CARES Act implementations present potential benefits to individuals and business owners
September 23, 2020
The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020, with the purpose of keeping the economy afloat during the COVID-19 pandemic. The act was designed to help rebuild the economy through federal government loans accompanied by a forgiveness element to support local and small businesses, as well as tax law changes and federal payments for individuals and/or households (stimulus checks). HK tax manager, Michael Hurd, discusses incentives and implications worth noting from this act, aside from the Payroll Protection Program (PPP), that are specific to individuals and business owners.
Individual tax relief
As a benefit for those who are looking to retrieve money from their retirement fund, the CARES Act waived the early withdrawal penalty to cover COVID-19 related expenses. Early withdrawal penalties are usually 10% of that sum, but the penalty has since been waived for qualified distributions. Individuals are still required to record the amount of proceeds retrieved from retirement accounts as taxable income, but there’s an opportunity to divide this income over a three year period versus grouping into one year.
Additionally, the CARES Act implements a suspension of required minimum distribution (RMD) for 2020, regardless if that taxpayer was impacted by the pandemic or not, for all individuals 70 and one-half-years or older. This allows taxpayers to keep more money in their retirement account where earnings are tax deferred until distributions are made.
The act also created an incentive for making charitable contributions to those in need during 2020. The first incentive is an above-the-line deduction of up to $300; even if deductions aren’t itemized, individuals can still receive up to a $300 deduction off tax returns. The second incentive removes adjusted gross income (AGI) limitations for contributions made by individuals in 2020. Normally contributions are limited to 50% of AGI, however the act eliminates this limitation and enables a larger deduction. An important note: removal of the AGI limitation is for 2020 only.
Finally, individuals can exclude up to $5,250 from income for payments made by an employer on an employee’s student loan. Usually, the individual would have to pick that up as taxable income if his/her employer is paying off student loans, however the CARES Act allows payments made up to $5,250 to be excluded from income claimed on tax returns. Again, this is for 2020 only.
Business tax relief
One of the first things the act implemented for business owners is the allowance of an employee retention credit for wages paid to employees not working due to the full or partial cessation of the employer’s business during 2020. The credit is allowed for qualified wages paid after March 21, 2020 and before January 1, 2021. This allowable credit has a maximum of $10,000 per employee.
To help maintain steady cash flow while retaining employees through the pandemic, the CARES Act permits a payroll tax deferral on wages paid in 2020. While owners must still withhold taxes from employees, these taxes do not have to be remitted to the IRS until next year. Half the withheld taxes are to be remitted by December 31, 2021, and the other half by December 31, 2022. While it’s still an amount owed to the IRS, this gives businesses some time before making payments for more financial availability. An important note: payroll costs used for this credit cannot be factored in for PPP loan forgiveness.
The rules related to net operating losses (NOLs) have been modified to benefit taxpayers and can now be carried back five years for losses incurred in 2018, 2019 and 2020. Before the CARES Act was approved, the Tax Cuts and Jobs Act (TCJA) eliminated NOL carry-backs; this change allows taxpayers to recoup some tax dollars by carrying back certain eligible losses.
Finally, The CARES Act addresses the “retail glitch” on qualified improvement property. This changes the life of qualified improvement properties from 39 years to 15 years for all properties placed in service after September 27, 2017. In addition to a shorter depreciation life, owners are able to take bonus depreciation on these assets. So, instead of writing off over the 15 years, it can be written off the first year the asset is placed in service. This allows small business owners to make certain repairs or physical improvements to buildings without putting a large strain on the financial state of the business. To claim this benefit on assets placed in service in prior years, the IRS allows taxpayers to adjust their current-year return. However, a special change in method form must be filed detailing the adjustment.
The CARES Act is one of the biggest and most expensive acts to be passed in the history of the U.S. This act was passed to help revive the economy and assist struggling families and small businesses during the troublesome effects of the COVID-19 pandemic. Individuals and business owners are seeing significant benefits from provisions set in place by the CARES Act, and hopefully continue to find opportunities for growth with the flexibility this act has provided.