Congress has just passed a new bill, called the CARES Act to provide stimulus and relief for the coronavirus situation. There are many aspects of the bill ranging from loan forgiveness, unemployment insurance expansion, healthcare provisions, student loan provisions, SBA loans and more. I have focused on just the tax items in this post.
- Section 2201 provides for rebates to individuals. A 2020 recovery rebate for individuals is created as a way to give cash directly to individuals in the next few weeks.
- Advanced refund payments based on 2018 or 2019 tax return income would be issued immediately. If you have filed a 2019 return it will be based on your 2019 income. If you have not yet filed a 2019 return it will be based on your 2018 income. If you don’t get it based on 2018/2019 income but do based on 2020 income you’ll receive it with your 2020 tax return instead.
- Credit is reduced when a taxpayers AGI exceeds $75k single $150k married, $5 reduction for every $100 over threshold
- Tax credit calculated again on 2020 return of $1,200 for each adult filing a return, $500 additional for dependent children under age 17, if an advanced credit was received that will reduce the credit on the 2020 return. If the advanced credit was more than the 2020 credit calculated taxpayers will not have to pay back the advanced amount.
- In order to qualify the taxpayer must have a SSN and must not be a dependent of another taxpayer
- Section 2202 provides that coronavirus withdrawals from retirement plans are allowed. Up to $100k can be withdrawn without penalty any time prior to Dec 31, 2020. Taxpayer may repay any amount of the $100k withdrawal within 3 year period from the date of withdrawal. Income is recognized ratably over the 3 year period 2020-2022. If a taxpayer repays an amount they will not be taxed on that portion of the distribution and it will be treated as a rollover. Taxpayer must be directly impacted to qualify for this treatment meaning: diagnosed with coronavirus, having a spouse or dependent diagnosed, experiencing adverse financial consequences as a result of being quarantined, furloughed or laid off or having hours reduced, unable to work due to lack of childcare, reduced hours if a business owner, or other similar factors. This section also increases the allowed loans from retirement plans from $50k up to $100k.
- Section 2203 provides that Required Minimum Distributions for 2020 can be delayed. Anyone who has not yet taken their 2020 RMD can just skip it entirely. There is no relief for those who already did a 2020 RMD and no relief for 2019 RMDs that a taxpayer is electing to take in 2020. Only the 2020 specific RMDs can be skipped.
- Section 2204 provides that starting in 2020 a $300 above the line deduction allowed for cash contributions to a public charity for taxpayers who do not itemize. Only cash contributions are allowed for the $300 deduction and contributions to a donor advised fund and contributions to a private foundation are not permitted for the $300 above the line deduction. This $300 deduction does not expire and will apply in future years.
- Section 2205 provides that the limitations on charitable contributions for Schedule A are repealed for 2020 so cash contributions can offset 100% of income. A new 25% limitation applies for C Corps for 2020. These new higher limits do not apply to contributions to private foundations or to donor advised funds.
- Section 2206 expands the employer paid tuition assistance to include payment of student loans. An employer can pay up to $5,250 of tuition or student loans for an employee in 2020 and that payment will be tax free to the employee. In 2021 it reverts back to just the tuition that can be paid tax free.
- Section 2301 creates an employee retention tax credit for employers. The employer will get a refundable credit for employment taxes paid to employees. Eligible employers are a business that was fully or partially suspended during 2020 because of order from a government authority. Employers can also qualify if they were open but revenue was less than 50% of the prior year during the quarter. Qualifying wages are up to $10,000 per employee for the year. Employers who take a small business interruption loan are not eligible. For employers with more than 100 people the credit is based on wages paid during the quarter that the business was shut down. Employers with less than 100 employees can claim the credit in the quarter they were shut down but also until they get back to at least 80% of the gross receipts from the prior year.
- Section 2302 provides that all employer payroll taxes for 2020 would be deferred. They would be remitted 50% on 12-31-2021 and 50% on 12-31-2022 with no interest charged in the meantime. This also applies to self-employment tax for individuals.
- Section 2303 modifies the rules around Net Operating Losses. NOLs created in 2018, 2019, 2020 can be carried back 5 years with no 80% limitations. So the loss from 2018, 2019, or 2020 could be carried back 5 years and fully offset income in the prior years for both individuals and C Corps.
- Section 2304 modifies the loss limitation rules for individual taxpayers. The 461(l) limitations of business losses to $250k / $500k per year for individual taxpayers and is removed for 2018, 2019 and 2020. Amended returns could be filed for 2018 or 2019 if a return was filed with a loss limited. The 461(l) limitation would resume in 2021 and a clarification was included that wages do not count as business income for this purpose.
- Section 2305 modifies AMT credit rules for C Corporations.
- Section 2306 modifies the Section 163(j) interest expense limitations. They are modified to allow interest expense of 50% of adjusted taxable income instead of 30% for the 2019 and 2020 tax years. The 163(j) limitation returns to a 30% limit in 2021.
- Section 2307 fixes the TCJA definition for qualified improvement property so it will have the 15 year life that was originally intended. With a 15 year life on qualified improvement property 100% bonus depreciation would be allowed on the qualified improvement property, retroactive to 2018. Amended returns could be filed for 2018 and 2019 if already filed.
- Section 2308 is a temporary exemption for 2020 of the alcohol excise tax for alcohol that is used to produce hand sanitizer. This seems aimed at the distilleries that would now be producing hand sanitizer products.
For more information, please contact Chris Wittich, CPA, at firstname.lastname@example.org