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Tax Provisions of the CARES Act

We read CARES, so you don’t have to! From individual stimulus checks to employer payroll taxes, and from retirement account withdrawals to alcohol excise taxes, Wegmann Dazet’s Frank Holzenthal provides an important summary of TEN federal tax benefits resulting from the recently passed Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

 

Economic Stimulus Payments to Individuals
  • Taxpayers to receive $1,200 ($2,400 for married couples) and $500 per child under 17
  • This applies to U.S. residents who are not dependents and have a valid SS#
  • Payments begins to phase out based on AGI from the most recent return at:
    • $75,000 for single or married filing separate
    • $112,500 for Head of Household filers
    • $150,000 for married filing jointly
  • The phase-out equals $5 for each $100 of excess over the above amounts
  • Social Security Recipients will receive this rebate automatically even if not filing
  • Payments will be direct deposited if the IRS has information on file from Jan 1, 2018
  • The IRS will notify recipients of the amount, method, and date of issuance
  • Filers may receive any shortage on 2020 tax returns, but will not be subject to repayment
  • For filers not receiving tax refunds through direct deposit, the IRS will launch a web portal to submit bank account information

 

Employer Retention Credit for Employers Subject to Closure Due to COVID-19

Not allowed if an employer receives a Paycheck Protection Program Loan

  • Refundable credit of 50% of eligible wages will be allowed against the employer’s Social Security Taxes (6.2%) – Credit max of $5,000
  • Applies to wages paid from March 13, 2020 through December 31, 2020
  • Wages plus health plan expenses are capped at $10,000 per employee
  • The credit applies to employers where either of the following occurs:
    • The business is fully or partially suspended due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
    • Gross receipts for any quarter that sees receipts less than 50% of the same quarter in 2019 and end in the quarter after which receipts go up to 80% of the same quarter in 2019
  • Eligible wages cannot exceed the amount the employee would have earned during the 30 days prior to the periods above and are calculated as follows:
    • If the average number of employees in 2019 was more than 100, wages paid to employees who are not providing services due to the circumstances above; or
    • If the average number of employees in 2019 is less than or equal to 100, wages paid to any employee due to either of the above circumstances
  • This credit is not allowed on any wages where a Work Opportunity Tax Credit has been taken or wages paid under the Families First Coronavirus Relief Act provisions.

 

Delay of Payment of Employer Payroll Taxes

Not allowed if employer receives PPP Loan Forgiveness

  • Employer may defer payment of employer’s share of Social Security Tax (6.2%) for 2020
  • Payments would be due 50% in 2021 and 50% in 2022
  • Self-employed individuals may defer 50% of the tax under this provision as well

 

Penalty-Free Withdrawals from Retirement Accounts
  • The penalty for early withdrawal from retirement accounts is suspended for 2020 if no more than $100,000 is withdrawn by one of the following individuals:
    • An individual diagnosed with COVID-19
    • An individual whose spouse or dependent was diagnosed with COVID-19
    • Anyone who experiences adverse financial consequences after being quarantined, furloughed, laid off, or forced to work reduced or no hours due to the closing of a business or school
  • The income tax consequences can be spread out over 3 years
  • The distribution can be recontributed within 3 years
  • If the distribution is recontributed to the plan within 3 years, no federal income tax will be owed on the distribution. To get a refund of any taxes paid on the distribution over the 3 year period, amended returns will have to be filed to claim a refund

 

Modifications for Net Operating Losses (NOLs)
  • Taxpayers with NOLs for 2018 – 2020 may carry back that loss for 5 years
  • NOLs may fully offset income in 2019 and 2020 in lieu of the 80% limitation

 

Modifications to Charitable Contributions
  • Corporations can take contributions up to 25% of taxable income for tax year 2020
  • Corporate contributions of food inventory during 2020 are allowed up to 25% of income
  • Individuals who itemize deductions may make cash contributions in 2020 up to 100% of Adjusted Gross Income
  • For individuals who do not itemize, a $300 deduction from taxable income will be allowed for cash contributions in 2020

 

Modification of Limitation on Business Interest
  • Corporations may take up to 50% of their adjusted taxable income for interest expense in 2019 and 2020 (up from 30%)
  • Partners in a partnership may take 50% of any excess on their 2020 returns with no limitation
  • Taxpayers are allowed to use 2019’s Adjusted Taxable income for 2019 and 2020

 

Technical Amendments Regarding Qualified Improvement Property
  • The CARES Act changes Qualified Improvement Property to a 15-year life (down from 39) making it eligible for 100% bonus depreciation for 2018 forward

 

Exception from Excise Tax for Alcohol Used to Produce Hand Sanitizer
  • For distilled spirits removed between Jan 1 – Dec 31, 2020, excise taxes shall be waived if used to produce and distribute hand sanitizer in response to the COVID-19 pandemic

 

Modification of the Excess Business Loss Rules for Taxpayers Other than Corporations
  • The CARES Act eliminates the limitation on pass-through losses (previously $250,000 for individuals / $500,000 for couples) retroactively to 2018 and forward to 2020

 

For any questions about these tax implications of the CARES Act, please contact us at info@wd.cpa.

 

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