CARES Act for Taxpayers – How to Maximize the Benefits of Retroactive Changes
You have been inundated with information related to the Coronavirus Aid, Relief and Economic Security (CARES) Act since Phase III was signed into law late on March 27, 2020. This historic stimulus package contains an unprecedented value to businesses, public institutions and individuals hit hard by the COVID-19 pandemic, and no stimulus package is written without changes to the Internal Revenue Code. The CARES Act includes many incentives for both individuals and businesses. With so many dollars at stake, there is likely something for everyone. Let’s look at the business and individual tax provisions that were introduced with the CARES Act and how you can take advantage of available savings.
Tax Benefits for Individuals
- Recovery Rebates – The Federal government has already begun distribution of these widely publicized payments of up to $1,200 to eligible taxpayers and $2,400 for married couples filing joint returns. An additional $500 payment will be sent to taxpayers for each qualifying child dependent under age 17. Rebates are phased out for high income taxpayers beginning at $75,000 (single and married filing separate), $112,500 (head of household), and $150,000 (married filing joint). The Internal Revenue Service (IRS) will base the qualification standards on the individual’s 2019 tax return. If the 2019 return has not yet been filed due to the July 15th deadline, the IRS will look to the 2018 tax return to determine eligibility. An important note that has been often overlooked; the rebate checks are an advance payment of a refundable credit to be claimed with the 2020 individual income tax returns. For more information regarding whether individuals qualify and how to claim the rebate, follow the link included at the bottom of this article.
- Waiver of 10% early distribution penalty – Taxpayers who have been infected, has a family member infected, or who is economically harmed by the Coronavirus can take a distribution from a qualified retirement plan of up to $100,000 from January 1, 2020, through December 31, 2020. Even if the taxpayer has yet to reach retirement age, this distribution would no longer be subject to the 10% early withdrawal penalty. Additionally, the taxable income resulting from the distribution is includable ratably over three years.
- Charitable Deduction Changes – The CARES Act relieves a couple restrictions on the utilization of charitable contribution deductions. First, for taxpayers that utilize the standard deduction, there is a new $300 charitable deduction that can be claimed in addition to the standard deduction. This applies even if the taxpayer does not itemize their deductions. Second, for contributions made in 2020 to public charities, the 60% adjusted gross income limitation is eliminated.
Tax Benefits for Businesses
- Employee Retention Credit – A refundable tax credit is allowed with the filing of payroll tax returns of eligible employers. The credit is equal to 50% of wages paid to certain employees after March 12, 2020, and before January 1, 2021. Wages are capped at $10,000 per employee, which means the maximum credit allowable is $5,000 per eligible employee. The credit is not available to employers receiving Small Business Interruption Loans.
- Deferral of Employer Payroll Taxes – This provision allows for the social security taxes of the employer to be deferred for up to two years for taxes incurred from March 27, 2020, through December 31, 2020. The employer portion of payroll taxes will be due in two installments. Half of the deferred tax will be due December 31, 2021, with the remaining half due December 31, 2022. This deferral does not apply if the wages were used to determine the amount forgiven under the Paycheck Protection Loans.
- Changes to Net Operating Loss Utilization – The CARES Act reverses the Tax Cuts and Jobs Act limitations on the utilization of net operating losses (NOL). Before the CARES Act, NOLs after 2017 could only be utilized to offset 80% of income in future years and could not be carried back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying the 80% taxable income limitation and carryback prohibition until 2021. The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit).
- Qualified Improvement Property – A technical correction was made in the CARES Act to rectify a mistake made in the wording of the Tax Cuts and Jobs Act passed in 2017 about the depreciation of Qualified Improvement Property (QIP). The CARES Act retroactively reinstates QIP, which includes a wide variety of interior, non-load-bearing building improvements as 15-year Modified Accelerated Cost Recovery System (MACRS) property or if required to be treated as alternative depreciation system property, as eligible for a write-off over 20 years. The correction of the error in the 2017 Tax Law restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, the ability to write off 100% in the year it is placed in service rather than depreciate the property ratably over 39 years!
Claiming Retroactive Tax Benefits
Questions have arisen as to how to claim the tax benefits outlined above, with confusion related to claiming retroactively instated incentives. The IRS has released some procedural guidance for claiming some of the above tax benefits.
- Recovery Rebates – An important note that has been often overlooked; the rebate checks are an advance payment of a refundable credit to be claimed with the 2020 individual income tax returns. While the credit is eventually determined based on the 2020 adjusted gross income, the timing of filing may determine whether you receive a rebate payment prior to that. The IRS recently clarified the rebate payments received will not have to be returned if the taxpayer is no longer eligible based on the 2020 income.
Consider a taxpayer that has not yet filed their 2019 return. If income was below the phase-out thresholds in 2018, but higher than the thresholds in 2019, they would be better off not filing 2019 until after a determination of their eligibility is made. Even if their income is above the threshold in 2020, they will still realize the benefit of receiving the advanced payment based on 2018 without a requirement to pay back the rebate received. To find more information regarding whether individuals qualify and how to claim the rebate, follow the link included below.
- Changes to NOL Utilization – Taxpayers with losses incurred in 2018 and 2019 need to re-evaluate the utilization of those losses. It might make sense to look back to 2013 to see if it should file a carryback claim to use losses to offset income generated in tax years 2013 and later.
- Claiming Bonus Depreciation on QIP – The IRS recently released Revenue Procedure 2020-25 outlining the procedures that need to be followed in order to claim the retroactive bonus depreciation for QIP placed in service during 2018. Taxpayers have the option of amending the 2018 and 2019 returns to claim the allowable increase in depreciation. As an alternative, the Revenue Procedure contains some administrative relief by allowing for taxpayers to file Form 3115 with the 2019 tax return and realize the lost depreciation all in 2019 with a Section 481(a) adjustment.
As always, seek the guidance of a tax professional in determining the best course of action based on the information above. This is a continually evolving situation that needs to be monitored closely. Resources and information have been available here:
This resource center is being updated continually to assist in keeping the public informed. Continue to refer to the above link for updates as more information becomes available. Most importantly, stay safe and healthy!
Contributing author: Nicholas L. Shires, CPA is a tax partner at Dannible & McKee, LLP. Nick has over 19 years of experience providing tax and consulting services to a wide range of clients, including individuals and privately held companies For more information on this topic, you may contact Nick at firstname.lastname@example.org or any of our tax professionals at (315) 472-9127.