The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, H.R. 748, hereinafter “the Act”) was enacted into law on March 27, 2020. It contains many tax provisions which will impact your practice immediately. This post highlights the major tax law changes contained in the Act.
As you know, Qualified Improvement Property should have been provided a 15-year recovery period under TCJA. The text was inadvertently left out and QIP was ineligible for 100% Bonus Depreciation. The Act fixes the TCJA error and designates QIP as 15-year property for depreciation purposes, a category eligible for 100% Bonus Depreciation. This change is effective for property placed in service after December 31, 2017.
But remember if you elected out of §163(j), you’re out of luck on the Bonus Depreciation.
Increase of §163(j) Limit
The Act increases the limitation in §163(j)from 30% to 50% for tax years beginning in 2019 and 2020. The limitation will not apply to partnership partners in 2019. Special rules apply for the treatment of excess business interest allocated to a partner in any tax year beginning in 2019. In addition, a taxpayer may elect to calculate the interest limitation for the tax year beginning in 2020 utilizing the adjusted taxable income for the last tax year beginning in 2019 as the base. For partnerships, the election must be made by the partnership.
The Act suspends the $250k/$500k loss limitation for noncorporate taxpayers. Excess business losses arising in 2018, 2019, and 2020 can be deducted.
For tax years beginning after December 31, 2017, the Act temporarily removes the 80% of taxable income limitation so that NOLs fully offset income. In addition, NOLs arising in a tax year beginning after December 31, 2018 and before January 1, 2021 may be carried back five years.
Employer Payroll Taxes
The Act allows taxpayers to defer paying the employer portion of certain 2020 payroll taxes effective for payments due after the Act’s enactment. Half will be due on December 31, 2021 with the remainder due on December 31, 2022.
Payroll Tax Credit
The Act provides a refundable payroll tax credit for 50% of wages paid by certain employers to certain employees during the COVID-19 crisis. The credit is available to employers whose operations have been fully or partially suspended or whose quarterly receipts declined more than 50% year over year. Other restrictions apply, and the number of full-time employees is relevant. Wages include health benefits and are capped at the first $10,000. This credit applies to wages paid after March 12, 2020 and before January 1, 2021.
The Act provides a refundable credit for 2020 equal to $1,200 ($2,400 for individuals filing joint returns) plus $500 for each qualifying child of the taxpayer. Phaseout occurs at $75,000 to $99,000 for a Single filer, $150,000 to $198,000 for a joint return with no children, and $112,500 to $146,500 for HOH with one child.
These direct payments are arguably the most talked about provision in the entire legislation. Our CARE webinar will cover the rebates, including widespread eligibility, in extraordinary detail so you can fluently discuss these with your clients. Receipt of unearned, untaxed money will undoubtedly be a pleasant topic welcomed by your clients and similarly will create goodwill to augment your bottom line.
No Penalty for Coronavirus-Related Retirement Plan Distributions
Any 2020 coronavirus-related distribution up to $100,000 from an eligible retirement plan will not incur the §72(t) 10% additional tax and may be included in income over three years. Distributions can also be contributed back to an eligible retirement plan within the three-year period.
No 2020 RMDs
IRAs and certain defined contribution plans will have no required minimum distributions for 2020.
There are other tax related topics in the Act which due to blog brevity I have not detailed herein. Eligible student loan payments, donations of food inventory, limitations on cash contributions, and an above the line $300 charitable contribution are chief among them. In much the same manner, this post was written with a broad brush due to the length and complexity of the Act. But don’t fear since our CARE webinar will comprehensively present the Act’s topics with the full amount of detail they are due. Join our panel of tax experts as they explain the relevant aspects of this new legislation with acumen specifically designed to impart to you exactly the info you’ll need for your clients’ tax consultation, preparation, and planning. Multiple dates of CARE are scheduled for your convenience, and you can sign up HERE.
Nick Spoltore is VP of Tax & Advisory Content for Surgent CPE. Mr. Spoltore is a graduate of the University of Notre Dame and of Delaware Law School. Before joining Surgent, he practiced tax and business law at the firm of Heaney, Kilcoyne in Pennsylvania and also in Delaware.