Individual and Business Tax Provisions of the Coronavirus Aid, Relief and Economic Security Act
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) contains tax relief provisions for individuals and businesses.
Individual Tax Provisions
Each individual, except for an individual who may be claimed as a dependent by another taxpayer, is allowed a refundable income tax credit for 2020 in the amount of $1,200 (or $2,400 for individuals filing a joint return), plus $500 for each qualifying child. Thus, children who can be claimed as dependents on their parents’ tax return are not eligible to receive the credit even if their parents choose not to claim the child as a dependent.
The amount of the credit is phased out by $5 for every $100 that a taxpayer’s adjusted gross income exceeds:
- $150,000 for a joint tax return,
- $112,500 for a head of household filer and
- $75,000 for all other taxpayers.
Thus, the credit is completely phased out for a single filer with adjusted gross income in excess of $99,000, and for joint filers with no children with adjusted gross income in excess of $198,000.
The Internal Revenue Service will issue advance rebates for the credit. Because advance rebates will be based on taxpayers’ 2019 returns, a taxpayer who wasn’t eligible to receive a credit for 2019 but becomes eligible for the 2020 tax year will not receive an advance rebate. Such a taxpayer, however, will be able to claim the credit when filing a 2020 tax return.
Relief from 10% Penalty for Coronavirus-Related Retirement Plan Distributions/Deferral of Income Recognition
Distributions from an eligible retirement plan made during 2020 that do not exceed $100,000 are not subject to the normal 10% penalty if the distribution is made to an individual:
- Who is diagnosed with the coronavirus,
- Whose spouse or dependent is diagnosed with the coronavirus, or
- Who experiences adverse financial consequences associated with the coronavirus as a result of (a) being quarantined, (b) being furloughed, (c) being terminated or having work hours reduced due to the coronavirus, (d) being unable to work due to lack of child care because of the coronavirus, or (e) closing or reducing hours of a business owned or operated by the individual.
Unless a taxpayer elects otherwise, the amount of any coronavirus-related distribution will be included in gross income ratably over three years.
Waiver of Required Minimum Distributions for 2020
Generally, a taxpayer who reaches age 72 must take annual required minimum distributions (RMDs) from a retirement plan or an individual retirement account. The CARES Act waives the RMD requirement for 2020 with respect to certain plans.
New $300 “Above-the-Line” Charitable Deduction
The CARES Act allows a taxpayer who does not elect to itemize deductions to claim a charitable contribution deduction in determining adjusted gross income — referred to as an “above-the-line” deduction — in an amount not to exceed $300.
Modification of Limitations on Cash Charitable Contributions
The CARES Act allows individual taxpayers to disregard certain charitable contributions in applying the 60% limitation on cash contributions.
Employer-Provided Student Loan Repayments
The CARES Act allows an employer to make repayments on principle or interest on any qualified higher education loan of an employee, and such payments are excluded from the employee’s gross income up to $5,250 per employee.
Business Tax Provisions
Refundable Payroll Tax Credit
The CARES Act provides a refundable payroll tax credit for 50% of wages paid (capped at the first $10,000 of wages paid, for a maximum credit of $5,000 per employee) to certain employees by employers affected by the coronavirus, including nonprofits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings, and employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. The payroll tax credit is not, however, available to employers receiving small business interruption loans.
If an employer had an average number of full-time employees in 2019 of 100 or fewer, then all employee wages are eligible, regardless of whether the employee is furloughed. If an employer had more than 100 average full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employer’s closure or reduced gross receipts are eligible for the credit.
Advance of Tax Credits under the Families First Coronavirus Response Act
The CARES Act allows employers to request an advance of the tax credits provided under the Families First Coronavirus Response Act for employers required to provide paid sick leave and paid family and medical leave.
Delay of Payment of Employer Payroll Taxes
The CARES Act permits employers to defer paying the employer portion of Social Security payroll taxes through December 31, 2020. Fifty percent of the deferred taxes will be due by December 31, 2021, and the other 50% will be due December 31, 2022.
Temporary Repeal of Taxable Income Limitation for Net Operating Losses
The CARES Act temporarily lifts the taxable income limitation for net operating losses, so that a net operating loss can now fully offset taxable income and its use is not limited to 80% of taxable income.
Use of Net Operating Loss Carrybacks
The CARES Act provides that net operating losses originating in a tax year beginning after December 31, 2018, and prior to January 1, 2021, can be carried back to each of the five tax years preceding the tax year in which the loss arose.
Modification of Limitation on Losses for Noncorporate Taxpayers
The CARES Act temporarily modifies the limitation for use of excess business losses by noncorporate taxpayers, thereby permitting such taxpayers to deduct such losses in 2018, 2019 and 2020.
Temporary Increase in Interest Expense Deduction
Under the Tax Cuts and Jobs Act of 2017, a deduction for business interest is limited to 30% of adjusted taxable income. This limitation has been temporarily and retroactively increased by the CARES Act from 30% to 50% for tax years beginning in 2019 and 2020.
Technical Correction for Bonus Depreciation of Qualified Improvement Property
The CARES Act makes a technical correction to the Tax Cuts and Jobs Act of 2017 by classifying “qualified improvement property” as 15-year property for depreciation purposes, thereby making such property eligible for 100% bonus depreciation.
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Douglas Turner Coats
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