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March 27, 2020 | Posted in:

The CARES Act: Key Tax Provisions for Businesses and Individuals

Late on March 25, 2020 the Senate passed the Coronavirus Aid Relief and Economic Security Act (CARES Act). The CARES Act is a stimulus bill featuring over $2 trillion in measures designed to make a significant impact on the economy and bring relief to individuals and businesses impacted by COVID-19 or the Coronavirus pandemic. On March 27, the bill was approved by the House and is awaiting President Trump’s signature. *Edit: As of 5:00pm March 27, President Trump has signed the CARES Act into law.*

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Following are the key tax provisions:
 

Businesses

Employee Retention Credit on Employment Taxes

To encourage employers to retain employees who cannot work due to the Coronavirus, the CARES Act grants eligible employers a new credit against employment taxes equal to 50% of qualified wages paid to employees who are not working due to the employer’s full or partial closing of their business or a substantial decline in sales. The credit can be claimed on a quarterly basis up to $10,000 in the aggregate (including health benefits) per employee for all quarters. The credit applies to wages paid between March 12, 2020 and January 1, 2021.

Deferral of Payroll and Self-Employment Taxes

The CARES Act is deferring the payment of payroll taxes to help free up employers’ cash flow. Payroll taxes due from the period beginning on the date the CARES Act is signed into law through December 31, 2020 are deferred. Eligible payroll taxes include 100% of the taxes incurred by employers and 50% of the taxes incurred by self-employed individuals. Note that half of the deferred payroll taxes will be due on December 31, 2021 and the second half on December 31, 2022.

Corporate Charitable Contributions

For corporations, the CARES Act temporarily increases the 10% of AGI limitation on charitable contribution deductions to 25% of AGI. Excess contributions may be carried forward to future years, subject to carryforward rules.

Alternative Minimum Tax Credits

The TCJA eliminated alternative minimum tax for corporations after 2017, and allowed corporations with unused minimum tax credits to claim deductions, subject to limitations, through 2020 with any remaining unused credit to be refundable in 2021. The CARES Act accelerates the refunds so they can be claimed in 2019.

Business Interest Expense Limitation

Another modification to the TCJA, the CARES Act increases the limitation on the deduction of business interest from 30% of adjusted taxable income to 50% for 2019 and 2020. In calculating the limitation for 2020, the taxpayer may elect to use adjusted taxable income for 2019 which will be beneficial for businesses who experience reduced income in 2020.

The limitation does not apply to taxpayers with average annual gross receipts for the prior three years below an inflation-adjusted amount. For 2020, this amount is $26 million or less.

Changes to Net Operating Losses

The CARES Act allows for a five-year carryback of net operating losses (NOLs) incurred in 2018, 2019, or 2020. Businesses are able to amend tax returns dating back to 2013 in order to take advantage of this update. The bill also eliminates loss limitation rules applicable to sole proprietors and passthrough entities to allow them to take advantage of the NOL carryback. NOLs arising before 2021 can be used to fully offset income and are not limited to 80% of taxable income, which is a limit imposed by the TCJA.

Modification to Qualified Improvement Property

Qualified improvement property is now defined as 15-year property (instead of 39). This allows 100% of improvements to be deducted in the year incurred. This change updates provisions in the TCJA and is effective for property acquired and placed in service after September 27, 2017.

Excise Tax Relief

For 2020, the CARES Act temporarily suspends alcohol excise taxes for use in or contained in hand sanitizer produced or directed by the FDA, as well as several other excise tax suspensions for 2020 only.

 

Individuals

Recovery Rebate Checks

Perhaps the most well-known part of the CARES Act, Recovery Rebate stimulus checks of direct cash payments will be made to taxpayers in the coming weeks. Individuals can expect a check of $1,200, or $2,400 for married couples filing jointly, along with $500 for each qualifying dependent child. Individuals and dependents must have a social security number. The rebate amounts are phased out at the following AGI thresholds:

Begins to Phase Out Completely Phases Out
Individual $75,000 $99,000
Married Couple $150,000 $198,000
Head of Household $112,500 $136,500

 

The income information is based on the taxpayer’s 2019 tax return (or 2018 return if the taxpayer has not yet filed this year). You do not need to apply as the IRS is anticipated to send each eligible taxpayer a letter to their last known address with the payment details including amount, date and method of payment.

There may be provisions for taxpayers to re-calculate the correct amount of recovery rebate using actual 2020 income and to recover any shortfall caused by basing the rebate amount on a prior-year tax return.
>Click here for IRS Guidance →

Retirement Plans and RMDs

The 10% penalty is waived when up to $100,000 in funds are withdrawn in 2020 from qualified retirement plans to be used towards Coronavirus-related expenses. A withdrawal qualifies when an individual or their spouse is diagnosed with COVID-19 or they are facing financial adversity as a result of quarantine, business closure or layoff, or reduced working hours due to the COVID-19 pandemic.

Income attributable to an early withdrawal is subject to tax over a three-year period. If made within three years, taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions.

The CARES Act waives all required minimum distributions for 2020, regardless of whether the taxpayer has been economically impacted by the pandemic.

Individual Charitable Contributions

For individuals, the CARES Act allows an above-the-line deduction of up to $300 for charitable contributions made by individuals who do not itemize their deductions. In addition, the CARES Act temporarily increases the 50% of AGI limitation on charitable contribution deductions to unlimited. The purpose is to incentivize taxpayers to continue making charitable contributions in 2020.

Student Loans Paid by Employers

Through December 31, 2020, employers can provide a student loan repayment benefit of up to $5,250 annually to employees tax-free. This cap applies to both new student loan repayment benefits and other educational assistance provided by an employer under current law. The loan must have been incurred by the employee and applies to payments made by the employer after the date of enactment through January 1, 2021.
 

Non-Tax Developments

Expanded Unemployment Assistance

For employees, the self-employed, and independent contractors who become unemployed, partially unemployed, or unable to work as a result of COVID-19, the CARES Act increases unemployment benefits by $600 per week for up to four months. Note that benefits may vary by state. The federal government is incentivizing states to suspend any “waiting week” provisions and will fund an additional 13 weeks of unemployment benefits through December 31, 2020 after the worker’s state unemployment benefits have ended.

Paycheck Protection Program

The CARES Act is helping Coronavirus-impacted small businesses and non-profits with less than 500 employees by providing loans to aid in covering payroll and other business expenses incurred February 15 to June 30 through a Paycheck Protection Program. The loans of up to $10 million are based on a formula tied to payroll costs and can cover employees earning up to $100,000 annually. Loans may be forgiven if applied towards payroll, interest payments on mortgages, rent, and utilities. The amount eligible for forgiveness would be reduced proportionally if the number of employees decreases as well as if there is a 25% or greater reduction in employee compensation.

Expanded SBA Loan Relief

The U.S. Small Business Administration (SBA)’s 7(a) loan program increases its maximum loan amount to $10 million under the CARES Act and also allows the loans to cover payroll support (including paid sick or medical leave), employee salaries, mortgage payments, insurance premiums and any other debt obligations. Sole proprietors, independent contractors, self-employed individuals, not-for-profits (excludes those that receive Medicaid reimbursements), and small to mid-sized businesses with fewer than 500 employees are eligible to apply.

To further determine eligibility, the CARES Act would require lenders to determine: (1) whether a business was operational on February 15, 2020, and (2) whether the business had employees for whom it paid salaries and payroll taxes, or paid independent contractors, and (3) whether the business has been substantially impacted by COVID-19. The CARES Act also delegates more authority to lenders on eligibility determinations without requiring them to go through all of the customary SBA channels.

For SBA Express loans, the $350,000 maximum limit is increased to $1 million through December 31, 2020, after which the Express loan maximum decreases to $500,000. The SBA typically responds to Express loans within 36 hours as opposed to the several weeks the standard 7(a) loans may take to process.

The 7(a) and Express loans are alternatives to the SBA Economic Injury Disaster Loans also available to small businesses and non-profits facing hardships during the pandemic.  Borrowers cannot use funds from both a 7(a) loan and EIDL for the same purpose.

Contact us

The news and legislation surrounding COVID-19 has been constant. If you have questions on how a provision affects your business or individual tax situation, we are here for clarification and to be a sounding board. Contact your Alloy Silverstein Accountant and Advisor.

COVID-19 Resource Center from Alloy Silverstein CPA Firm Accountants and Advisors NJ

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