CARES Act Tax Savings Opportunities
Much has been written about the Coronavirus Aid, Relief, and Economic Security (CARES) Act that became law in late March, the third piece of legislation quickly passed to fight the COVID-19 pandemic and mitigate the economic havoc it quickly began to wreak.
As the largest stimulus package in history with its accompanying cost of an estimated $2.2 trillion, naturally the various elements have been dissected ad nauseum. I’ve noticed lately, however, an increase in requests for a briefer synopsis of the various tax savings provisions contained in CARES, and that is the focus of this article.
After you read this, you may find something of interest that you wish to explore or pursue more in depth.
With that in mind, let’s begin with provisions for INDIVIDUALS:
Waiver of retirement account early-withdrawal penalty
Under CARES, the 10% penalty for an early withdrawal from a retirement account is waived on up to $100,000 of year 2020 distributions for coronavirus-related purposes.
A distribution is coronavirus-related if made to someone:
- Who is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
- Whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19; or
- Who experiences, due to SARS-CoV-2 or COVID-19, adverse financial consequences because of being quarantined, being furloughed or laid off, having work hours reduced, or being unable to work due to lack of child care or the closing or reducing hours of a business the individual owns or operates.
A taxpayer who takes a coronavirus-related distribution can either report the distribution as ordinary income ratably over a three-year period beginning in 2020 or can recontribute the funds to a retirement plan within three years to avoid tax on the withdrawal altogether.
Waiver of required minimum distributions (RMDs) for 2020
The CARES Act waives the RMD rules for certain defined contribution plans and IRAs during 2020. In other words, you don’t have to take your RMD in 2020, and if you already have done so, you can roll it back in and pay no tax.
To encourage charitable giving during this time, the following applies during 2020 to cash donations made to certain charities:
- Individuals who do not itemize can claim an above-the-line deduction of up to $300 for such contributions;
- Individuals who itemize can deduct such contributions up to 100% of adjusted gross income; and
- C corporations can deduct such contributions up to 25% of taxable income.
Exclusion for student loan repayment
Employees can exclude up to $5,250 from income for student loan repayments made by an employer after March 27, 2020, and on or before December 31, 2020.
Taxpayers meeting certain conditions and who are not dependents of another taxpayer were designated to receive a "recovery rebate" of $1,200 each plus an additional $500 per qualifying child. Most of these payments have already gone out to those identified as eligible. I mention it here, however, because if you were not eligible for the rebate based on your 2018 or 2019 income, but would be eligible based on your 2020 income, you can claim the rebate as a credit when you file your 2020 tax return.
Now on to tax savings for BUSINESS:
Deferral of employer Social Security tax
The employer share of the 6.2% Social Security tax on wages paid from March 27, 2020, through year-end, is deferred, with 50% due on December 31, 2021, and 50% due on December 31, 2022. A similar rule applies to 50% of self-employment tax liability of partners and sole proprietors. While originally an employer who received a forgivable PPP loan was ineligible, that prohibition has since been lifted.
Employee retention credit
The CARES Act added a refundable payroll tax credit equal to 50% of qualified wages (wages, including qualified health plan expenses allocable to the wages) paid by eligible employers from March 13, 2020, to December 31, 2020. In general, to be eligible, the employer must have been order to partially or completely shut down due to COVID-19, or suffered a greater than 50% revenue decline. Certain other conditions apply as well.
Allowance of net operating loss (NOL) carrybacks
The CARES Act permits NOLs from the 2018, 2019, and 2020 tax years to be carried back to the previous five tax years (beginning with the earliest year first) and suspends the 80%-of-taxable-income limitation through the 2020 tax year. This allows businesses to quickly recoup taxes paid in those earlier years by deducting the loss incurred now.
Bonus depreciation for qualified improvement property
Under the law known as the Tax Cuts and Jobs Act (TCJA), qualified improvement property (QIP) was supposed to have a 15-year cost recovery period and be eligible for 100% bonus depreciation. A drafting error, however, caused QIP to have a 39-year cost recovery period and be ineligible for bonus depreciation. The CARES Act retroactively corrects the drafting error for QIP acquired and placed in service after 2017.
Temporary suspension of excess business loss rules
The TCJA also limited individuals from using more than $250,000 ($500,000 for married filing jointly taxpayers) of business losses to offset nonbusiness income. The CARES Act repeals the limitation for years beginning before 2021.
The repeal is nonelective, so it appears that any taxpayer with an excess business loss in 2018 or 2019 will need to amend their return to claim that loss, regardless of whether doing so is favorable.
Other business provisions beyond the scope of this article include making the corporate credit for prior-year AMT paid into a refundable credit, and a modification of the business interest imitation imposed on certain larger taxpayers by TCJA.
As you can see, space limitations prevent much of a deep dive into the particulars of any of the above opportunities. However, if you see one that you think may apply to you or your business, it could be worth real money to explore further!