The $2 Trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Act”) that was enacted on March 27, 2020 contains a wide range of tax relief provisions for both individuals and businesses. Some of these could offer substantial tax planning opportunities for some taxpayers. We’ve identified some key tax provisions as follows:
The IRS will soon being sending out rebate checks of $1200 per person/$2400 for married, joint filers and $500 per qualifying child. The rebate checks are essentially an advance payment of a new 2020 tax credit. Although the credit is for 2020, the amount is treated as an overpayment of 2019 (or if the taxpayer has not yet filed a 2019 tax return, 2018) tax in the amount of the rebate, permitting taxpayers to receive these payments immediately. If the credit as calculated for 2020 winds up being less than the taxpayer’s rebate check, the taxpayer gets to keep the excess amount. The rebate/credit phases out for taxpayers with incomes in these ranges:
- Single or Married Separate $75,000 – $99,000
- Head of Household $112,500 – $146,500
- Married Joint $150,000 – $198,000
Taxpayers who do not receive a rebate check or only receive a partial one may be eligible to take additional credit on their 2020 tax return if they otherwise qualify.
The IRS may automatically deposit the rebate checks electronically to the bank account used for the taxpayer’s most recent refund deposit for tax year 2019 (or 2018 if applicable). Thus, no action should be required for most taxpayers.
For taxpayers who expect their 2019 income to be higher than 2018, such that this would phase them out of a rebate check, they may consider delaying filing for 2019 and letting IRS use their 2018 return to base the calculation on.
For taxpayers who expect their 2019 income to be lower than 2018, such that this would permit them to receive a rebate check where they otherwise may not based on 2018 (or 2020 forecasted income), they may wish to file as quickly as possible.
Access to Retirement Funds
The Act permits individuals to withdraw up to $100,000 from a qualified retirement account (this includes most employer plans as well as IRAs) between January 1, 2020 and December 31, 2020 without incurring the 10% penalty for early withdrawals if (1) they are diagnosed with COVID-19, (2) their spouse or dependent is diagnosed with COVID-19, or (3) 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, closing or reducing hours of a business owned or operated by the individual due to COVID-19 or other factors as determined by the IRS.
Taxpayers are also allowed to repay to their retirement account such amounts within 3 years of the distribution date if they choose or recognize the distribution as taxable income ratably over 3 years. Thus, taxpayers can decide whether to treat this as a loan or a taxable distribution, with some deferred tax effects.
Required Minimum Distributions (“RMDs”) waived for 2020
The Act provides that the annual RMD requirements for retirement account owners age 72 or higher do not apply for 2020. This applies to most employer plans as well as IRAs. This includes not only taxpayers who were already taking annual RMDs but also taxpayers whose required beginning date for RMDs occurs in 2020.
Taxpayers who do not otherwise need the money should consider not taking a 2020 RMD in order to preserve more money inside their retirement account(s) available for potentially more tax-free compounded growth over time.
Charitable Contribution Incentives
The Act permits a temporary lift of the 60% adjusted gross income (AGI) limit on 2020 cash contributions to certain charities and other nonprofit entities if the taxpayer so elects, rather than the normal 5-year carryforward rule on excess contributions over that AGI limit.
The Act also adds a new $300 above-the-line charitable contribution deduction for taxpayers who make cash contributions in 2020 but do not elect to itemize their deductions.
Permitted charities for these new provisions include organizations described in IRC Section 170(b)(1)(A), such as most public charities, churches, educational institutions, hospitals, and medical research organizations. Contributions to donor advised funds and Section 509(a)(3) supporting organizations don’t apply for these new provisions and are subject to prior rules and limitations on donations to those types of charitable entities.
Taxpayers who expect to be in a high income tax bracket in 2020 may consider increasing their 2020 cash contributions to certain charities if this fits with their long-term charitable giving plan, while reducing other contribution dollars/assets and preserving for donation in subsequent years.
Employee Retention Credit
The Act contains a new refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees. Details include:
- Eligible employers- The credit applies to employers, including non-profit entities, whose operations have been fully or partially suspended due to a government order limiting commerce, travel, or group meetings or who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. Special rules apply for employers with more than 500 employees.
- Not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act, referred to as SBA 7(a) Paycheck Protection Program loans.
- Eligible wages- Up to $10,000 of total wages and health benefits per employee paid between March 13, 2020 and December 31, 2020 that are not taken into account for required sick leave or family leave compensation under the Families First Coronavirus Act (FFCRA).
- IRS is granted authority to waive penalties on employers who do not deposit applicable payroll taxes in anticipation of receiving the credit.
Most businesses will want to first consider applying for a Paycheck Protection Program loan under SBA 7(a) with a qualifying lender, which is subject to certain forgiveness rules on some amounts paid over an 8-week period starting with the loan origination date. Such amounts forgiven are nontaxable to the employer.
Businesses who don’t fit that program or are unable to participate for some reason should then consider the above payroll tax credit rules to defer and reduce payroll taxes to free up more current cashflow.
Payroll Tax Delay
The Act defers the employer portion of federal Social Security taxes and 50% of self-employment taxes otherwise due between March 27, 2020 and December 31, 2020. Half of the deferred amounts will be due by December 31, 2021, with the remainder due by December 31, 2022. This provision is available to all businesses except those granted Paycheck Protection Program loans discussed above, which are partially or fully forgiven.
Net Operating Losses
The Act permits a 5-year carryback of Net Operating Losses (NOLs) incurred in 2018, 2019 or 2020, lifts the 80% of taxable income limitation, and lifts the limitation on certain “excess business losses” incurred in those years.
Businesses that incurred NOLs for tax years 2018 or 2019 that were suspended should consider immediately filing amended returns to carryback any losses to prior tax years and get refunds if they were in relatively high tax brackets in the carryback year(s).
IRC 163(j) Interest Limitation
For tax years 2019 and 2020, the 30% income limit on business expense for certain businesses is raised to 50% under the Act, permitting many businesses to take more interest deductions for these years. Also, for 2020 taxpayers are also allowed to choose between 2019 and 2020 income in applying the 50% limitation. Thus, businesses whose income drops in 2020 may be able to take higher interest deductions by using 2019 income as the base for applying the 50% limitation.
Businesses that have already filed 2019 tax returns applying the 30% limit under prior law may wish to amend their 2019 tax returns to apply the new 50% limit and potentially generate more 2019 tax savings
Qualified Improvement Property Immediate Expensing
The Act fixes a technical glitch regarding 100% bonus deprecation on Qualified Improvement Property (QIP), permitting immediate expensing of such property acquired and placed in service after September 27, 2017. QIP is any improvement to the interior of a nonresidential building that is placed in service after the building is first placed into service other than enlargements to the building, elevators, escalators or structural framework.
Businesses that acquired and placed into service QIP between September 28, 2017 and 2019 may wish to amend their returns to treat this property as eligible for 100% bonus depreciation. This may result in substantial tax refund opportunities for some taxpayers and could even result in NOL carryback claims for some.
Student Loan Assistance
The Act provides the ability for employers to pay either directly to the lender or as reimbursement to the employee between March 28, 2020 and December 31, 2020 up to $5250 of certain student loan debt for its employees, which is tax-free to the employee. The $5250 cap applies to all educational assistance provided however, including tuition, fees, and books in addition to any student loan repayments.
The CARES Act includes other tax provisions as well, such as corporate Alternative Minimum Tax Credit acceleration, excise tax relief on alcohol used for hand sanitizers and on aviation and kerosene used in aviation fuel and other relief for certain taxpayers.
Please contact our team of professionals if you would like help exploring and applying the new CARES Act tax relief provisions for your situation.