The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, P.L. 116-136, contains important tax changes designed to deliver speedy relief to businesses and individuals struggling due to the COVID-19 pandemic. The CARES Act was signed into law by the President on March 27, 2020. Here is a summary of the of the changes you should be aware of…
Net operating losses: The CARES Act temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
Deferral of noncorporate taxpayer loss-limits: The CARES Act retroactively turns off the excess active business loss limitation rule of the 2017 Tax Law in Section 461(l) by delaying its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the 2017 Tax Law and were treated as NOL carryforwards in the following tax year.
Interest limitation: For tax years beginning in 2019 and 2020, Section 163(j) is amended to increase the adjusted taxable income percentage from 30% to 50%. Also, taxpayers can elect to use 2019 income in place of 2020 for the computation.
Qualified improvement property: The bill also makes technical corrections regarding qualified improvement property under Section 168 by making it 15-year property.
Waiver of Required Minimum Distributions for 2020: The bill temporarily suspends the required minimum distribution rules in Section 401 for 2020.
Retirement plans: Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the Section 72(t) 10% additional tax for early distributions. Eligible distributions can be taken up to December 31, 2020. Coronavirus-related distributions may be repaid within three years. For these purposes, an eligible taxpayer is one who has been diagnosed with SARS-CoV-2 virus or COVID-19 disease, one whose spouse or dependent has been diagnosed with SARS-CoV-2 virus or COVID-19 disease, one who experiences adverse financial consequences from being quarantined, furloughed, or laid off or who has had his or her work hours reduced, or one who is unable to work due to lack of child care. Any resulting income inclusion can be taken over three years. The bill also allows loans of up to $100,000 from qualified plans, and repayment can be delayed.
Charitable deductions: The bill creates an above-the-line charitable deduction for 2020 (not to exceed $300). The bill also modifies the AGI limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. The bill also increases the food contribution limits to 25%.
Payroll tax delay: The bill delays payment of 50% of 2020 employer payroll taxes until December 31, 2021; the other 50% will be due December 31, 2022. For self-employment taxes, 50% will not be due until those same dates.
In some ways, March seems like years ago given all that has happened. However, we think it is important to highlight some of the tax law changes brought about by the CARES Act since these will directly impact income tax returns for 2020. And, in some instances, amended returns will need to be filed to implement certain retroactive provisions contained in the Act.
Price CPAs’ experience in tax matters dates back to our beginning over 67 years ago. Contact us today (615.385.0686 or firstname.lastname@example.org) to arrange for our expertise in tax planning, preparation, and problem resolution to be applied to your business or personal circumstances.
Mark Fly, CPA/ABV Alan Webb, CPA
Tax Director Partner