Tax Details of the Coronavirus Aid, Relief, and Economic Security (CARES) Act
The CARES Act provides numerous business and individual tax changes that not only apply to the 2020 tax year but also apply retroactively to tax years 2018 and 2019. While each provision in the Act is not applicable to every business, there are significant planning opportunities for tax refunds or tax avoidance. Below are the significant provisions for small businesses and individuals.
Business Provisions
Bonus Depreciation for Qualified Improvement Property (store build outs) The 2017 Tax Cuts and Jobs Act (TCJA) expanded bonus depreciation (100% write off) for fixed asset purchases with a class life of 20 years or less and applied to new or used fixed asset purchases. Beginning in 2023, the bonus depreciation will be reduced by 20 percentage points each year and will be fully eliminated in 2027. While Congress intended that Qualified Improvement Property (e.g., leasehold improvement to a leased property) would qualify for bonus depreciation, a technical error prevented these assets from qualifying.
The CARES Act corrected this technical error retroactively to the effective date for the TCJA. Each business owner should work with their tax advisor to determine if these changes would be applicable for their business. The combination of the bonus depreciation correction and the changes to NOLs (see below) could potentially be the biggest planning / tax mitigation strategy for small businesses.
Net Operating Loss Carrybacks The CARES Act provides a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, and 2020. Businesses will be able to amend or modify their tax returns for tax years dating back to 2013 to take advantage of the carryback. Also, the loss limitation rules have been eliminated to allow full advantage of these NOLs.
Payroll Tax Deferral The payment of the 6.2% OASID (Social Security) portion of payroll taxes incurred by employers and equivalent amount incurred by self-employed, is deferred from March 27, 2020, through December 31, 2020. Half of the deferred payroll taxes are due December 31, 2021 and the other half due December 31, 2022. Deferral is not available to employers who have had indebtedness forgiven under Sections 1106 or 1109 of the Act.
Employee Retention Credit This provision provides a refundable payroll credit for 50% of the wages paid by eligible employers to certain employees during the COVID-19 crisis. This credit is available to businesses whose operations have been fully or partially suspended due to government order. It is also available for businesses that have experienced a greater than 50% decrease in quarterly receipts on a year over year basis. This is applicable for employers with 100 or fewer eligible employees. No credit is available to employers receiving a Small Business Interruption Loan under Section 1102 of the Act. Credit is available for wages paid after March 12, 2020 and before January 1, 2021. This is applicable only to the first $10,000 in wages paid per employee and does not include wages for which a Work Opportunity Credit is allowed.
Exclusion of Loan Forgiveness Income Typically loan forgiveness received by a taxpayer is treated as income for tax purposes. Under the Care Act, loan forgiveness to an eligible recipient of a covered loan or covered mortgage obligation is not subject to income taxes on the amount forgiven during the covered period.
Individual Provisions
Recovery Rebates An eligible individual is allowed an income tax credit for 2020 equal to the sum of $1,200 ($2,400 for eligible individuals filing Joint) plus $500 for each qualifying child of the Taxpayer. This is a refundable credit. The credit is reduced but not below zero by 5% of the Taxpayer's Adjusted Gross Income (AGI) in excess of $150,000 for Joint returns, $112,500 for Head of Household, and $75,000 for all others.
Waiver of Early Withdrawal Penalties from Qualified Retirement Plans The 10% penalty for distributions from Qualified Retirement Plans before the age of 59.5 is suspended up to $100,000 of distributions made in 2020, for a qualified individual. Qualified individuals are those who are diagnosed with the COVID-19 virus, whose spouse is diagnosed with the COVID-19 virus, or one who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or reduced income due to closing or reduced business hours or other factors as determined by Treasury.
Distribution Can be Contributed Back to Qualified Retirement Plan Within 3 Years of the distribution, a qualified COVID-19 distribution (see above) up to $100,000 can be contributed back to a Qualified Retirement Plan without tax or penalty.
Income Spread of Early Withdrawal Over 3 Years The tax on a Qualified COVID-19 distribution of up to $100,000 per individual can be included in taxable income pro rata in 2020, 2021, and 2022. An individual can elect to have the entire distribution treated as taxable in 2020 if so elected.
Waiver of RMDs for 2020 Once the owner of a Qualified Retirement Plan or IRA reaches the age of 72 (previously 70.5) the owner is required to take a Required Minimum Distribution (RMD) annually. The Act suspends the RMD requirement for 2020.
Charitable Contributions The Act creates a $300 above the line tax deduction for those that do not itemize on their taxes.