Congress passed and President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act (H.R. 748) on March 28, 2020. Here are some highlights of tax provisions of the Act.
Advance tax rebates
The provision that has received the most publicity is advance tax rebates of $1,200 for single persons and $2,400 for married couples who file joint income tax returns. In addition to these amounts, $500 will be included in the advance tax rebate for each dependent child claimed by the taxpayer(s) who qualifies for the child tax credit under Internal Revenue Code Section 24.
The rebates will be mailed or electronically deposited as soon as possible by the IRS to provide relief to Americans who are suffering from the shutdown of our society to fight the coronavirus pandemic.
Not everyone will qualify. The rebates are reduced to not below zero by 5% of the taxpayer’s adjusted gross income above $150,000 for married couples filing joint returns, $112,500 for heads of households, and $75,000 for other taxpayers.
Nonresident aliens, anyone who is claimed as a dependent, estates and trusts don’t qualify for the rebate.
The IRS will make a preliminary determination based on the last income tax return filed for 2018 or 2019, or for seniors who do not file an income tax return, their social security record.
When the taxpayer prepares his or her 2020 federal individual income tax return, the rebate will be recomputed based on the current year facts. Any additional rebate will be allowed as a credit on the income tax return. The taxpayer gets to keep any excess of the amount received over the computed amount.
The rebate reduces the federal income tax and any amount already received by the taxpayer and is treated as an refund received in amount. The rebate isn’t taxable income. The rebate can be more than the tax before the rebate and is refundable.
Waived early withdrawal penalty for certain retirement plan distributions
Taxpayers who receive a distribution from a qualified retirement plan or an IRA before they reach age 59 1/2 are normally subject to a 10% federal early distribution penalty.
The penalty will be waived for up to $100,000 of distributions during 2020 to an individual (1) who is diagnosed with coronavirus, (2) whose spouse or dependent is diagnosed with coronavirus, or (3) who experiences financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the coronavirus crisis, being unable to work due to lack of child care due to the virus, closing or reducing hours of a business owned or operated by the individual due to the virus, or other factors as determined by the IRS.
Unless the taxpayer elects out, the income from a coronavirus-related distribution will be spread ratably over a 3-taxable year period, beginning with with the distribution year (2020.)
Although these distributions won’t be eligible under the usual rules for rollovers or trustee-to-trustee transfers, corona virus-related distributions from a qualified plan or an IRA may be repaid to the qualified plan or an IRA within 3 years beginning the day after the date the distribution was received. The amount repaid will be treated as a direct trustee-to-trustee transfer within 60 days of the distribution.
It appears claiming the recharacterization of the distribution for any repayments will be reported on an amended 2020 income tax return.
Required minimum distributions aren’t required for 2020
The required minimum distributions that apply to defined contribution qualified retirement plans (401(k)s and profit sharing plans) and IRAs after a participant reaches age 72 (age 70 1/2 before the SECURE Act was enacted) is waived for 2020.
If an employee reached age 70 1/2 during 2019, so the employee has a required beginning date on April 1, 2020, the penalty is also waived for that payment.
For years after 2020, the required minimum distributions will be computed by the regular procedure (beginning balance divided by life expectancy) without regard to the 2020 required minimum distribution and the required beginning date will be unchanged for other income tax determination purposes.
Charitable contributions limits for individuals increased
Individuals who don’t itemize deductions on their federal income tax returns will be able to deduct on their 2020 federal income tax returns up to $300 of charitable contributions that would otherwise qualify, except for donations to a donor advised fund or a private foundation.
The limitation for itemized deductions of cash charitable contributions to public charities by individuals, normally 60% of adjusted gross income, is eliminated for 2020.
Charitable contributions limit for corporations increased
The limit for charitable contributions for C corporations is increased for charitable contributions paid in cash during calendar year 2020 to public charities from 10% of modified taxable income to 25% of modified taxable income.
Charitable contributions limit for food inventory
For noncorporate taxpayers, the limit for charitable contributions of food inventory is increased from 15% to 25% of the taxpayer’s aggregate net income for 2020 from all trades or businesses from which such contributions were made.
For C corporations, the limit for charitable contributions of food inventory is increased from 15% to 25% of modified taxable income.
Exclusion for employer payments on student loans
Effective for payments made after March 28, 2020 and before January 1, 2021, payments by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan incurred by the employee for education of the employee are excluded from the employee’s taxable income. The employee won’t be eligible to claim an interest deduction for the excluded amount.
Payroll tax credit for certain employers
Employers who have their business operations fully or partially suspended during a calendar quarter due to orders from a government authority due to the coronavirus during the period beginning with the first calendar quarter beginning after December 31, 2019 for which gross receipts are less than 50% of gross receipts for the same calendar quarter in the prior year and ending with the calendar quarter for which gross receipts are greater than 80% of the gross receipts for the prior year and all tax-exempt organization during 2020 are eligible for an employee retention tax credit of 50% of qualified wages of up to $10,000 for each employee for all calendar quarters.
Note that employers who receive a small business interruption loan aren’t eligible for this credit. (The loan may be eligible for forgiveness, and that would be double-dipping.) If the employer claims the credit and receives a loan in a subsequent quarter, the credit will be recaptured.
The credit is effective for wages paid after March 12, 2020 and before January 1, 2021.
The credit is limited to the employment taxes (employer share of payroll taxes) for all employees during the calendar quarter, but any credit in excess of that amount is treated as an overpayment and is refundable to the employer.
The credit is reduced for credits allowed for employment of qualified veterans, research expenditures of qualified small businesses, and payroll tax credits for paid sick and paid family and medical leave provided in the Families First Coronavirus Response Act.
For employers having an average of more than 100 full-time employees during 2019, qualified wages means wages paid with respect to which an employee is not providing services due to a government-ordered suspension or a period of significant decline in gross receipts, but not in excess of the amount the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period.
For employers with an average of 100 or fewer full-time employees in 2019, qualified wages means wages paid with respect to an employee during any period of a government-ordered suspension or during a quarter that is within a period of significant decline in gross receipts.
Qualified wages don’t include any amounts taken in account for payroll tax credits provided in the Families First Coronavirus Response Act.
Qualified wages includes the employer’s qualified health plan expenses properly allocable to the wages that are excluded from the gross income of employees.
Wages of employees for which a work opportunity credit is claimed aren’t eligible for the credit.
Governmental employers aren’t eligible for the credit.
Deferred payment of employer payroll taxes
Deposits of the employer portion of payroll taxes due from March 28, 2020 through December 31, 2020 are deferred and payable 50% on December 31, 2021 and the balance on December 31, 2022.
Payments for one half of self-employment tax (the “employer” portion) for 2020 are also deferred and payable 50% on December 31, 2021 and the balance on December 31, 2022.
Employers that have a loan forgiven under Section 1106 of the CARES Act for a loan under Section 7(a)(36) of the Small Business Act aren’t eligible for deferring payment of employer payroll taxes.
Net operating loss deduction and carrybacks
The 80% of taxable income limitation for deducting net operating losses has retroactively been suspended for taxable years beginning after December 31, 2017 and before January 1, 2021. For taxable years beginning after December 31, 2020, the 80% of taxable income limitation for deducting net operating losses will be restored.
For losses arising in a taxable year beginning after December 31, 2017 and before January 1, 2021, net operating losses may be carried back 5 taxable years. Previously, net operating loss carrybacks weren’t allowed for these years.
Taxpayers may elect to waive the carryback. There is also a special election available to exclude carrybacks to one or more years that have income exclusion of offshore income under Internal Revenue Code Section 965.
Taxpayers may revoke a previous election to waive a net operating loss carryback by July 25, 2020.
Note many taxpayers should consider filing amended returns to claim net operating loss carrybacks from 2017, 2018. and 2019.
Excess business loss limitations suspended
The limitations on deductions for business losses in excess of business income have been suspended for taxable years beginning after December 31, 2017 and before January 1, 2021.
Since these losses will now be allowed, taxpayers who are entitled to them should file amended income tax returns to claim them.
Tax credit for prior year minimum tax liability of C corporations
The alternative minimum tax was repealed for C corporations by the Tax Cuts and Jobs Act of 2017. Unused minimum tax credits were scheduled to be refundable with an annual 50% limitation for taxable years beginning in 2018, 2019, and 2020 until a 100% limitation would be applied for taxable years beginning in 2021.
Under the CARES Act, taxpayers may elect to claim a refundable credit for 100% of the balance for taxable years beginning in 2018 or 2019.
The election to claim the 100% limit for 2018 can be made using an application of tentative refund form (Form 1139.) The form should be filed by December 31, 2020. The IRS should issue the refund within 90 days after receiving the form.
Increased limit on deduction for business interest
Certain taxpayers that have more than $25 million of business income or are “tax shelters” are subject to a limitation for deducting business interest expenses.
Under the Tax Cuts and Jobs Act of 2017, the limit is the sum of (1) business interest income of the taxpayer for the tax year; (2) 30% of the taxpayer’s adjusted taxable income for the year; and (3) floor plan financing interest of the taxpayer for tax year.
Under the CARES Act, the limitation of item (2) is increased to 50% for taxable years beginning in 2019 and 2020.
Technical correction for Qualified Improvement Property
Qualified improvement property is an improvement to an interior portion of a building that is nonresidential real property provided the improvement is placed in service after the date the building was first placed in service. Improvements relating to the enlargement of a building, an elevator or escalator, or the internal structural framework of the building aren’t qualified improvement property.
This is the expanded definition of qualified improvement property adopted in the Tax Cuts and Jobs Act of 2017.
A drafting error in the Tax Cuts and Jobs Act of 2017 made the property subject to a 39 year depreciable life and not eligible for 100% bonus depreciation.
The CARES Act includes a technical correction defining qualified improvement property as 15 year property, qualifying for bonus depreciation. This correction is retroactive to the date of enactment of the Tax Cuts and Jobs Act of 2017, which was December 20, 2017.
Taxpayers with commercial buildings that had qualified improvement property placed in service after 2017 should amend their 2017, 2018 and 2019 income tax returns to claim bonus depreciation for the year the property was placed in service.
Government loan guarantees for small businesses
In addition to the tax provisions discussed above and many other matters, the legislation includes a “Paycheck Protection Program.” The Federal government will 100% guarantee SBA administered loans to businesses with not more than 500 employees. Sole proprietors, independent contractors and other self-employed individuals are eligible for loans. The covered loan period begins February 15, 2020 and ends on June 30, 2020.
The maximum loan amount is $10 million thorugh December 31, 2020. The loan amount is based on payroll costs incurred by the business.
Uses of the loan include payroll support, such as employee salaries, paid sick or medical leave, insurance premiums and mortgage, rent, and utility payments.
Eligibility is based on whether a business was operational on February 15, 2020 and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.
The Act waives borrower and lender fees for particpaing in the Paycheck Protection Program, and waives collateral and personal guarantee requirements under the program.
The maximum interest rate for these loans is four percent.
No loan payments will be required for at least six months and not more than a year, and requires the SBA to issue guidance about the deferment process by April 27, 2020.
Although the stated maturity of the loans is 10 years, the principal amount of the loan is forgiven up to the amount of (1) payroll costs; (2) payments of interest on a covered mortgage obligation; (3) payments on any covered rent obligation; and (4) covered utility payments.
For details about how these changes affect your situation, consult with your tax advisor or write to me at firstname.lastname@example.org.