While all the chatter is about the stimulus payments and the loan programs available for the small business owner there were also many tax provisions that were included in the CARES Act:
Special rules for retirement funds: If you take money out of a qualified retirement plan before age 59 1/2, you not only pay income tax on the distribution, but Section 72(t) generally imposes a 10% penalty as well. There are several exceptions to the penalty, of course, and the CARES Act adds a new one, allowing a taxpayer to take a “coronavirus-related distribution” of up to $100,000 in the year 2020 free from penalty.
A “coronavirus-related distribution” is a distribution made during 2020:
To an individual who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,
whose spouse or dependent is diagnosed with one of the two diseases, or
who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care.
While the distribution escapes the 10% penalty, it doesn’t escape the income tax. The Act, however, allows the taxpayer to spread the income over a 3-year period beginning with 2020. The taxpayer also has the choice to avoid any income recognition by repaying the distribution to the retirement plan within three years of receiving it.
Temporary waiver of required minimum distribution rules for certain retirement plans and accounts: For those required to withdraw a “required minimum distribution” from their retirement plan in 2020, the CARES Act temporary waives the requirement for this year only.
Allowance of partial above the line deduction for charitable contributions during 2020: an individual can make a cash contribution of up to $300 to a qualifying charity and deduct the contribution above-the-line. Thus, the taxpayer receives the deduction in addition to the standard deduction if they are not itemizing on their return. This benefit is not available if they are able to itemize on the tax return.
Modification of limitations on charitable contributions during 2020: After passage of the TCJA, cash contributions to public charities are generally limited to 60% of a taxpayer’s adjusted gross income (AGI). The CARES Act allows such contributions to be deducted up to 100% of AGI for 2020, with any excess contributions available to be carried over to the next five years. For corporate donors, the limit would increase from 10% of adjusted taxable income to 25%.
Exclusion for certain employer payments of student loans: As part of the CARES Act, an employer can pay up to $5,250 in 2020 of an employee’s student loan obligation on a tax-free basis. Note, however, that this provision modifies existing Section 127, which permits an employer to pay up to $5,250 of an employee’s qualified educational expenses with the payment being tax-free to the employee. The employee cannot double dip and take an adjustment on their personal tax returns if the loan payment is made by the employer.
Modifications for net operating losses: Prior to 2018, net operating losses of a business or individual could be carried back two years and forward 20 years, and when carried forward, they could offset 100% of taxable income. The TCJA altered these rules, disallowing all carrybacks related to post-2017 losses, providing for an indefinite carryforward period, and limiting the use of post-2017 losses when carried forward to 80% of taxable income.
Congress temporarily reversed the TCJA changes:
Losses from 2018, 2019 and 2020, will be permitted to be carried back for up to five years. As was previously the case, a taxpayer will be permitted to forgo the carryback, and instead carry the loss forward.
Losses carried to 2019 and 2020 will be permitted to offset 100% of taxable income, as opposed to 80% under the TCJA.
Pre-2018 loss carryforwards continue on the same rules as prior to the TCJA
Temporary (and Retroactive) Removal of Section 461(l): As part of the TCJA, Congress added a limitation on an individual’s ability to use losses from a business.
New Section 461(l) provides that the amount of “net business loss” an individual may use in a year to offset other sources of income is capped at $250,000 (if single; $500,000 if married filing jointly).
Any excess loss is converted into a net operating loss.
The latest legislation delays the enactment of Section 461(l); not only for 2020, but retroactive to January 1, 2018. As a result, taxpayer who had a loss limited by the provision in 2018 or 2019 can file an amended return to claim a refund.
Modified of limitations on business interest: as part of the TCJA, new Section 163(j) limited a large business’s (gross revenues in excess of $25 million) ability to deduct its interest expense to 30% of “adjusted taxable income,” with any excess interest expense carried forward. The CARES Act would increase that limit to 50% of adjusted taxable income for 2019 and 2020, and perhaps more importantly given that most businesses will not HAVE taxable income in 2020, the business can elect to use its 2019 adjusted taxable income in computing its 2020 limitation. Thus, if a business had ATI of $10 million in 2019 but a negative ATI in 2020, it could elect to deduct $5 million of interest expense in 2020 (50% of $10 million), generate a bigger loss, and then use the favorable new net operating loss provisions to carry back the loss to 2019 and recover taxes paid in that year.
Qualified Improvement Property Fix: The CARES Act provides a much-needed technical correction to the QIP problem by giving it its intended 15 year life, while making the change retroactive to January 1, 2018. Thus, taxpayers should be entitled to file amended returns to reap the benefits of accelerated depreciation in 2018 and 2019. Employee Retention Credit is designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.
Does my business qualify to receive the Employee Retention Credit? The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans.
Qualifying employers must fall into one of two categories:
The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
How is the credit calculated? The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer provided health care.
How do I know which wages qualify? Qualifying wages are based on the average number of a business’s employees in 2019.
Employers with less than 100 employees: If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.
Employers with more than 100 employees: If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
I am an eligible employer. How do I receive my credit?
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Relief from Penalty for failure to deposit employment taxes: The IRS has issued Notice 2020-22 which provides a waiver of additions to tax for failure to make a deposit of taxes for employers required to pay qualified sick leave wages and qualified family leave wages mandated by the Families First Coronavirus Response Act (Families First Act) and qualified health plan expenses allocable to these wages.
This notice also provides a waiver of additions to tax for failure to make a deposit of taxes for certain employers subject to a full or partial closure order due to the coronavirus disease 2019 (COVID-19) or experiencing a statutorily specified decline in business under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
This notice applies to deposits of Employment Taxes (including withheld income taxes, taxes under the Federal Insurance Contributions Act and taxes under the Railroad Retirement Act) reduced in anticipation of the credits with respect to qualified sick leave wages and qualified family leave wages paid with respect to the period beginning April 1, 2020, and ending December 31, 2020.
This notice applies with respect to deposits of Employment Taxes reduced in anticipation of the credits with respect to qualified wages paid with respect to the period beginning on March 13, 2020 and ending December 31, 2020.This relief ensures that such employers may pay qualified sick leave wages and qualified family leave wages required by the Families First Act or qualified wages under the CARES Act using Employment Taxes that would otherwise be required to be deposited without incurring a failure to deposit penalty.