The last two weeks have seen a flurry of federal and state announcements regarding tax relief and business measures related to COVID-19. The Internal Revenue Service has issued several notices regarding tax filing and payment deadlines. Many governors and states have also pushed back tax filing and payment deadlines. Congress has passed, and the President has signed, several COVID-19 relief and stimulus packages. The largest of which, the Coronavirus Aid, Relief and Economic Security (CARES) Act, was signed into law on March 27, 2020.
The CARES Act has significant provisions related to individuals, in the form of direct payments and retirement plan changes, and businesses, particularly related to lending options and tax credits. The following is a summary of the various provisions for individuals and businesses under the CARES Act.
INDIVIDUALS MAY BENEFIT FROM THE FOLLOWING
- Single filers, with an adjusted gross income (AGI) of $75,000 or less, will receive $1,200. Those who file as Married Filing Jointly, with an AGI of $150,000 or less, will receive $2,400. The amount will be phased out as AGI increases. Those with an AGI of $99,000 for Single filers and $198,000 for married filing jointly filers will not receive any rebate.
- An additional $500 will be paid for each child, under the age of 17, to those whose AGI is below the full eligibility limit of $75,000 or $150,000 depending on their filing status.
- The 2019 tax return will determine eligibility and amount of the rebate check. If a 2019 return has not yet been filed, then 2018 tax returns or Social Security records will be utilized. Amounts received are not considered income and are treated as a refundable tax credit on the 2020 tax return.
Retirement Account Modifications
- 2020 Required Minimum Distributions (RMD) requirements are waived for IRAs and certain defined contribution plans. The delay also applies to 2019 RMDs that needed to have been taken by April 1, 2020.
- No 10% penalty will apply for amounts, up to $100,000, that may be withdrawn from retirement accounts for coronavirus-related purposes if made during 2020. Amounts withdrawn are included in income, but may be spread out over three years. In addition, the funds may be recontributed within three years. Coronavirus-related purposes include being diagnosed with COVID-19, having a spouse or dependent diagnosed with COVID-19 or experiencing adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19 or other factors as determined by the IRS.
- Loans of up to $100,000 may be taken from retirement accounts and IRAs for those impacted by the coronavirus. An individual may self-certify that they have been impacted by the coronavirus, which has the same meaning as referenced above for coronavirus-related purposes.
Charitable Contribution Limits for 2020
- The 60% limit is suspended for 2020 cash contributions made by individuals to public charities but not to supporting organizations or donor-advised funds.
- Individuals that take the Standard Deduction on their 2020 return may take up to $300 for cash charitable contributions to public charities but not to supporting organizations or donor-advised funds.
BUSINESSES MAY BENEFIT FROM THE FOLLOWING
Delayed Payment of Employer Payroll Taxes
- If eligible, an employer can defer the payment of the employer portion of Social Security taxes (6.2%), with remittance occurring in two installments, December 31, 2021 and December 31, 2022.
50% Employee Retention Payroll Tax Credit for Employers Closed as a Result of COVID-19
- The refundable payroll tax credit is equal to 50% of the first $10,000 in wages, including health plan benefits, per employee.
- If a business has more than 100 full-time employees, only wages related to employees that are not providing service to the employer as a result of COVID-19 are eligible for the credit.
- Eligible businesses are those that had operations suspended due to orders from a government entity limiting commerce, travel or group meetings or have a 50% reduction in gross receipts year over year in a calendar quarter.
Net Operating Loss (NOL) Change
- If the NOL occurred in 2018, 2019 or 2020, it may be carried back to the five preceding years.
- Tax years 2018-2020 will not be subject to the NOL deduction limit, previously set at 80% of taxable income.
Paycheck Protection Program
- $350 billion was allocated to help small businesses keep workers employed during the COVID-19 crisis. This comes in the form of federally-guaranteed loans from the Small Business Administration that may be forgiven if the borrower either maintains its payroll or restores its payroll after the COVID-19 crisis ends.
- Eligible businesses include a business with fewer than 500 employees or an individual who is self-employed or operating as a sole proprietor or independent contractor.
- The maximum loan amount is 2.5x the business’ average monthly payroll costs, not to exceed $10 million. Compensation of an employee’s annual salary in excess of $100,000 is excluded from the calculation. The interest rate shall not exceed 4%.
- If there is not a reduction in the number of full-time equivalent employees, then the loan can be forgiven in an amount that is equal to the amount spent by the borrower during the 8-week period beginning on the loan date for payroll costs, rent and utility payments. The amount of the loan forgiveness cannot exceed the principal and is not included in taxable income.
- Employers that take advantage of the loan provisions herein may not also take advantage of the payroll tax credit available under the Families First Coronavirus Response Act.
Changes to “Excess Business Loss” Limitations Regarding Pass-through Losses
- Under the Tax Cuts and Jobs Reform Act of 2017 pass-through losses were limited to $250,000 for an individual or $500,000 for a married couple filing jointly.
- The limitation is repealed in its entirety retroactively to tax years 2018 and 2019 as well as 2020.
- The prior law limitations on excess business loss will return and be effective for tax years 2021-2025.
Multi-Family Real Estate Borrower’s Relief
- Borrowers of federally backed mortgage loans regarding residential real estate for one to four family occupancy can seek up to 360 days of forbearance.
- Borrowers of federally backed mortgage loans regarding residential real estate for occupancy of five or more families can seek up to 90 days of forbearance. Borrowers must have been current on all loan payments as of February 1, 2020.
Charitable Contribution Limits for 2020
- The 10% limit is increased to 25% for 2020 cash contributions made by a corporation to public charities but not to supporting organizations or donor-advised funds.
Employee Student Loans as Educational Assistance
- An employer may make up to $5,250 in student loan payments during 2020 and the employee may exclude this amount from gross income as an Employer-Provided Educational Assistance Benefit.
Technical Correction to the Tax Cuts and Jobs Act of 2017 regarding Bonus Depreciation
- Qualified Improvement Property is now eligible for 100% Bonus Depreciation and is assigned a 20-year class life under the Alternative Depreciation System and is effective for property placed in service after December 31, 2017.
- This results in an immediate tax refund opportunity for those businesses previously limited in the 2018 and 2019 tax years.
The combination of loans and tax credits to businesses and direct tax rebates and tax relief to individuals are designed to help offset the personal and business economic impacts of the COVID-19 minimization efforts and shelter-in-place orders. It remains to be seen if additional economic measures will be needed; however, the tax provisions as enacted serve as a significant first step.
As always, your Oxford team of advisors are available to discuss these matters further as you assess the potential advantages of the CARES Act for you and your family.
The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.