On Friday, March 27, 2020, the $2 trillion CARES (Coronavirus Aid, Relief and Economic Security) Act was signed into law by President Trump after an overwhelming vote in the House to provide relief to businesses and individuals impacted by COVID-19. Below are key takeaways for both businesses and individuals that you need to know.
2020 Recovery Rebates
- Are you likely eligible for a rebate? Find out by using this easy calculator
- Individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child
- Credit is phased out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals
- Not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts
- Do I need to do anything to receive my refund?
- For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as the IRS will use information from a taxpayer’s 2019 tax return, if filed, or in the alternative, their 2018 return
- As of April 15, 2020, many people are beginning to receive their refund checks
- What if my AGI is just over the stated limits?
- The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold
- The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
Rules for Retirement Funds
- 10% early withdrawal penalty waived for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020, and before December 31, 2020
- Income attributable to such distributions would be subject to tax over three years (can elect out and claim income during 2020)
- If the taxpayer wants to re-contribute the previously withdrawn funds to an eligible retirement plan, they may do so within three years without regard to that year’s contribution limit
- Loans from qualified retirement account limits are increased from $50,000 to $100,000, not to exceed one-half of the present value of the vested balance
- Loan repayments due from the date of the enactment of the Act through December 31, 2020 will be delayed one year.
- How do I know if my distribution qualifies?
- A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences 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 Treasury Secretary
RMDs (Required Minimum Distributions)
- RMDs are suspended for 2020, including inherited IRAs as well as traditional IRAs of those over age 70½
- Should I take my RMD anyway?
- Possibly, if you are in a lower tax bracket this year as a result of changes to your financial situation. Check with your tax advisor if you’re considering this option
- What if I already took my 2020 RMD?
- Option 1: Include it in your 2020 gross income and pay taxes on it
- Option 2: If it was withdrawn within the last 60 days, you can return the distribution or deposit in another qualified retirement account or consider a Roth conversion.
- Note: The IRA contribution deadline for 2019 is delayed to 7/15 in accordance with the tax return deadline
- Individuals may receive a deduction up to $300 for cash contributions for those that do not itemize
- For those who do itemize, they are able to deduct up to 100% of their AGI vs the normal 50% limitation
Payroll and Self-Employment Tax Delay
- 50% of 2020 employer payroll taxes are delayed until Dec. 31, 2021, with the remaining 50% due Dec. 31, 2022
- This 50/50 split also applies to self-employment taxes
Refundable Payroll Tax Credit
- 50% of wages paid by employers to employees during the COVID-19 crisis can be eligible for a refundable payroll tax credit
- Available to employers whose (1) operations were fully or partially suspended due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year
- Based on qualified wages paid to the employee
- For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above
- For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order
- Provided for the first $10,000 of compensation per employee, including health benefits, paid to an eligible employee
- For wages paid or incurred from March 13, 2020 through December 31, 2020
- Wages paid under the Families First Coronavirus Response Act are excluded from eligible wages
- Employers receiving Small Business Interruption Loans under the Small Business Act are not eligible for this credit
- Payroll tax credits for paid sick leave and paid family leave enacted as part of the Families First Act will be able to be refunded in advance using forms and instructions that will be provided by the IRS, and the IRS will waive any penalties for failure to deposit payroll taxes if that failure was due to an anticipated payroll tax credit via Sec. 3111(a) or 3221(a)
- For corporations, the 10% limitation is increased to 25% of taxable income
- Also increases the limitation on deductions for contributions of food inventory from 15% to 25%
Net Operating Loss Deduction Changes
- Temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021
- Returns for taxable years with beginning dates from January 1, 2018 through December 31, 2020 can use 100% of all NOL carryovers to offset taxable income regardless of the taxable year in which the NOL arose
- What if I have already filed for 2018 and/or 2019 and was limited on my NOL deduction due to the 80% rule?
- To claim the full NOL deduction, you will need to amend those returns
- For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback)
- NOLs for REIT years (defined as any taxable year for which the provisions of part II of subchapter M apply) are not eligible for carryback
Excess Loss Limitations
- This excess business loss limitation provision from the TCJA (Tax Cuts and Jobs Act) is now repealed for taxable years beginning before January 1, 2021
- Thus, noncorporate taxpayers with business losses arising in 2018, 2019, and 2020 can enjoy the five-year carryback without regard to the excess business loss rules (losses in excess of $250,000 for individuals or $500,000 for married taxpayers filing jointly)
Alternative Minimum Tax
- The CARES act modifies the AMT credit for corporations to make it a refundable credit for 2018 tax years and therefore accelerates their ability to recover these credits
Modification on Limitation of Business Interest
- For tax years beginning in 2019 and 2020, Sec. 163(j) is amended to increase the adjusted taxable income percentage from 30% to 50%
- Taxpayers can elect to use 2019 income in place of 2020 for the computation
Qualified Improvement Property
- A TCJA error is corrected and enables businesses to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building
High Deductible Health Plans
- The rules for high-deductible health plans (HDHPs) are amended to allow them to cover telehealth and other remote care services without charging a deductible
Alcohol Excise Tax Exception
- The provision waives the federal excise tax on any distilled spirits used for, or contained in, hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration and is effective for calendar year 2020