The “Coronavirus Aid, Relief, and Economic Security Act” (Cares Act) includes many tax and financial breaks for both individuals and businesses. We broke down many of the essential elements and how they can assist you and your business during this troubling time.
Cares Act Recovery Rebate
The most talked about provision is the “recovery rebates” for individuals. These rebates are actually credits allowed on taxpayers’ 2020 tax returns. The treasury will pay these out in advance.
Eligibility for the Recovery Rebate
Each eligible individual will receive $1,200 ($2,400 for married couples filing jointly) plus an additional $500 for each qualifying child. These rebates are intended for low- to middle-income individuals, and are phased out for higher income folks. For unmarried individuals the credit begins to phase out at an AGI of $75,000 and is fully eliminated at $98,990. Head of household filers, the phase-out range is $112,500 to $136,490. For married couples filing jointly it is $150,000 to $197,990.
The Treasury will determine who receives a check and what the amount will be. This amount is based on the individual’s 2019 tax return. The Treasury will use the 2018 tax return when a 2019 return has not been filed. For those who have not filed either a 2018 or 2019 return, the Treasury will provide a payment to individuals that received 2019 Social Security or Railroad Retirement benefits.
Advance Rebates
Where an advance rebate is more or less than allowed, the adjustment is made on the 2020 tax return. Reasons could include because an individual’s filing status or family size is different in 2020. Or the credit is subject to phase-out based on 2020 income. Thus, these individuals may be entitled to an additional credit.
Advance rebates that are more than allowed for 2020 must be reduced. They can be reduced by the advance rebates made or allowed to the taxpayer during 2020. This means that individuals who otherwise wouldn’t have a 2020 return filing requirement based on their income will likely have to file to reconcile their advance rebate with their actual credit.
Rebates will not be paid to individuals who are claimed as a dependent of another on a prior year return.
Additional Key Provisions of the Cares Act
The Cares Act is over 500 pages covering tax provisions, economic stimulus, business loans, health care and more. Following is an overview of the key issues relating to individuals and small businesses.
Cares Act for Individuals:
- Penalty Free Retirement Withdrawals. Penalty-free withdrawals from qualified retirement plans (including 401(k)s, TSAs, SEPs and traditional IRAs) are allowed. Withdrawals are limited to $100,000. And the income is taxable over a three-year period with an option to also recontribute the withdrawal over a three-year period.
- RMD Waiver. There is a one-year waiver for the 2020 required minimum distribution (RMD) from qualified plans and traditional IRAs for taxpayers that turned 70.5 in a year before 2020 and those that turn 72 in 2020. This prevents them from having to take a distribution when the stock market is in a decline.
- Charitable Contributions. A suspension of charitable contribution limits applies for 2020. Generally, for cash gifts, tax deductible charitable contributions are limited to 60% of adjusted gross income (AGI). The suspension of the limitation will allow taxpayers to make larger charitable contributions during this trying time. Also included is an above-the-line charitable deduction limited to $300 of cash donations for those that don’t itemize their deductions.
- Student Loan Payments. Employees can exclude from income payments made before January 1, 2021 by their employers towards their student loans.
Cares Act for Businesses:
Payroll Deposits Delayed. In order to provide businesses with more financial resources to survive, employers can delay payroll tax deposits. Now, the 50% of payroll tax deposits for 2020 are not due until December 31, 2021. And the balance is due by December 31, 2022.
Employee Retention Credit. In order to help businesses retain employees and keep them employed during this crisis, Congress has provided a refundable employer retention credit equal to 50% of qualified wages. This credit can be used to offset quarterly employment taxes. The qualified wages under this provision are limited to $10,000 per employee in 2020.
NOL Carryback Reinstated. Under the 2018 tax reform legislation (TCJA), a business net operating loss (NOL) was no longer allowed to be carried back to a prior year. It had to carry forward to the next tax year. In addition, the carryforward loss deduction was limited to 80% of the carryforward year’s taxable income. Under the CARES Act, carryback of losses incurred in 2018 through 2020 has been reinstated. And the 80% of taxable income limitation has been repealed. This is designed so businesses with financial problems can file for tax refunds from the carryback years when they were profitable and had paid income taxes.
Additional Provisions for Businesses
Limitation on Losses. The legislation retroactively turns off the excess active business and farming loss limitation rules implemented as part of tax reform to apply after December 31, 2020 instead of after December 31, 2017.
Prior Year AMT Credit for Corporations. Allows corporations to claim 100% of AMT credits in 2019 as fully-refundable. And provides an election to accelerate claims to 2018, with eligibility for accelerated refunds.
Limitation on Business Interest. Generally this allows businesses to elect to increase the interest limitation from 30% of adjusted taxable income to 50% for 2019 and 2020. In addition, this allows businesses to elect to use 2019 adjusted taxable income in calculating their 2020 limitation.
Loan Guarantees and Subsidies. This includes over $300 billion for Small Business Administration (SBA) loan guarantees and subsidies and additional funding for SBA resources.
Of course, there are additional details that we will be providing in the days ahead. Please call our office at (360) 778-2901 if you have questions.
Live Updates: The Latest COVID-19 News for Taxpayers and Small Business Owners
