After significant deliberation and debate, the CARES Act has been signed into law by President Trump. It constitutes the United States’ largest stimulus package ever, in an amount greater than $2 trillion, aimed at boosting the economy due to the national Coronavirus quarantine. The CARES Act will impact individuals and businesses by its tax-savings provisions.
Individual Relief and Retirement Fund Changes
Under the CARES Act, individuals will be granted $1,200 in relief ($2,400 for those filing jointly) with an additional amount of $500 for each qualifying child. This relief, however, phases out for individuals with an adjusted gross income (AGI) greater than $75,000 ($150,000 for those filing jointly). This relief phases out at $5 dollars for each $100 increment of income above the applicable AGI threshold so it will be completely phased out for individuals with an AGI greater than $99,000 ($198,000 for joint returns). Further, this relief will not apply to nonresident aliens, estates, trusts, or individuals claimed as a dependent on another’s income tax return. These amounts should be available for immediate distribution with the government working to issue checks or make direct deposits, as promptly as possible. Generally, the payouts will be based on 2018 income tax returns filed.
The CARES Act also impacts retirement fund rules. Early retirement funds withdrawal typically incurs a 10% penalty, but that penalty will be waived under the CARES Act (for distributions up to $100,000), thereby allowing individuals access to cash flow in direct response to Coronavirus-related need. Taxpayers taking advantage of this provision can elect to incur the associated income tax burden ratably over a three (3) year period or may ratably repay the funds over the same period (essentially making the early distribution equivalent to a loan). Repayment of the withdrawal will avoid the income tax consequences associated with the distribution.
Also, required minimum distributions for 2020 will be temporarily waived under the CARES Act, allowing taxpayers to leave money in their retirement accounts, should they so choose.
To encourage charitable giving, the CARES Act will allow individuals to subtract up to $300 of charitable cash contributions from their 2020 AGI calculation if they do not itemize. For those that itemize, certain cash contributions to charity by individuals in 2020 will have increased deductibility because the 50% AGI limitation has been temporarily suspended.
The 10% taxable income limitation on corporate charitable cash gifts will be increased to 25%.
Student Loan Assistance
Nontaxable employer-provided education assistance will be expanded to include payment of principal and interest on an employee’s qualified education loan if such payment is made prior to January 1, 2021. The payment can be made by the employer to either to the employee or the lender and such payments will not constitute income to the employee. These payments remain subject to the $5,250 annual limitation of educational assistance that an employee may receive tax-free.
The CARES Act makes adjustments to payroll tax by giving impacted employers a credit for each quarter equal to 50% of each employee’s qualified wages for the quarter. The amount of employee wages is limited to $10,000 (resulting in a maximum credit of $5,000 after application of the 50% limitation) and the credit is further limited to the amount of taxes owed as reduced by other applicable credits, including those available under the Families First Coronavirus Response Act, so there will not be a “double-dip”. Employers eligible for this credit are those who were in business during 2020 and either suffered suspended business operations due to government order as a result of the virus outbreak or suffered significant declines in gross receipts.
The CARES Act is relaxing the restrictions on the use of net operating losses imposed under the Tax Cuts and Jobs Act of 2017 (“TCJA”). Net operating losses from 2018, 2019, or 2020 will now be eligible for a five (5) year carry back. Also, the net operating losses can be fully used to offset income rather than being subject to limitation.
Under the TCJA, the business interest expense deduction was limited to 30% of adjusted taxable income. The CARES Act increases the deduction limitation to 50%. Also, the taxpayer will elect to base the limitation calculation on 2019 adjusted taxable income instead of their 2020 income number. Due to the Coronavirus impact on the economy, most businesses will have a stronger 2019 income, and with the CARES Act election, will, therefore, be able to increase the business interest expense deduction’s impact.
The TCJA also imposed certain “excess business loss” limitations on noncorporate (e.g., passthrough) taxpayers, which has now been held in abeyance until the 2021 tax year.
Eligible businesses are now permitted to take an immediate deduction (rather than a 39-year depreciation deduction) for building improvement costs. Business making facility improvements should consult with their tax advisor.
Coronavirus Business Guidance
Legislative responses to the economy have been fast and complex. Please contact your professional advisors to discuss the CARES Act impact on your personal taxes and on your business. Relief is available and we are here to help maximize the opportunities for capturing the economic aid available. Our tax attorneys and business advisors remain resolute in protecting our clients during this trying time.