allows employers and self-employed individuals to delay payment of the 6.2% employer share of Social Security tax from the date of enactment through the end of 2020. The tax would be payable over the following two years with half paid by December 31, 2021 and the other half by December 31, 2022. Please note that this provision does not extend the filing date of the payroll tax returns.

Waiver of 10% Early Withdrawal Penalty for Some Retirement Plan Distributions

Generally, withdrawing money from your retirement plan before age 59½ subjects you to tax and a 10% penalty unless you meet certain criteria or us the money for a specific set of reasons. The CARES Act removed this penalty on up to $100,000 of distributions taken between January 1, 2020 and December 31, 2020 for taxpayers affected in the following ways by the coronavirus: (1) if they are diagnosed with COVID-19 (2) if their spouse or dependent is diagnosed with COVID-19, or (3) if they experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19. The distribution would still be subject to income tax.

Changes to the Charitable Contribution Limitations

For individual taxpayers who itemize deductions, the CARES Act suspends the 50% adjusted gross income limitation for many 2020 charitable contributions and instead allows 100% of AGI.  Corporate taxpayers who normally have a 10% income limitation instead be limited to 25% of income. Individuals who take the standard deduction will receive a charitable contribution deduction of up to $300 for cash contributions made during 2020 to certain 501(c)(3) organizations.

Expensing of Qualified Improvement Property Costs.  

The Tax Cuts and Jobs Act from 2017 contained an error that prevented taxpayers from taking accelerated depreciation on costs to improve certain nonresidential business property. The CARES Act would allow taxpayers to take the intended more beneficial treatment on 2019 returns, and allow taxpayers in most cases to amend 2018 tax returns for the same treatment for assets placed in service in that year.

Tax-Free Employer Repayment of Employee Student Loans.  

 Under the CARES Act, if an employer pays student loan debt on behalf of an employee, up to $5,250 of the payment can be excluded from the employee’s income. This provision applies to payments made between the date of the CARES Act through January 1, 2021. If the employer provides other educational assistance to employees, those amounts would be included in the $5,250 cap

Please feel free to contact our team with any questions. We will get through this together.


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