The CARES Act: Individual and Business Tax Incentives

Below is a summary of the tax relief and tax incentives for individuals and businesses previously announced as part of the CARES Act. Please contact your tax professional on 973-298-8500 if you have any questions. 

INDIVIDUAL TAX RELIEF

Retirement Plans

To allow taxpayer’s portfolios time to recover from the shutdown’s bear market, the CARES Act waives all 2020 Required Minimum Distributions (RMDs) for calendar year 2020 for IRAs and 401(k), 403(b), and 457(b) plans. It does not apply to defined benefit plans. The 2020 RMDs are based on a person’s December 31, 2019 account balance. It also avoids individuals taking a high RMD for 2020 on retirement accounts that have suffered significant losses since the end of 2019. The Secure Act also changed the starting RMD age from 70 ½ to 72 for IRAs and defined contribution plans for 2020.

The CARES Act RMD waiver also applies to RMDs that must be made by April 1, 2020 (if not previously made in 2019). In other words, account owners who turned 70½ in 2019 and elected to delay their first distribution until April 1, 2020 instead of taking required distributions in 2019, do not have to take that withdrawal, even though it counts toward their 2019 RMD.

• For example, if John reached age 70½ in 2019, but decided to delay his 2019 RMD distribution until April 1st, 2020, as well as a second RMD for 2020 by the end of 2020. Under the CARES Act, John now does not have to take a 2019 or 2020 RMD.

If you inherited a retirement account as a designated beneficiary, the CARES Act waives the 2020 RMD, as well. In addition, for non-designated beneficiaries, 2020 does not count towards the post-death payout “five-year rule” where the owner died before their required begin date.

The SECURE Act’s new 10-year payout rule that applies to non-eligible designated beneficiaries is not impacted by the CARES Act provision that waives RMDs for 2020. The 10-year payout rule applies the year after the year of death of the original retirement plan account owner. As a result, 2020 does not count as year one in regard to the 10-years payout. 2021 is the first year in the 10-year limit.

The 60-day rollover rule can be applied if you already took a distribution from an IRA or a retirement plan for 2020. Under the 60 day rule, you can deposit all or a portion of distribution in an IRA or a retirement plan within 60 days to avoid the distribution counting as taxable income. Any taxes withheld from the distribution from a retirement plan have to be repaid as well. Therefore, you’ll have to use other funds to roll over the full amount of the distribution. You are allowed only one IRA rollover per year. The entire amount of distribution must be deposited at one time. IRA trustee to trustee transfers do not count towards one IRA rollover per year rule.

The 10% penalty on early withdrawals of up to $100,000 from qualified retirement plans for coronavirus related distributions is waived. A qualifying distribution is one made during the 2020 calendar year to an individual (or spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus. The withdrawal amount is subject to tax over a three-year period, and taxpayers may recontribute the amounts to a qualified retirement plan without regard of annual caps on contributions if made within three years.

Charitable Contributions

For those who do not itemize, the new provision allows you to take an above the line deduction not to exceed $300 for a cash contribution to a qualified organization. For those who itemize, the adjusted gross income (AGI) limitation has been raised from 60% of AGI to 100% of AGI for cash contributions made to a qualifying organization (excess contributions can be carried over to the next 5 years).

Student Loans Paid by Employers

There is an exclusion of up to $5,250 from income for payments of an employee’s education loans. The loan must have been incurred by the employee for his or her own education. The payment can be made to the employee or directly to the lender. This only applies for payments made by an employer after the date of enactment and before January 1, 2021. This applies to new student loan repayment benefits as well as other assistance like tuition, fees, books, provided by the employee.

Recovery Rebates

The recovery rebates, applicable to individuals and joint filers, are advance refunds of credits against 2020 taxes. The amounts are $1,200 for individuals, $2,400 for joint filers based on 2018 adjusted gross income, unless a 2019 return has already been filed. It also includes a $500 credit for each child. There is a phaseout that begins at $75,000 for individuals and $112,500 for head of households and $150,000 for joint filers. They are completely phased out at $99,000 for single filers, $136,500 heads of household and $198,000 for joint filers.

BUSINESS TAX RELIEF

Employee Retention Credit

The CARES Act grants eligible employers a credit against employment taxes equal to 50% of qualified wages paid to employees who are not working due to the full or partial termination of business or significant decline in gross receipts. The credit can be claimed on a quarterly basis, and the amount of wages, including health benefits, for which the credit can be applied, is limited to $10,000 in total per employee for all quarters. The credit applies to wages paid after March 12, 2020 and before January 1, 2021. Several requirements apply, contact us for additional information.

Payroll Tax Deferral

To free up cash flow and retain employees during quarantine or shutdown, the CARES Act defers the payment of payroll taxes from the date the Act was signed until December 31, 2020. All payroll taxes incurred by employers and 50% of those incurred by the self-employed qualify for the deferral. Half of the deferred taxes are due on December 31, 2021, the remainder is due on December 31, 2022.

Net Operating Losses

There is a five-year carryback of net operating losses (NOLs) occurred in 2018, 2019, or 2020 by a business. Businesses will be able to amend or modify tax returns for the tax years dating back to 2013 in order to take advantage of the carryback. It eliminates loss limitation rules applicable to sole proprietors and pass-through entities to allow them to take advantage of the NOL carryback. Also, it allows NOLs occurring before January 1, 2021 to fully offset income, currently limited to 80% of taxable income.

Minimum Tax Credits

The Act accelerates the year for which a fully refundable credit can be claimed to 2019 and allows corporations to elect to claim the fully refundable minimum tax credits in 2018. This is an adjustment to the Tax Cuts and Jobs Act.

Business Interest Expense Limitation

Another adjustment to the Tax Cuts and Jobs Act, the CARES Act increased the limitation amount to 50% of the taxpayer’s adjusted taxable income for 2019 and 2020. The taxpayer may elect to use adjusted taxable income for 2019 in calculating the limitation.

Qualified Improvement Property

Qualified Improvement Property is depreciated as 39-year property and is not qualified for bonus depreciation. This allows any expenses incurred by owners to make improvements to the physical premises related to their businesses to be accelerated into the 2017 or 2018 tax year on an amended return, or on the 2019 tax year return.

Excise Tax Relief

It provides a temporary exception from alcohol excise taxes for alcohol for use in or contained in hand sanitizer produced or directed by the Food and Drug Administration related to the pandemic. It also suspends excise taxes on aviation and kerosene used in aviation fuel. Applicable to 2020 only.

Other provisions not directly having a tax impact include:

• The exclusion from tax of any forgiven small business loans, mortgage obligations, or other loan obligations forgiven by the lender during the applicable period.
• A safe harbor from the definition of a high deductible health plan permitting telehealth services to be included even though these services do not carry a deductible.
• The inclusion of over-the-counter menstrual products as qualified medical expenses for purposes of distributions from health savings accounts and health flexible spending arrangements.
• Pension funding relief for failures to meet contribution requirements to defined contribution plans during 2020.
• Allows certain charitable employers whose primary exempt purpose is providing services to mothers and children to use small employer charity pension plan rules.

Source: Wolters Kluwer

April 24, 2020