The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on Friday, March 27, 2020. The CARES Act is estimated to cost $2.2 trillion dollars and contains numerous tax provisions aimed at benefitting both individuals and businesses. Below is a summary of some of the most important provisions included in the Act.
• Individual taxpayers with adjusted gross income (AGI) less than $75,000 will receive a onetime economic impact payment of up to $1,200, and married couples with AGI less than $150,000 will get up to $2,400, plus an additional $500 per child. The payment is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000, $198,000 for joint filers and $136,500 for head of household filers. The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2019 tax return, or their 2018 return if 2019 is not yet filed. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return. Eligible recipients will receive their economic impact payment via direct deposit if they receive federal tax refunds or Social Security payments through direct deposit. All others will be sent a check via US Mail.
• Individuals who do not elect to itemize his or her deductions are able to take an above-the-line tax deduction for charitable contributions of up to $300 for the 2020 tax year.
• There is a one-year waiver of required minimum distributions (RMDs) for defined contribution plans like 401(k)s and 457 plans, and IRAs. This waiver applies to both 2019 RMDs subject to the normal April 1st deadline and to 2020 RMDs. Some taxpayers may wish to forgo some or all of their previously anticipated RMD as part of their 2020 tax planning strategy.
• The 10% penalty on early withdrawals from retirement accounts is waived on up to $100,000 for people affected by coronavirus and the taxpayer can spread the resulting taxable income over a 3-year period beginning in 2020. If the taxpayer repays the withdrawal within three years of receiving it, no taxes are due.
• Eligibility for unemployment insurance is expanded under the Act and provides people with an additional $600 per week on top of the unemployment amount determined by each state.
• Federal student loan borrowers may suspend payments through September 30, 2020 without accumulating interest on those loans. Also, employers are able to assist employees with college loan debt by making tax free payments up to $5,250.
• Many over-the-counter medical supplies can once again be reimbursed through health care flexible spending accounts and health savings accounts (HSA).
• Businesses may apply for forgivable loans with their financial institutions that are backed by the Small Business Administration (SBA). The maximum loan amount is the lesser of 2.5 times the borrower’s average monthly payroll costs or $10,000,000 and the portion of the loan that is forgivable is based on the amount that the business spent on payroll, utilities, rent, or interest on mortgage debt in the eight weeks following the loan origination. Layoffs and reducing the wages of employees who make less than $100,000 by 25% or more in this same eight week period reduce the amount of the loan that is forgivable.
• Businesses may apply a 50% refundable credit towards their payroll tax liability on up to $10,000 in wages per employee. However, only businesses that suffer from suspended operations or experience at least a 50% decrease in gross receipts compared to the same quarter from last year are eligible.
• The Act provides a temporary five-year NOL carryback for most taxpayers. NOLs incurred in 2018, 2019, and 2020 may be carried back to offset taxable income earned during the five-year period prior to the year in which the NOL was incurred. The Act also temporarily removes the taxable income limitation, thereby allowing taxpayers to utilize NOLs to offset 100 percent of taxable income in tax years 2018, 2019, and 2020.
• The limitation on deducting business losses of more than $250,000 ($500,000 for married taxpayers filing jointly) is suspended through the end of 2020.
• For taxable years beginning in either 2019 or 2020, the taxable income limitation for purposes of applying the business interest expense limitation has been raised to 50% up from the 30% limitation created by the Tax Cuts and Jobs Act. Additionally, a new provision allows for taxpayers to choose between 2019 and 2020 taxable income for purposes of the 2020 interest expense limitation calculation.
• Employers and self-employed individuals are able to defer the employer portion of payroll taxes beginning with the enactment date of the law through the end of 2020. Fifty percent of the deferred taxes become payable on December 31, 2021 with the balance payable on December 31, 2022.