CARES Act Tax Implications
Below are some of the tax-related provisions in the Coronavirus Aid, Relief and Economic Securities Act.
Filing and payment deadlines deferred
The following applies to all individuals, trusts, estates, partnerships, associations, companies or corporations of whether or how much they are affected by Coronavirus.
For a taxpayer with a Federal income tax return or a Federal income tax payment due on April 15, 2020; the due date for filing and paying is automatically postponed to July 15, 2020 regardless of the size of the payment owed.
The taxpayer doesn’t have to file IRS Form 4868 or Form 7004 to get the extension.
The relief is for Federal income tax payments and Federal income tax returns due April 15, 2020 for the person’s 2019 tax year (and also Federal estimated income tax payments due on April 15, 2020 for the person’s 2020 tax year).
No extension is provided for the payment or deposit of any other type of Federal tax (i.e. Estate tax (Form 706) or Gift taxes (Form 709)) or the filing of any Federal information return.
As a result of the filing and tax payment postponement from April 15, 2020 to July 15, 2020, that period is disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the postponed income tax returns or pay the postponed income taxes. Interest, penalties and additions to tax will begin to accrue again on July 16, 2020.
Employee Retention Tax Credit
The Treasury Department and the Internal Revenue Service launched the Employee Retention Credit on March 31, 2020; designed to encourage business to keep employees on their payroll. This is different than the SBA’s (7a) PPP loan. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. Please see IRS Employee Retention Credit info here
Recovery Rebate for Individuals
To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing tax returns. An additional $500 payment will be sent to taxpayers for each qualifying child dependent under age 17. Economic impact payments will not be included in the recipients’ income for tax purposes. Please see Individual Stimulus Checks FAQs here.
Waiver of the 10% early distribution penalty
The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus. Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread-out.
Waiver of required distribution rules
Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020 due to the account owner’s having turned 70 ½ in 2019.
Charitable deduction liberalizations.
The CARES Act makes significant liberalizations to the rules governing charitable deductions.
Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a charitable deduction to taxpayers claiming the standard deduction.
The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020. Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
Net operating loss liberalizations
The 2017 Tax Cuts and Jobs Act limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability the ability to carry NOLs back to prior 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 for carrybacks 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, the taxpayers can take an NOL deduction equal to 100% of taxable income.
These notes are certainly not comprehensive regarding all matters with regards to the Coronavirus Aid, Relief and Economic Securities Act. We highly recommend discussing any questions about the above information with your accountant.