The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law by President Trump on March 27, 2020. It was a bipartisan stimulus package designed to inject $2.2 trillion into the U.S. economy through various programs. While most of the attention has been focused on small business forgivable loan programs, there are several changes which will directly impact your individual and business tax returns.
Provisions Impacting Individual Tax Returns:
- Economic Impact Payments (Stimulus Checks): U.S. residents are eligible for an advanced rebate of a temporary 2020 tax credit. The payment is $1,200 for individual and head of household filers, and $2,400 for married couples filing jointly. The payment is phased-out for individuals with an AGI between $75,000 and $99,000, and married couples with an AGI between $150,000 and $198,000. There is an additional $500 payment per qualifying child. The eligibility is based on your most recently filed tax return (2019 if it has already been electronically filed, or 2018 if it has not). If you are eligible for the payment in 2020 but a rebate is not received during the year, the IRS will apply the amount due to the taxpayer as a credit against their 2020 taxes.
- Charitable Deductions: Individuals who claim the standard deduction can now take an above-the-line deduction for up to $300 of cash contributions to public charities. For 2020, the normal 60% of AGI limitation on charitable contributions is waived for taxpayers who itemize deductions, allowing individuals to elect to deduct 100% of their cash donations to public charities.
- Required Minimum Distributions (RMDs):Any minimum distributions that were required to be paid in 2020 are waived. If the required minimum distribution for 2020 was already paid, you can re-contribute it to a qualified plan, provided you do so within 60 days of the receipt of the original distribution.
- Waiver of Early Withdrawal Penalties from Retirement Accounts: If an individual, their spouse, or their dependent, is diagnosed with Coronavirus through a CDC-approved test, or is economically harmed by it as the result of a quarantine, business closure, layoff, or reduced hours, the individual can withdraw up to $100,000 from their IRA, pension plan, or 401(k) plan, in 2020, without incurring the 10% early distribution penalty. The funds received from these withdrawals will be taxed evenly over a three-year period. These withdrawals can be re-contributed to a qualified retirement plan at any time during the three-year period, beginning on the day after the date the distribution was received, in order to eliminate the otherwise reportable taxable income.
- Student Loan Payments: The CARES Act allows an employer to contribute a maximum of $5,250 in 2020 towards an employee’s student loans at no cost to the employee.
Provisions Impacting Business Tax Returns:
- Net Operating Losses: The ability to carry back any net operating losses arising in 2018 through 2020, for five years, can result in immediate refunds for the 2018 tax year – and the 2019 tax year after the 2019 return is filed. In addition, any net operating loss arising in 2018 to 2021 and carried forward can be used to offset 100% of taxable income, as opposed to the 80% limitation under current law.
- Deduction of Net Flow-Through Business Losses: The 2017 Tax Cuts and Jobs Act (TCJA) added a provision which limited the deduction of net business losses to $500,000 per year for joint returns. This provision has been suspended for 2018 through 2020.
- Qualified Improvement Property: The TCJA inadvertently changed the depreciation life of qualified improvement property from 15 years to 39 years.
The CARES Act retroactively fixed this change in prior years and moving forward.
• Business Interest Deduction: The CARES Act increases the limitation on business interest expense deduction to 50% for 2019 and 2020, and taxpayers can elect to use the 2019 adjusted taxable income amount in 2020. Please contact a member of the Waterford Advisors team if you have any questions regarding the provisions detailed above. Please consult a member of the Waterford Advisors team if you need assistance in this matter.