On March 27, 2020, President Trump signed into law, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
What follows is a basic summary of the tax relief that will become available to individuals and businesses.
Generally, based the amount of adjusted gross income (“AGI”), the Act provides a payment to individuals up to $1,200 ($2,400 for joint filers) increased by $500 for each child under the age of 17. Single taxpayers with no children and AGI exceeding $99,000, joint filers with no children and AGI exceeding $198,000, non-residents and those claimed as a dependent are not be eligible for a payment.
Charitable Contribution Deductibility
The Act increases the ability to deduct charitable contributions by: (1) allowing deductions up to $300 of qualified cash charitable contributions to those using the standard deduction; and (2) suspending AGI limitations on the deductibility of cash contributions.
Qualified Plan Distributions
The Act makes is easier to obtain coronavirus related (as defined in the Act) distributions from a 401(k) and certain other retirement plans/accounts by: (1) exempting distributions up to $100,000 from the 10% early distribution penalty (the distribution remains subject to income tax); (2) spreading the income tax on the distribution over a 3-year period; (3) allowing the distribution to be repaid within a 3 year period to avoid the income tax; (4) increasing the amount that may be borrowed from $50,000 to $100,000 and easing repayment rules; and (5) waiving required minimum distribution rules for 2020.
Deductibility of Business Losses
The Act amends prior law allowing individuals to fully deduct net business losses against all income for taxable years 2018, 2019 and 2020. Doing so may also create a net operating loss that may be carried back as discussed below in the business provisions.
Credit for Retaining Workers
Generally, the Act provides a credit for wages paid to employees that have been retained despite the partial or full suspension of operations due to the COVID-19 crisis. The amount of credit is equal to 50% of the qualifying wages paid to the employee after March 12, 2020 and before January 31, 2021, not to exceed $10,000. This is a refundable credit applied against the employer’s payroll taxes. Employers that receive a Small Business Interruption Loan are not eligible for this credit.
Employer Payroll Tax Deferral
The due date for depositing the employer share of payroll taxes incurred between the Act’s effective date and December 31, 2020 is deferred: 50% of the amount is due December 31, 2021 the remaining 50% is due December 31, 2022. Due dates for payment of the Medicare tax (1.45% portion) and taxes withheld from employees are not deferred. Any taxpayer that has loans forgiven under the Act is not eligible for this deferral.
The Act increases the threshold for businesses to deduct qualified charitable contributions to 25% (from 10%) of taxable income.
Greater Deductibility of Net Operating Losses
The Act eases limitations on the deductibility of net operating losses (“NOL”) by: (1) allowing 5-year carryback of an NOL generated after December 31, 2017 and before January 1, 2021; and (2) increasing the maximum NOL that may be deducted.
Prior Year Minimum Tax
The amount of business’ Alternative Minimum Tax carryovers are now completely refundable on the business’ 2018 or 2019 returns.
Greater Deductibility of Business Interest
The Act makes is easier to deduct business interest expense by increasing the limitation on the deduction from 30% to 50% of AGI for 2019 and 2020. Special rules apply to partnerships and partners.
Greater Bonus Depreciation
The Act changes bonus depreciation provisions to allow a 100% write-off of qualified improvement property. The changes are retroactive and will apply to property placed in service after December 31, 2017 (refunds may be available to businesses amending their 2017, 2018 or 2019 (if filed) tax returns).
For more support and information relating to COVID-19, please visit the Kerr Russell COVID-19 Resource Center. If you have questions relating to this article or other matters, please contact a Kerr Russell attorney.
About the author:
Daniel Schulte has more than 25 years of experience helping clients solve tough problems and capitalize on opportunities that require a blend of business and legal expertise. His practice focuses on addressing the legal, business, licensing, and regulatory challenges of health care professionals, organizations, and facilities. Dan understands how legal issues impact business objectives and, as a result, offers his clients practical, results-oriented advice. He is a Certified Public Accountant, former managing partner and current executive committee member of the firm. Dan also serves as co-chair of the firm’s Health Care Practice Group.
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