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Tax Implications of the Coronavirus Aid, Relief, and Economic Security (CARES) Act

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In response to the COVID-19 pandemic, the Senate and now the House have passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is expected to be signed by President Trump immediately. The Act is the third phase of economic stimulus related to the coronavirus and intends to spur the economy with more than $2 trillion in relief. Below are key tax related aspects of the Act.

Recovery Rebates for Individuals

Qualifying individuals are entitled to a rebate of $1,200 if single or $2,400 if married filing jointly plus $500 for each child under the age of 17. The rebates are treated as an advance refund of a 2020 tax credit. The IRS will access either your 2019 tax return, 2018 tax return or Social Security statement to determine the payment amount. In order to qualify, an individual, spouse and qualifying child must have valid social security numbers. The individual stimulus payment phases out by $5 for every $100 a taxpayer’s adjusted gross income exceeds $75,000 if single and $150,000 if married.

Key Tax Provisions

  • Net Operating Loss changes – Current tax law disallows net operating loss (NOL) carrybacks and limits the use of NOL carryforwards. This rule is suspended for 2018, 2019 and 2020 and taxpayers will be permitted to carry back NOLs for up to five years.
  • Net business loss limitation changes – Under current tax law, an individual may only offset net business losses of up to $250,000 if single and $500,000 if married filing jointly against other sources of income. This limitation is removed for 2018, 2019 and 2020.
  • Interest limitation change – Currently, the interest expense deduction is allowed limited to the extent of 30% of adjusted taxable income. The Act increases this limit to 50% of adjusted taxable income for 2019 and 2020. If 2020 becomes a loss year for your business, the business can elect to use its 2019 adjusted taxable income in computing its 2020 limitation.
  • Qualified Improvement Property Fix – When originally drafting the 2017 Tax Cuts and Jobs Act, Congress intended to change the depreciation on “Qualified improvement Property” from 39 to 15 years and to allow bonus depreciation to be taken on those assets. However, a drafting error in the bill kept the depreciable life (at) to 39 years. Beginning January 1, 2018, this retroactive change gives Qualified Improvement Property a 15 year life and allows for 100 % bonus depreciation, meaning the entire cost can be deducted in the year it is placed in service. Qualified Improvement Property is generally defined as any improvement made to the interior portion of a nonresidential building any time after the building was placed in service.
  • Qualified retirement plan distributions – Distributions from a qualified retirement plan before the age of 59 ½ are typically not only taxable at ordinary income tax rates, but comes with a 10% penalty with certain exceptions. Taxpayers meeting certain qualifications can take a coronavirus – related distribution of up to $100,000 in 2020 without paying the 10% penalty. Ordinary income tax would still be due, but the tax could be spread over three years. In addition, an individual may borrow up to $100,000 from their vested plan assets for the 180 day period beginning with the enactment of the Act.
  • Required minimum distributions – The Act permits a one year delay in required minimum distributions for defined contribution retirement plans.
  • Charitable Contributions – An individual is allowed to make a cash contribution of up to $300 to certain qualifying charities and deduct the contribution no matter if they take the standard or itemized deduction. In addition, the Act changes the limit on charitable giving from 60% of adjusted gross income to 100% of adjusted gross income. Any excess contributions would be carried over for five years. For corporations the charitable deduction limit would increase from 10% of adjusted taxable income to 25%.
  • Employer payments of employee student loan debt – In 2020, an employer can pay up to $5,250 of an employee’s student loan debt on a tax free basis. This overall limitation applies to the student loan debt payment and educational assistance combined.
  • Employee Retention Credit – For certain businesses forced to fully or partially suspend its operations or experience a year over year reduction in gross receipts of at least 50% due to COVID-19, it may be eligible for a refundable credit against payroll taxes equal to 50% of the first $10,000 in wages per employee. For employers with more than 100 employees, wages eligible for the credit are wages that an employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages qualify for the payroll tax credit.
  • Delay of employer payroll tax and self-employment tax – The due date for depositing employer payroll taxes and 50% of self-employment taxes is postponed and would be payable over the next two years.

We expect taxpayers to benefit from these wide ranging provisions. Furthermore, since many of these provisions are retroactive to the 2018 tax year, there is a significant opportunity to potentially amend 2018 tax returns in certain situations to generate immediate cash refunds.

We are monitoring this Act closely, working with our clients to assist them. For more information, please reach out to your Berntson Porter contact directly.