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Tax Provisions of the CARES Act Thumbnail

Tax Provisions of the CARES Act

By: Jackie M. McGuire, CPA – Client Service Manager

CARES Act: Summary of Tax Provisions

In response to the coronavirus (COVID-19) pandemic, U.S. Congress, the Executive Branch, and the Internal Revenue Service (IRS) has taken several actions to provide relief to business and individual taxpayers.  On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to address the economic impact of COVID-19. The CARES Act includes several federal income tax provisions for both businesses and individuals.

The following is summary of provisions to benefit BUSINESSES:

  • Net operating losses (NOLs): NOLs arising in a tax year beginning after December 31, 2017 and before January 1, 2021, may now be carried back five years.
  • Business Interest Expense: Businesses may be able to deduct additional interest expenses in taxable years beginning in 2019 and 2020. Previously the interest deduction for businesses has been limited to 30% of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). The CARES Act increases the limitation to 50% of adjusted EBITDA.
  • Excess Business Loans: The CARES act suspends the application of the “excess business loss” limitation applicable to pass-through businesses and sole proprietors until tax years beginning after December 31, 2021.
  • Paycheck Protection Program (PPP): SBA loans granted through the PPP will be excluded from gross income for federal income tax purposes to the extent the loan proceeds were used for payroll, qualified mortgage, rent or utility expenses.
  • Leasehold Improvements: The CARES Act fixed the “technical glitch” of Tax Cuts and Jobs Act that did not include certain qualified leasehold improvements as eligible for bonus depreciation. Businesses that made or planning to make such improvements can apply the new bonus depreciation rules. The correction is effective as of the enactment of the Tax Cuts and Jobs Act (effective 1/1/2018); therefore, businesses can amend prior year returns and make refund requests if necessary.
  • Payroll Relief:
    • The CARES Act defers payment of the employer’s share of Social Security Tax over a two- year period. Half of the amount is required to be paid by December 31, 2021 and the remainder due by December 31, 2022.
    • Certain employers may be eligible the Employee Retention Credit for a refundable Social Security tax credit for up to 50% of qualified wages paid during the COVID-19 crisis. The credit is provided for up to $10,000 of qualified wages, including health benefits, paid to an eligible employee. If the tax credit exceeds the amount of the employer’s Social Security tax due for the applicable quarter, the employer may treat the excess as a refundable overpayment.   Credit is available to employers whose operations were fully or partially suspended due to a COVID-19 shutdown order or to employers who have experienced a significant reduction in gross receipts. Credit cannot be taken if the Business received the PPP loan.
  • Charitable Contributions: Charitable contribution deductions by corporations are ordinarily limited to 10% of their adjusted gross income. For taxable years ending after December 31, 2019, this limit is increased to 25% of the corporation’s adjusted gross income for contributions made during the 2020 calendar year.
  • Retirement Plans:
    • Distributions: The CARES Act authorized a “Coronavirus-related distribution” from retirement plans of up to $100,000 that is exempt from the 10% early distribution penalty that normally applies to distributions under the age of 59 ½.   Plans are not required to offer such distributions; however, taking advantage of this provision pay requires the cooperation of the employer by adding this distribution option to the plan.
    • Loans: The CARES Act increased the retirement plan loan limits from $50,000 to $100,000 for 180 days (after date of enactment of CARES Act).

The following is a summary of provisions to benefit INDIVIDUALS:

  • Rebate Checks: Recovery rebate checks of up to $1,200 ($2,400 for taxpayers married filing jointly) will be made available to most individuals and families, with an additional $500 for each child under the age of 17. There are no limits on the number of children that can qualify. These recovery rebate checks are reduced by $5 for each $100 a taxpayer’s income that exceeds $75,000 ($150,000 for taxpayers married filing jointly and $112,500 for head of household). The complete phase out of the recovery rebate check will depend on the filing status, adjusted gross income in the applicable tax year, and the number of children claimed by the taxpayer. Certain taxpayers that are not required to file a tax return are still eligible for the recovery rebate checks.
  • Retirement Plan Distributions:
    • The CARES Act authorizes a “Coronavirus-related distribution” from retirement plans, of up to $100,000 that is exempt from the 10% early distribution penalty that normally applies to distributions under the age of 59 ½.  
      • The time period in which to pay the income tax attributable to a coronavirus related distribution is extended to allow for payments of the tax over three years.
      • Taxpayers may re-contribute the funds withdrawn for a coronavirus related distribution within three years without regard to that year’s cap on contributions.
    • The CARES Act waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
  • Charitable Contributions:
    • Generally, taxpayers must itemize their deductions to take advantage of charitable contribution deductions. For the 2020 tax year, up to $300 of eligible contributions can eligible for an above-the-line charitable deduction. Note that charitable contributions made to a private foundation or donor-advised funds are not eligible.
    • The CARES Act temporarily modified the charitable contribution limits from 60% to 100% of adjusted gross income. The excess contributions may be carried over for the next five tax years.