08 Aug Tax Provisions of the CARES Act
The CARES Act has been hailed as a “massive $2.2 Trillion” aid package. The law was a gargantuan 880 pages. It was signed into law on March 27, 2020 and has many provisions meant to aid workers and the economy. Considering how big and new it is, there is still a lot of guidance missing. This post will specifically focus on some of the tax provisions.
Net Operating Loss (NOL)
Prior to the Tax Cuts and Jobs Act, net operating losses were allowed to be carried back two years and carried forward 20 years. Additionally, there was no income limitation on the NOL you were allowed to take. In other words, you could zero out all of your income with a NOL. In an effort to generate revenue, the TCJA changed these provisions. It disallowed NOL carrybacks, with the exception of qualifying farms, and allowed indefinite NOL carryforwards. The landmark 2017 legislation also implemented an 80 percent of taxable income limit on NOLs. Fast forward to the CARES Act. Now, the income limitation has been removed, and losses occurring in 2018, 2019, and 2020 can be carried back five years.
Typically, taxpayers need to itemize their deductions to get a tax benefit for charitable contributions. The CARES Act allows a $300 above the line deduction for charitable contributions. While the amount is small, it is used to calculate one’s adjusted gross income. Adjusted gross income is an important number for other deductions and credits. After the passage of TCJA, itemizers were generally allowed to deduct cash contributions to public charities up to 60% of their AGI. The CARES Act increased the allowed charitable contributions deduction to 100% of AGI.
Recovery rebates, also known as stimulus checks, are one of the most anticipated provisions of the CARES Act. Recovery rebates will be based on 2018 AGI if you have not already filed your 2019 tax return. Individual taxpayers with an AGI less than $75,000 and married filing joint taxpayers with AGI less than $150,000 will receive $1,200 and $2,400, respectively. The amount of the rebate will be decreased as a taxpayer’s AGI exceeds the thresholds. Stimulus checks will not be received by taxpayers with an AGI in excess of $99,000 for single filers and $198,000 for married filing joint couples. Taxpayers will also receive an additional $500 for each child under 17 years old.
These stimulus checks are technically advance refundable credits for 2020. On a side note, this is why the stimulus checks are not taxable. The fact that these checks are advance refundable credits mean these amounts are technically an amount to offset your tax due dollar for dollar. Fox example, if you have tax due of $10,000 before any credits and are allowed a $3,400 tax credit, you would then have a total tax due of $6,600 post credit. Instead of waiting until you file your tax return in April 2021 to put these funds in your hand by offsetting some of your tax due, the government is putting this money in your hands today. While the amount of money is based on your 2018 or 2019 AGI, the checks are a 2020 advanced credit. This means that you may receive a check but due to an increased 2020 AGI, you may receive more than you were supposed to. The good news is that there are no mechanisms in the Act that allow for a clawback. Consider the opposite. You do not get a check today because you had a high income 2018 and/or 2019 but were laid off this year or you had a child this year. In these scenarios, the credit you would be allowed based on your 2020 status would offset your tax liability when you file your 2020 tax return in 2021.
Typically, distributions from pre tax retirement accounts are taxed at ordinary income rates and subject to a 10% penalty if you are younger than 59.5 years old. The CARES Act allows “corona virus related” distributions up to $100,000 to avoid the early withdrawal penalty. Additionally, the tax due on the distribution can be paid over a three year period. If you want to avoid taxes on the distribution altogether, the CARES Act allows you to pay back the distribution within three years.
Before the CARES Act, loans on 401(k) account were only allowed up to $50,000. The newly enacted Act increased the maximum loan amount to $100,000 for the 180 day period following the enactment of the Act.
Taxpayers required to take minimum distributions from their account can forgo 2020 RMDs. Those taxpayers taking their first RMD before April 1 because they turned 70.5 in 2019 can also forgo taking their RMD. Even beneficiaries of inherited IRAs can forgo their 2020 RMDs. Lastly, “non-designated” beneficiaries who inherit IRAs from a decedent who dies before their “required beginning date” must distribute the entire account balance within five years. The CARES Act enables these types of beneficiaries to not count 2020 toward the five years.
Employee Retention Credit (ERC)
This is a highly technical provision in the Act that has some important caveats. Therefore, we are going to boil it down here, and if you think this situation may apply to you, reach out to us to dig deeper. Eligible employers are allowed a credit equal to 50% of up to $10,000 of an employee’s qualified wages. The ERC is a refundable tax credit. Employee wages include “qualified health plan expenses.”
Eligible employers are businesses that were forced by a governmental order to fully or partially suspend operations in a quarter or that have experienced a decline in quarterly revenue during 2020 of more than 50% from the same quarter in 2019. If this does not apply to your business, you cannot take the credit. You also cannot take the credit if you took out a paycheck protection loan.
Employer payment of Employee’s Student Loan
This provision amends the already existing IRC Section 127 Employee Assistance Programs. This provision allows employer’s to exclude up to $5,250 of payments of their employees’ student loans from their income. Normally, taxpayers must realize this type of benefit as income, but the provision also allows employees to exclude the loan payments from income. If this benefit is given, the employee cannot deduct the student loan interest allowed by IRC Section 221. These benefits are also exempt from payroll taxes.
The CARES Act provides some very much needed assistance including tax relief. Future posts will take deeper dives on some of these provisions and how they could apply to some examples. This post does not discuss all of the tax provisions of the Act and should not be considered advice. Feel free to contact us if you’d like to know how some of these provisions apply to your specific situation, or consult your tax advisor before making any decisions.