CARES Act – Key Individual & Business Tax Provisions
April 7, 2020

To Our Valued Clients and Friends,

The Coronavirus Aid, Relief and Economic Security Act (CARES) was signed into law by the President on March 27, 2020. The legislation includes tax relief for individuals and businesses. Below is a summary of the key individual and business tax provisions from the CARES Act:

INDIVIDUAL PROVISIONS

Tax Rebate Checks. U.S. residents who are not dependents of another taxpayer will be sent tax rebate payments equal to $1,200 per person, plus $500 for each qualifying child under the age of 17, dependent upon prior income level.

The rebate phase out will begin once Adjusted Gross Income (AGI) exceeds the following:

  • $75,000 for single filers
  • $112,500 for head of household
  • $150,000 for married filing jointly

Rebates decrease by $5 for every $100 of excess AGI. Therefore, when AGI exceeds $99,000 for a single filer, $136,500 for a head of household and $198,000 for married filing jointly, no rebate check will be issued. The complete phase out could increase slightly based on the number of qualifying children in a household. Those who have not yet filed a 2019 return will have the rebate amounts computed based on their 2018 tax return, or the most recent Social Security Benefit Statement as provided on Forms SSA-1099 and RRB-1099.

The rebate check works as an advance credit against your 2020 tax return. It is based on your 2018 or 2019 tax return for the initial payout. The rebate will need to be recomputed on an individual’s 2020 tax return using 2020 information. Therefore, when the 2020 tax return is filed, the information for 2020 will be used to determine the amount of the rebate that should have been received. If in 2020, the amount of the rebate owed is more than what you received based on the 2019 or 2018 returns, the excess will be treated as a credit against any 2020 tax liability. However, on the other hand, if the advanced rebate was too much, the amount received will not be required to be repaid.

The IRS will electronically deposit the rebate to a bank account that was previously authorized by a taxpayer with their 2018 or 2019 tax returns. Once the payment is made to a taxpayer’s bank account the IRS will mail a notice to the taxpayer’s last known mailing address confirming the direct deposit. If direct deposit was not used in 2018 or 2019, paper checks will be mailed to eligible taxpayers, though we do not yet have a date for when that will be completed.

Required Minimum Distribution Rules. The minimum distribution rules for withdrawals from a qualified retirement account (including IRAs) are waived for the 2020 tax year.

Loans and Withdrawals from Qualified Retirement Accounts. CARES waives the normal 10% penalty for eligible taxpayers withdrawing money from a qualified retirement account for distributions up to $100,000 made during 2020.

Additionally, the income tax associated with the coronavirus distribution can be eliminated by repaying the distribution though contributions returned to the plan in not less than equal payments over three years, starting with 2020. Taxpayers can recontribute funds into a qualified retirement account within those three years without regard to any annual limitation. Taxpayers can also borrow up to $100,000, from a qualified retirement account. The test for the upper limit for a loan is also increased to now be based on 100% of the present non-forfeitable value. Plus, on existing loans a one-year extension on any associated due dates is now available.

Eligible taxpayers include:

  • A taxpayer diagnosed with the virus
  • Taxpayers whose spouse or dependent is diagnosed with the virus
  • A taxpayer who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual

Charitable Deductions. The act creates an above-the-line charitable deduction for 2020 (not to exceed $300). The act also modifies the adjusted gross income limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations.

BUSINESS PROVISIONS

Employee Retention Credit. The act creates an employee retention credit for employers that were fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to the coronavirus. Or, employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. However, for purposes of the credit, qualified wages do not include wages counted as part of paid sick leave and paid family payroll tax credits in the Families First Coronavirus Act. Also, if an employer receives a covered Paycheck Protection Program (PPP) loan under Section 1102 of the act, the employer is not eligible to claim an employee retention credit.

Payroll Tax Credit Refunds. The law provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Act. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using Form 7200.

Payroll Tax Delay. Employers and self-employed individuals can defer payment of the employer’s share of the Social Security tax they are otherwise responsible for paying (generally a 6.2% tax on wages or earned income) for the 2020 tax year. The deferred employment tax can be paid over the following two tax years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.

Net Operating Losses. The Tax Cuts and Jobs Act (TCJA) placed several limitations on the use of the net operating losses (NOLs) for the tax years from 2018 forward. First, NOLs could only be carried forward (previous law had allowed NOLs to be carried back two years). Second, NOLs could be used to offset no more than 80% of a taxpayer’s taxable income, with any remainder carried forward for use in a subsequent year. CARES temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021 and allows losses arising in 2018, 2019 and 2020 to be carried back five years.

Qualified Improvement Property. Qualified improvement property generally includes interior, non-structural improvements to nonresidential buildings that are placed in service, after a building was originally placed in service. Qualified improvement property was intended to be classified as 15 year property under the TCJA which would have allowed the property to be eligible for bonus depreciation. However, due to a drafting error, qualified improvement property was not assigned a recovery period of 15 years. As a result, qualified improvement property placed in service after December 31, 2017 was assigned a recovery period of 39 years and was not eligible for bonus depreciation. The CARES retroactively corrects the drafting error and assigns qualified improvement property a 15 year recovery period, which allows those improvements to be eligible for bonus depreciation.

SBA Loans. The CARES Act introduced significant additional financial aid to small businesses called the Paycheck Protection Program (PPP). Administered through the Small Business Administration (SBA), participating banks and other qualified lenders will be able to issue businesses with no more than 500 employees (subject to certain limitations) loans equal to the lesser of $10 million or 2.5 times an employer’s average monthly payroll costs. All or a portion of the loan amounts can be forgiven by the government if the employer meets certain requirements. For more information on the Paycheck Protection Program please visit our COVID-19 resource guide.

As new developments and guidance is released as a result of the COVID-19 pandemic we will do our best to provide you the latest updates. As a reminder, our office remains closed until further notice based on the Governor’s directive. We are continuing to work remotely as we help you through these difficult times. Please feel free to contact us if we can provide any assistance and please stay safe.

Sincerely,

The Clausen & Company Team



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