The landmark stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provide tax relief and tax incentives for businesses and individual taxpayers. The intention being to increase liquidity in the economy by easing limitations on business deductions and tax deferrals, as well as by introducing recovery rebates for individuals.
Individual tax relief
The CARES Act provides tax relief for individual taxpayers in four main ways.
- Recovery rebates – Eligible individual taxpayers can receive recovery rebates, which are advance refunds in the form of credits against 2020 taxes. The amounts are $1,200 for individuals, or $2,400 for joint filers, with a $500 credit for each child. The rebate amounts will be reduced by $5 for every $100 in excess of the threshold amounts specified below, which are based upon 2018 adjusted gross income (unless a 2019 return has already been filed). This phaseout starts at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. The rebates are completely phased out for single filers over $99,000 in adjusted gross income, heads of household over $136,500, and joint filers over $198,000.
- Retirement plans – The 10-percent penalty on early withdrawals up to $100,000 from qualified retirement plans will be waived for 2020 distributions related to COVID-19. To qualify, distributions must be made to an individual (or spouse of an individual) diagnosed with the virus with a CDC-approved test, or to an individual who experiences adverse financial consequences from COVID-19 because of quarantine, business closure, layoff, or reduced hours. Any income resulting from the early withdrawal is subject to tax; taxpayers may recontribute the withdrawn amounts to a qualified retirement plan regardless of caps on annual contributions if made within three years. The bill also waives required minimum distributions for 2020.
- Student loans paid by employers – Students can exclude up to $5,250 in payments of an employee’s education loans from their 2020 income. The loan must have been incurred by the employee for the education of the employee, and the payment can be made to the employee or directly to the lender. This exclusion only applies for payments made by an employer after the date of enactment and before January 1, 2021.
- Charitable contributions – The CARES Act further incentivizes charitable contributions for the 2020 tax year by providing a deduction of up to $300 for charitable contributions made by individuals – even if not itemized – and increasing percent-of-adjusted gross income (AGI) limitations for all taxpayers as well as for specific types of contributions.
Business tax relief
The CARES Act provides tax relief for businesses and organizations in six main ways.
- Employee retention credit – Similar to the paid leave credits granted under the Families First Coronavirus Response Act, eligible employers can claim a quarterly employee retention credit against employment taxes equal to 50 percent of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business or a significant decline in gross receipts. For wages paid after March 12, 2020, and before January 1, 2021, the amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters. The provision contains several requirements defining qualified wages, qualified employees, and qualified employers.
- Payroll tax deferral – The CARES Act defers payroll tax payments to provide additional cash flow for employers and makes it easier for them to retain workers. Payroll taxes due from the date the CARES Act is signed into law through December 31, 2020, are deferred, with 50 percent of the deferred payroll taxes due on December 31, 2021, and the remainder due on December 31, 2022.
- Net operating losses – Businesses are eligible for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020, and they can amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carryback. The CARES Act also eliminates loss limitation rules for sole proprietors and passthrough entities so they can also take advantage of the NOL carryback and allows for NOLs arising before January 1, 2021, to fully offset income – a change from the current limitation of 80 percent of taxable income.
- Minimum tax credits – Under the Tax Cuts and Jobs Act, corporations are not required to pay the alternative minimum tax (AMT) for tax years after 2017, but they can claim a refundable portion of any unused AMT through 2021. TCJA limits the amount of the refundable AMT credit to 50 percent of any excess minimum tax in 2018 through 2020, before being fully refundable in 2021. The CARES Act allows corporations to claim a fully refundable credit in 2019 or 2018 instead of 2021.
- Business interest expense limitation – The CARES Act increases the limitation on the amount of allowable deductions for business interest (regardless of the type of entity) to 50 percent of the taxpayer’s adjusted taxable income for 2019 and 2020, and allows taxpayers to use adjusted taxable income for 2019 in calculating the limitation for 2020. Note: For 2020, the limitation does not apply to taxpayers with average annual gross receipts for the prior three years below $26 million.
- Qualified improvement property – When Congress drafted the TCJA, it allowed for 100-percent bonus depreciation rules to apply to all MACRS property with a recovery period of 20 years or less. However, as a result of a Congressional oversight, qualified improvement property is still depreciated as 39-year property and not qualified for bonus depreciation applicable to 15-year property. The CARES Act corrects this situation by defining qualified improvement property as 15-year property, thus allowing 100 percent of improvements to be deducted in the year incurred. This change applies to property acquired and placed in service after September 27, 2017.
In addition to the areas outlined above, the CARES Act includes many other relief efforts and provisions that could have an impact on your business or personal finances.
Michael Custer, CPA, is a tax principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.