Dear Clients and Friends,
We are posting this to our blog to make you aware of the major tax provisions and business relief opportunity in the Caronavirus Aid, Relief, and Economic Security (CARES) Act signed into law by President Trump on Friday March 27, 2020. This historic piece of legislation is designed to provide over $2 trillion of aid to individuals and businesses to help boost the economy during the coronavirus pandemic. Here are the highlights:
Individual Tax Provisions
Recovery rebates – Individuals will be receiving stimulus payments, also called recovery rebates, directly from the federal government. These payments are an advance refund of a tax credit on the 2020 tax return. Individuals will receive a credit of $1,200 ($2,400 for married couples) plus $500 for each dependent child under 17. The payments will be reduced $5 for every $100 that an individual’s Adjusted Gross Income (AGI) is over $75,000 ($150,000 for married couples). The amount of the credit will ultimately be determined by your 2020 AGI, but the advance payments will be based on either your 2018 or 2019 AGI, depending on whether you have already filed your 2019 tax return. If an individual’s 2020 credit is more than the advance payment, they will receive the extra as a credit on their 2020 tax return. If the 2020 credit is less than the advance payment, an individual will not be required to pay back any of the advance payment. The timing of the payments is unknown; it could be a few weeks or a few months.
Retirement plan withdrawal – Individuals can take up to $100,000 out of their retirement plans without penalty if they, a spouse, or a dependent has been diagnosed with COVID-19, has been required to be isolated, has had work hours reduced, or has been unable to work due to lack of child care or school. Any taxable income on the withdrawal can be spread over three years. Distributions must be done in 2020 to qualify. The CARES Act also suspends required minimum distributions (RMDs) for 2020.
Charitable contributions – An above-the-line deduction for charitable contributions, not to exceed $300, has been created for 2020. This deduction is allowed even if an individual does not itemize.
Business Tax Provisions
Payroll tax delay – An employer’s share of the 6.2% social security payroll tax on employee wages through December 31, 2020 can be deferred, with 50% being payable in 2021 and 50% payable in 2022. This takes effect immediately. Self-employed individuals may also delay payment of half of the social security tax due on their self-employment income until 2021 and 2022.
Employee retention credit – An employer whose business was fully or partially shut down by orders from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19, or the business remained open but had a 50% decline in revenue compared to the same quarter in the prior year, is eligible for a credit against payroll taxes (does not include sick leave or family medical leave pay eligible for the payroll tax credit created by the "Families First Act" signed March 18, 2020). The credit equals 50% of qualified wages paid from March 12, 2020 through December 31, 2020 up to $10,000 of wages per employee. The definition of qualified wages depends on the size of the employer. For employers with over 100 employees qualified wages are limited to wages paid to employees not able to work during the shutdown or decline in revenue period. For employers with less than 100 employees qualified wages include all wages paid during the shutdown or decline in revenue period. The decline in revenue period ends once revenues exceed 80% of the same quarter in the prior year. Qualified wages include certain excludable group health plan costs. This credit is not available if the employer receives a payroll protection loan described later.
Net operating losses – The limitation on using NOLs to offset only 80% of taxable income has been removed for tax years 2018 – 2020. And NOLs generated in 2018 – 2020 may be carried back five years.
Excess business losses – The limit on deducting excess business losses by noncorporate taxpayers has been removed for tax years 2018 – 2020.
Interest expense limitation – The limit on the deductibility of interest expense has been modified to allow increased deductibility for tax years 2019 and 2020.
Qualified improvement property – The depreciable life of qualified improvements to real estate property has been changed from 39 years to 15 years retroactive to January 1, 2018. The property is also now eligible for 100% bonus depreciation.
Business Relief Opportunity
Paycheck protection loans – Businesses with less than 500 employees, including sole proprietorships and non-profits, are eligible for loans through the Small Business Administration with a maximum maturity of 10 years and maximum interest rate of 4%, no standard loan fees, and no personal guarantees. Loan payments may be deferred for at least six months or up to a year. A portion of the loan is eligible for tax-free forgiveness. A few details:
- Application period runs through June 30, 2020.
- Loan proceeds must be used for payroll costs including health and retirement benefits, loan interest, rent, and utilities.
- Loan amount is limited to 2.5x average monthly payroll costs (with certain limits) including health and retirement benefits for the one year period ending on the application date.
- The amount eligible for forgiveness equals the amount paid for payroll costs including health and retirement benefits, mortgage interest, rent and utilities in the eight-week period beginning on the date of the loan.
- The loan forgiveness amount will not be treated as taxable income.
- Loan forgiveness must be applied for with specified documentation.
- The loan forgiveness amount could be reduced if the employer cuts back on employees or wages during the eight-week period, but can be avoided if the employer subsequently rehires or increases wages within an allotted time period.
This is just a brief summary highlighting the major tax provisions and business relief opportunity in the CARES Act. Additional guidance on these provisions is sure to be released over the next few weeks, and additional relief legislation could still be passed as this situation continues to play out. Please contact us if you have any questions regarding how these tax provisions or other provisions included in the act will affect you.
Van Bruggen & Vande Vegte, PC