The “Coronavirus Aid, Relief, and Economic Security Act” (Cares Act) includes many tax and financial breaks for both individuals and businesses. We broke down many of the essential elements and how they can assist you and your business during this troubling time.
Recovery Rebate – The most talked-about provision is the “recovery rebates” for individuals. These rebates are actually credits allowed on taxpayers’ 2020 tax returns that will be paid out in advance by the Treasury.
Each eligible individual will receive $1,200 ($2,400 for married couples filing jointly) plus an additional $500 for each qualifying child (under age 17 at years end). These rebates are intended for low- to middle-income individuals, so they are phased out for higher-income folks. For unmarried individuals, the credit begins to phase out at an AGI of $75,000 and is fully eliminated at $98,990. For those filing as head of household, the phase-out range is $112,500 to $136,490, and for married couples filing jointly, it is $150,000 to $197,990.
The Treasury will determine who will receive a check and the amount they are entitled to based on the individual’s 2019 tax return. Where no 2019 return has been filed at the time of the rebate payment, the Treasury will use the 2018 tax return. For those who have not filed either a 2018 or 2019 return, the Treasury will provide a payment to individuals that received 2019 Social Security or Railroad Retirement benefits.
In recent guidance, the IRS has indicated they will be providing an on-line means for taxpayers to provide their direct deposit information so the rebates can be expedited rather than having to wait for a check. The IRS has also indicated they would provide later guidance on how people that are not required to file a return can file in order to obtain an advance rebate. Further details will be provided at www.IRS.gov/coronavirus.
Where an advance rebate is more or less than allowed because an individual’s filing status or family size is different in 2020 or the credit is subject to phase-out based on 2020 income, the adjustment is made on the 2020 tax return. Thus, individuals may be entitled to an additional credit, and if the advance rebate was greater than the actual credit, they will NOT have to repay the excess. This means that individuals who otherwise wouldn’t have a 2020 return filing requirement based on their income will likely have to file to reconcile their advance rebate with their actual credit.
The rebates will not be paid to individuals who are claimed as a dependent of another on a prior year return. Also ineligible for the credit or an advance rebate are those without a Social Security number (or ATIN for an adopted child who doesn’t yet have an SSN).
Additional Key Provisions – The Cares Act is over 500 pages covering tax provisions, economic stimulus, business loans, health care and more. Following is an overview of the key issues relating to individuals and small businesses.
- Penalty-Free Retirement Withdrawals – Penalty-free withdrawals from qualified retirement plans (including 401(k)s, TSAs, SEPs, and traditional IRAs) are allowed. The withdrawals are limited to $100,000 and the income is taxable over a three-year period with an option to also recontribute the withdrawal over a three-year period.
- RMD Waiver – There is a one-year waiver for the 2020 required minimum distribution (RMD) from qualified plans and traditional IRAs for taxpayers that turned 70.5 in a year before 2020 and those that turn 72 in 2020. This prevents them from having to take a distribution when the stock market is in a decline.
- Charitable Contributions – A suspension of charitable contribution limits applies for 2020. Generally, for cash gifts, tax deductible charitable contributions are limited to 60% of adjusted gross income (AGI). The suspension of the limitation will allow taxpayers to make larger charitable contributions during this trying time. Also included is an above-the-line charitable deduction limited to $300 of cash donations for those that don’t itemize their deductions.
- Student Loan Payments – Employees can exclude from income payments (Up to $5,250) made before January 1, 2021, by their employers towards their student loans.
- Payroll Deposits Delayed – In order to provide businesses with more financial resources to weather this epidemic, employers can delay payroll tax deposits for 2020 with 50% not due until December 31, 2021, and the balance due by December 31, 2022.
- Employee Retention Credit – In order to help businesses retain employees and keep them employed during this crisis, Congress has provided a refundable employer retention credit equal to 50% of qualified wages. This credit can be used to offset quarterly employment taxes. The qualified wages under this provision are limited to $10,000 per employee in 2020.
- NOL Carryback Reinstated – Under the 2018 tax reform legislation (TCJA), a business net operating loss (NOL) was no longer allowed to be carried back to a prior year, had to be carried forward to the next tax year, and the carryforward loss deduction was limited to 80% of the carryforward year’s taxable income. Under the CARES Act, carryback of losses incurred in 2018 through 2020 has been reinstated and the 80% of taxable income limitation repealed. This is designed so businesses with financial problems can file for tax refunds from the carryback years when they were profitable and had paid income taxes.
- Limitation on Losses – The legislation retroactively turns off the excess active business and farming loss limitation rules implemented as part of tax reform to apply after December 31, 2020, instead of after December 31, 2017.
- Prior Year AMT Credit for Corporations – Allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and provides an election to accelerate claims to 2018, with eligibility for accelerated refunds.
- Limitation on Business Interest – Generally allows businesses to elect to increase the interest limitation from 30% of adjusted taxable income to 50% for 2019 and 2020 and allows businesses to elect to use 2019 adjusted taxable income in calculating their 2020 limitation.
- Loan Guarantees and Subsidies – Includes over $300 billion for Small Business Administration (SBA) loan guarantees and subsidies and additional funding for SBA resources.
Of course, there are additional details that we will be providing in the days ahead. Please call if you have any questions.