The US Senate has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and it is expected to be passed by the House and signed by the President shortly.
Here are the highlights as they relate to individual stimulus payments and income taxes.
2020 Recovery Rebate for Individuals
Checks will be arriving to US individuals with a social security number between now and December 31, 2020. The amount of the check will be based on one of the following: your 2019 individual income tax return; your 2018 individual income tax return (if you haven’t filed 2019 yet); or your SSA-1099 if you haven’t filed either year. The starting point for the amount will be $1,200 for single individuals and $2,400 for married people filing jointly, plus $500 for each child under the age of 17.
The payment amount will begin to decrease for individuals with AGI above $75,000 (single) and $150,000 (married filing jointly). For every $100 that your AGI exceeds these limits, the payment is decreased by $5. This means that for a married couple otherwise due $2,400 would receive zero if their AGI exceeds $198,000. Married couples with two children will phase out completely at $218,000.
You’ll note that these payments include in their title the word “Rebate.” That’s exactly what these are. These are advance payments of a rebate that all taxpayers will be eligible for with their 2020 individual income tax returns. The Act calls for a recalculation of the rebate on your 2020 individual income tax return using 2020 data. It’s unclear whether or not there will be a true up of the amount due in the form of an additional payment, a required payment back from the individual, or the inclusion of any amount in taxable income.
Income Tax Changes
Qualified Improvement Property
One of the most glaring oversights in the Tax Cuts and Jobs Act passed in December of 2017 was the failure to give qualified improvement property a 15-year life, and make it eligible for Bonus depreciation. The CARES Act fixes this allowing for the opportunity for amended returns and/or method changes to increase depreciation expense in 2018 and forward and lower tax liabilities.
Net Operating Losses
The Tax Cuts and Jobs Act made net operating losses only eligible for carryforward and limited losses arising in 2018, and thereafter to only offset 80% of taxable income in future years. Included in the CARES Act is a change that will allow for 2018, 2019, and 2020 NOLs to be carried back up to five years, and any losses carried forward to 2019 and 2020 will be able to offset 100% of taxable income.
Interest Expense Limitation
The interest expense limitation contained within IRC §163(j) as implemented as part of the Tax Cuts and Jobs Act limits net interest expense to 30% of adjusted taxable income. Under the CARES Act, the 30% limitation would be increased to 50% for 2019 and 2020. Plus, a business can elect to use its 2019 adjusted taxable income to calculate its limitation in 2020 if favorable. This would allow a company in income in 2019 to increase a 2020 taxable loss and carry that loss back to prior years for a larger refund of prior year taxes.
However, the above increase in percentage of adjusted taxable income used to calculate the interest expense limitation does not apply to partnerships. As an alternative, the CARES Act keeps the 30% in place and allows 50% of any disallowed interest to be deductible in 2020. The remaining 50% will carry forward and be subject to the standard 163(j) rules for disallowed interest.
Individual Net Business Loss
IRC §461(l) established as part of the Tax Cuts and Jobs Act limits the net business loss permitted to offset other income to $250,000 for single individuals, and $500,000 for married individuals. Disallowed losses are converted to net operating loss carryforwards. The CARES Act retroactively eliminates this limitation back to January 1, 2018, and instead delays implementation until 2020. So if an individual was limited under this code section a potential amended return opportunity exists.
Qualified Retirement Plans
Coronavirus related distributions of up to $100,000 in 2020 will not be subject to the penalties normally associated with early withdrawals. In order to be considered a Coronavirus related distribution, it must:
- Be made in 2020
- To an individual or an individual’s spouse or dependent with a COVID-19 or SRS-COV-2 diagnosis as determined by a CDC approved test, or
- An individual who experiences:
- Work furlough or reduction in hours
- Inability to work due to lack of child care
- Financial difficulties due to a quarantine
The withdrawal is subject to income tax, which can be spread over a three-year period beginning in 2020. If the withdrawal is paid back within three years of receiving the distribution it is no longer subject to income tax.
Loan limitations from qualified plans are also increased from $50,000 to $100,000 for 180 days beginning once the Act is signed into law.
Finally, required minimum distributions are not required for 2020.
Contributions of up to $300 are now allowed as an “above the line” deduction starting in 2020. This permits individuals who would otherwise get no tax benefit for charitable contributions due to the inability to itemize after the changes made by the Tax Cuts and Jobs Act to realize a tax benefit. This provision applies only to taxpayers not itemizing.
For taxpayers who do itemize deductions, the AGI limitation on charitable contributions is removed for 2020. The current limitation is 60%. For 2020, individual taxpayers can deduct charitable contributions up to 100% of AGI. Any additional contributions not deducted in 2020 can be carried forward to offset income in the future for five years. For C Corporations, the current limit of 10% of taxable income is increased to 25%.
Employer Payment of Employee Student Loan Debt
The CARES Act allows an employer to repay an employee’s student loans up to $5,250 in 2020 without the employee having to include the amount in taxable income; however there are two caveats. The $5,250 cap will include any payments for an employee’s qualified education expenses, and an employee who receives a tax free debt repayment by their employer will not be able to deduct student loan interest.
An employer can receive a one-time tax credit for the employer’s share of social security taxes if:
- A business’ operations were partially or completely halted during 2020 due to a government imposed shutdown, or
- A business was able to continually operate, but whose gross receipts in any quarter of 2020 were reduced by more than 50% when compared to the same quarter of 2019, and
- The business continued to pay its employees
Businesses can claim a credit against its share of social security taxes up to 50% of qualified wages paid to each employee for each effected quarter ending December 31, 2020.
Deferral of Employer Payroll Tax and Self-Employment Tax
Employers can defer payment of its share of social security taxes due from the date the Act is signed into law through December 31, 2020 to December 31, 2021 and December 31, 2022. 50% normally due in 2020 will be shifted to 2021, with the remaining 50% shifting to 2022.
Self-employed individuals can defer payment of one-half of their self-employment tax normally due from the date the Act is signed into law through December 31, 2020. One-half of the deferred amount will be due December 31, 2021 with the final half being due December 31, 2022.
The provisions above will only apply to businesses which do NOT have a payroll protection loan forgiven.
As future changes to the CARES Act are made, we will continue to keep you updated. Please be sure to check our COVID-19 Resource Center daily as we are regularly updating all of our guidance as changes happen. And as always, if you have any questions, please do not hesitate to contact us.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although McKonly & Asbury has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.
About the Author
Mark is a Partner with McKonly & Asbury. Serving as Director of Tax Services, he brings a wealth of experience in federal, state, and international income as well as franchise tax issues for both publicly and privately held corporatio… Read more