On Tuesday night, the Senate unanimously passed the Coronavirus Aid, Relief and Economic Security Act or “CARES Act”. The House is expected to pass this bill without significant changes and the President is expected to sign into law, shortly thereafter. The bill is a massive 880 pages and includes needed economic stimulus, as well as some traditional Congressional “pork”.
On the tax front, the below is a summary of a few key changes:
Recovery Rebate for Individual Taxpayers
Section 2201 of the CARES Act includes a Recovery Rebate that is to be paid to individuals as soon as possible. Single individuals are eligible for a base $1,200, while married couples who file jointly are eligible for a base $2,400. People with children are eligible for an additional $500 per qualifying child. This rebate, of course, does not come without limits. The rebate begins to be phased out when income reaches $150,000 for joint filers, $112,500 for head of household filers, and $75,000 for all others. The rebate is reduced by 5% of the person’s adjusted gross income in excess of those income levels. The calculation will be based on the taxpayer’s 2019 tax return, if already filed, or the 2018 tax return, if your 2019 tax return has not been filed. If a person’s 2020 income is below the limits, but the person’s prior years income was above those limits, then no rebate will be sent initially. Instead, those individuals may be eligible for an equivalent tax credit with the filing of their 2020 tax return. Payments will be direct deposited to the account listed on the taxpayer’s most recent tax return or mailed to the most recent address on file with the IRS, if no direct deposit information was provided.
Retirement Account Distribution Penalties and 2020 Required Minimum Distributions Waived
Section 2202 of the CARES Act waives the 10% penalty on up to $100,000 of early distributions from retirement plans. The distribution must be coronavirus-related, meaning that (1) the individual or their spouse was diagnosed with COVID-19 or (2) the individual experiences adverse financial consequences as result of certain COVID-19 conditions. If the distribution is from a traditional retirement account, then the individual must still recognize the taxable income on the distribution, but only over the next three years. Additionally, required minimum distributions for certain retirement plans have been waived for 2020.
Charitable Contribution Changes
The CARES Act provides a $300 above-the-line charitable contribution for taxpayers who take the standard deduction and make at least a $300 charitable contribution to a qualifying charity. Additionally, the charitable contribution limit is suspended for the 2020 tax year. The deduction was previously limited to 50-percent of adjusted gross income.
Employer Payments of Student Loans
Under Section 2205 of the CARE Act, employers may make up to $5,250 annually toward an employee’s student loans and the amount would be excluded from an employee’s income.
Another Refundable Payroll Tax Credit
The CARES Act includes a 50% refundable payroll tax credit for up to $10,000 of qualified wages per employee paid by employers whose business has been disrupted by COVID-19. This includes employers whose operations were fully or partially suspended due to governmental and employers who experience a more than a 50 percent drop in gross receipts from a similar quarter in the prior year. For small employers (under 100 employees), all wages paid are eligible. For larger employers (100 or more employees), only wages paid to employees retained, but not working due the COVID-19 crisis are eligible for the credit. This credit is in addition to the credit provided in the FFCRA passed last week, but taxpayers may not claim the credit for the same wages.
Employer-Side Social Security Tax Payments May be Delayed
Section 2302 of the CARES Act allows employers to defer payment of the employer share of Social Security tax. Half of the deferred amount must be paid by December 31, 2021 and the remaining half by December 31, 2022.
5 Year Carryback Allowed for Net Operating Losses Incurred in 2018, 2019, or 2020
In an effort to provide businesses with more funding, the CARES Act modifies the current tax code to allow a net operating loss incurred in 2018, 2019, or 2020 to be carried back five years. This is a significant change as the Tax Cut and Jobs Act previously disallowed any carryback of net operating losses. By carrying back a net operating loss, a business may quickly obtain a refund for taxes paid in previous years. Additionally, modifications were made to the excess business loss limitations to allow owners of pass-through entities the ability to take advantage of this carryback rule.
Technical Amendment Regarding Qualified Improvement Property
Previously, the Tax Cut and Jobs Act contained an unintended error regarding the deprecation of certain improvements to facilities. This error was in the government’s favor, as it greatly limited the immediate deduction of the cost of those improvements. The CARES Act corrects this error, allowing additional depreciation to be taken for all qualified improvement property placed in service after December 31, 2017. Application of this new rule to 2018 and 2019 returns is currently unclear, but Taxpayers will presumably be required to either amend returns or file additional forms with their return.
The above key provisions are all taxpayer-friendly and should provide individuals and businesses with more funding to weather this crisis. If you would like for us to analyze the affects of this bill on your specific circumstances, please contact us today.