In response to the growing COVID-19 pandemic and its effects on the country’s economy, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27, 2020.
The Act is filled with multiple efforts to support the economy while the country deals with job furloughs, business limitations and closings, and shelter in place orders across many states. These incentives, aid and credits are aimed at all segments of the economy, from the individual families and non-profits to both large and small businesses. We would like to make you aware of some of the most significant changes to the tax law created by the CARES Act.
Individual Incentives include:
- Waiver of required distribution rules – Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.
- Charitable deduction Enhancements – The CARES Act makes two significant individual adjustments to the rules governing charitable deductions:
- Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
- The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
Business Incentives included are:
- Delayed payment of employer payroll taxes – Taxpayers (including self-employed) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax and the employer and employee representative portion of Railroad Retirement taxes. The relief isn’t available if the taxpayer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act.
- Net operating losses – The 2017 Tax Cuts and Jobs Act (the 2017 Tax Law) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.
The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for:
- A 100% deduction of NOLs arising in tax years before 2018, and
- A deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.
- Acceleration of corporate AMT liability credit – The 2017 Tax Law repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully-refundable. The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and further provides an election to accelerate the refund to 2018.
- Technical correction For QIP – The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats a wide variety of interior, non-load-bearing building improvements (qualified improvement property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property. The correction of the error in the 2017 Tax Law restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores 15-year MACRS write-offs for many leasehold, restaurant and retail improvements.
- Charitable deduction Enhancements – The CARES Act also makes two significant business specific adjustments to the rules governing charitable deductions:
- The limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
- For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
These incentives are available to most any business or nonprofit who meet the outlined criteria and have been affected by the COVID-19 pandemic. We encourage anyone looking for aid from the CARES Act to contact McClintock & Associates for tailored and specific guidance.