Tax-Related Provisions of the 2020 CARES Act

2020 CARES Act

What it Means for Business & Individual Income Tax

March 30, 2020

Late last week, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This Act, which is the largest government stimulus in history, provides a collection of resources and lifelines to businesses and individuals in the United States who have been affected by the COVID-19. Included in these provisions were many small business loan provisions, as well as income tax changes and various payroll credits.

We understand that many of our clients have questions about how the Act will impact their tax planning strategies, both from a business perspective as well as on an individual level. Although there are still many unknowns that exist in the application of the new guidance, we have developed the following overview of the key provisions. The information included in this update is a brief summary that is designed to provide an overview of the tax changes from the CARES Act. We are working to stay updated with the changing trends as the IRS and the Treasury Department provide additional guidance. As we have come to expect with the rapidly evolving COVID-19 relief efforts, things will likely continue to change over the coming weeks.

Please reach out to your HBE advisor with any specific questions on how these provisions may impact your individual situation.

Business Tax Provisions

Employee Retention Credit
This provision provides for a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis, up to $10,000 of compensation including health insurance paid to each eligible employee. The credit would be available to employers whose operations were fully or partially suspended due to a COVID-19 related shutdown order, or whose gross receipts declined by more than 50% when compared to the same quarter in the prior year.

IPlease note that these credits are not available to businesses receiving Small Business Interruption Loans, including the potentially forgivable Payroll Protection Loans, as well as businesses participating in some of the other COVID-19 relief programs. It is important to analyze the different forms of relief that are available to determine what is the most beneficial in your particular situation.

Click here for more information on payroll retention credits, delay of payroll taxes, and employee leave credits.

Delay of Payment of Employer Payroll Taxes
This provision of the bill allows for employers and self-employed individuals to defer the payment of the employer’s share of the 6.2% Social Security taxes for the remainder of 2020. One half of these taxes would be due by December 31, 2021 and the other half would be due by December 31, 2022. The employee taxes withheld, which would be the employee’s half of Social Security and Medicare taxes along with federal withholding, as well as the employer’s share of Medicare taxes, would still be due at the same time they are normally due.

Net Operating Losses (NOLs)
Under the CARES Act, NOLs arising in 2018, 2019, or 2020 may be carried back five years, instead of the limitation on NOL carrybacks under the 2017 Tax Cuts & Jobs Act, in addition to continuing to be able to be carried forward to future tax years. Furthermore, NOLs arising from these three tax years may be used to fully offset income in the year(s) that the losses are carried to. Previously, NOLs after 2017 could only offset 80% of taxable income in the year(s) they were used.

Business Loss Limitations
Under the 2017 Tax Cuts & Jobs Act, business losses were limited in the amount of their deduction so that business owners could not use losses from their businesses to offset other unearned income items on their tax return. This has been suspended for 2020; meaning that business losses sustained by a taxpayer in 2020 may be fully used to offset additional non-business sources of income or to create an NOL that can either be carried back or carried forward to another tax year.

Corporate AMT Tax Credits
This provision accelerates the refund of Minimum Tax Credits (MTCs) for corporations, now that AMT no longer exists for corporations. Beginning in 2019, 100% of MTC’s may all be refunded back, accelerating the timeline of the refund by a few years.

Business Interest Expense Limitation
For certain larger businesses and some controlled groups and tax shelters, the 2017 Tax Cuts & Jobs Act added an interest expense limitation. A business was limited to deducting interest expense up to 30% of the business’s taxable income, with the rest being carried forward to a future year. For 2019 and 2020, that limit has been adjusted to 50%. In addition, businesses may elect to use their 2019 income as the calculation base for the 50% limitation in 2020 if their 2019 income is higher.

Qualified Improvement Property Technical Correction
Under the 2017 Tax Cuts & Jobs Act, Qualified Improvement Property, defined as non-structural interior renovations of an existing commercial property, were granted some preferential tax treatment compared to the 39 year straight line depreciation normally afforded to commercial improvements. Due to a drafting error, however, this property stay as 39 year property, which meant it was eligible for Section 179 depreciation, but not bonus. The CARES Act adjusts the life of the QIP property to 15 years and bonus eligible, retroactive to 2018. Therefore, it is possible to amend 2018 tax returns to take advantage of this. If there was an election out of bonus for 15 year property on the 2018 return, then bonus cannot be claimed, but it may still be worth amended for the accelerated depreciation claimed by cutting the life of asset by more than half. Unlike other provisions of this bill, this does not end after 2020, this is a permanent change.

Individual Tax Provisions

Recovery Rebates
Cash payments of $1,200 for each adult (up to $2,400 for a married couple) and $500 for each child will be made to lower- and middle-income individuals. Individuals who earn $75,000 or less and married couples earning $150,000 or less in adjusted gross income are entitled to the full payment. The payment would be reduced if income exceeds these amounts, phasing out entirely at $99,000 for single individuals and $198,000 for couples without children. For the purposes of this credit, a child is defined as children under the age of 17 that you claim as a dependent on your tax return.

The income thresholds will be based on 2019 income tax returns, or 2018 income tax returns if a 2019 return has not yet been filed. If the credit is limited based on your 2019 or 2018 income, but would be allowable on your 2020 return, you will get the additional credit back when you file your 2020 tax return. At this time, it appears that an excess credit you received would not need to be paid back to the government. We do not yet know whether you would be able to still file your 2019 return in the next few days to utilize your 2019 income instead of 2018 income for purposes of this credit.

Forbes has a good stimulus check calculator to check out if you are curious to see how much of a rebate you will be entitled to. You can check it out if you click here.

Retirement Plans
For amounts withdrawn from a qualified retirement plan during 2020 for use by someone directly impacted by COVID-19, the 10% early withdrawal penalty does not apply on up to $100,000 of distributions. Additionally, the income is included as taxable income over a three year period, instead of all at once. The taxpayer also has three years to recontribute the amount that was withdrawn back into the plan. At this point, it is a bit unclear how that will work for tax purposes.

In addition, Required Minimum Distributions have been waived for 2020 for taxpayers who would otherwise be required to draw an RMD.

Charitable Contributions
For 2020, individuals who do not take the itemized deduction and instead take the standard deduction are able to deduct up to $300 of cash charitable contributions on top of the standard deduction. This deduction cannot be for amounts contributed to a donor advised fund.

Also in 2020, there is an election to taken cash charitable contributions against 100% of taxable income, overruling the normal 60% limitation in place. An election must be made on the tax return, this is not an automatic amount. In addition, any partnership or S corporation that makes charitable contributions that pass through to the owners must separately make the same election on their return.