By: John Werlhof, CliftonLarsonAllen
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act is the largest stimulus package in our nation’s history.
- Among other things, the CARES Act provides tax relief for businesses and individuals.
- You may be able to take advantage of a number of tax savings opportunities.
Deferral of employer Social Security taxYou can generally defer the employer share of the 6.2% Social Security tax on wages paid from March 27, 2020, through December 31, 2020, with 50% due on December 31, 2021, and 50% due on December 31, 2022. A similar rule applies to 50% of the self-employment tax liability of partners and sole proprietors. The deferral is not available if you take advantage of loan forgiveness under the paycheck protection program provisions of the CARES Act (i.e., certain new Small Business Administration [SBA] loans for payroll and specified other expenses). Take the loss of the deferral into account when considering whether to take advantage of a paycheck protection loan.
Employee retention creditThe CARES Act added a refundable payroll tax credit equal to 50% of certain compensation paid from March 13, 2020, to December 31, 2020. To qualify, your business must either have had its:
- Operations fully or partially suspended due to a COVID-19-related shutdown order, or
- Gross receipts decline by more than 50% when compared to the same quarter the prior year.
Reinstatement of NOL carrybacksFollowing tax reform, net operating losses (NOLs) generated in tax years beginning in 2018 and later years cannot be carried back and can only offset up to 80% of taxable income in carryover years. The CARES Act permits NOLs from the 2018, 2019, and 2020 tax years to be carried back to the previous five tax years (beginning with the earliest year first) and suspends the 80% of taxable income limitation through the 2020 tax year. The NOL carryback can result in an immediate refund of taxes paid in prior years. Aside from the cash flow benefits of obtaining an immediate refund, NOL carrybacks present an opportunity to secure permanent tax savings by using losses to offset income generated prior to tax reform when the tax rates were higher. For example, a corporate NOL from 2020 can be carried back to offset income from 2015, which may have been subject to a 35% tax rate rather than carried over to 2021 when income is subject to a 21% tax rate. In some cases, however, income in future years will be subject to higher tax rates than income in the carryback period, so you’ll need to work with your tax advisor to determine whether the carryback is right in your particular situation. You may be able to use proactive planning measures to accelerate deductions and defer income to maximize the amount of the NOL that you can carry back. If 2019 was profitable but you anticipate a loss for 2020, you may want to consider whether accelerating income into the 2019 year and deferring deductions to 2020 to maximize the NOL for 2020 makes sense in your situation. Example: Auburn, Inc., an accrual-method C corporation, anticipates having $2 million of taxable income in 2019 and $0 taxable income in 2020. If Auburn can shift $1 million of income from 2020 to 2019, Auburn will have $3 million of taxable income in 2019 (subject to tax at a 21% rate) and a $1 million net operating loss in 2020, which can be carried back to offset income in 2015 (subject to tax at a 35% rate). While it’s counterintuitive to accelerate income, doing so creates an NOL in 2020 which can be carried back to offset income subject to higher rates in earlier years, resulting in permanent tax savings of $140,000. The additional tax for the 2019 tax year is generally due by July 15 and the refund for carrying back the 2020 loss won’t be available until sometime in 2021. If you need the cash to keep your business afloat, then accelerating income may not make sense for you.
Temporary suspension of excess business loss rulesTax reform limited individuals from using more than $250,000 ($500,000 married filing joint) of business losses to offset non-business income. The CARES Act repeals the limitation for years beginning before January 1, 2021. If you had a business loss that was limited in 2018 or 2019 under the excess business loss rules, then you may be able to obtain a refund by filing an amended tax return.
Corporate credit for prior year AMTTax reform repealed the corporate alternative minimum tax (AMT) and provided an opportunity for corporations to claim a refund of minimum tax credit carryovers during 2018 through 2021. The CARES Act makes any remaining minimum tax credit carryovers fully refundable in 2019. Alternatively, corporations can elect to claim a refund for the unused carryovers in 2018.
Modification of business interest limitationThe business interest limitation was added as part of tax reform and generally limits the deduction for business interest expense to the sum of (i) business interest income, (ii) 30% of adjusted taxable income (ATI), and (iii) floor plan financing interest. Certain small taxpayers are exempt from the limit. The CARES Act increases the limit to 50% of adjusted taxable income (ATI) for 2019 and 2020, potentially increasing interest expense deductions and reducing taxable income (or creating a net operating loss which can be carried back). You can elect to use your 2019 ATI in computing the 2020 limit, providing relief if your business income declines in 2020. If your business is a partnership, then the relief from the business interest limitation for 2019 takes a modified form. With this change, you could have an opportunity to amend your return if you already filed your 2019 tax returns and your deduction for business interest was limited.
Bonus depreciation for qualified improvement propertyUnder tax reform, qualified improvement property (QIP) was supposed to have a 15-year cost recovery period and be eligible for 100% bonus depreciation. A drafting error, however, caused QIP to have a 39-year cost recovery period, and be ineligible for bonus depreciation. QIP includes most improvements to commercial or industrial buildings after the building was first placed in service, such as most tenant improvements. The CARES Act retroactively corrects the drafting error for QIP acquired and placed in service on or after January 1, 2018. The retroactive fix may present an opportunity for you to accelerate depreciation, either by filing a Form 3115 or, in some cases, by filing an amended tax return. If you elected out of the business interest limitation for your real property business, then you are not eligible for bonus depreciation on QIP.
Recovery rebateYou may be entitled to a “recovery rebate” of $1,200 ($2,400 married filing joint), plus an additional $500 per qualifying child, if you are a U.S. resident and can’t be claimed as a dependent of another taxpayer. The rebate begins phasing out if your income exceeds $75,000 ($112,500 head of household; $150,000 married filing joint) and is reduced by $5 for every $100 that your income exceeds the threshold. The rebate is available only if you and your qualifying children have a Social Security number. The IRS will begin direct depositing the rebate or mailing checks around April 6, and will base the first round of payments on income reported on your 2018 tax return (or 2019 return, if you’ve already filed). If you receive a rebate but your 2020 income makes you ineligible for the rebate, there is no requirement for you to pay it back. On the other hand, if you were not eligible for the rebate based on your 2018 or 2019 income, but will be eligible based on your 2020 income, you can claim the rebate as a credit on your 2020 tax return.
Waiver of early withdrawal penaltyThe 10% penalty on an early withdrawal from a retirement account is waived for up to $100,000 of distributions for coronavirus-related purposes made on or after January 1, 2020. A distribution is considered coronavirus related if it is made to an individual:
- Who is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
- Whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19; or
- Who experiences adverse financial consequences because of quarantine, furlough, lay off, work hour reduction, or inability to work due to lack of child care.
Waiver of Required Minimum Distributions (RMDs) for 2020The CARES Act waives the required minimum distribution rules for certain defined contribution plans and IRAs during 2020. The waiver is not applicable to defined benefit plans (i.e., pensions). Example: While employed, Beth contributed to a 401(k) plan. Beth turns 70 on May 1, 2019. Beth did not receive her RMD on or before January 1, 2020. Beth does not have to take a RMD in 2020.
Charitable contribution provisionsFavorable rules apply if you make cash donations during 2020 to certain charities:
- Individuals who do not itemize can claim an above-the-line deduction of up to $300 for such contributions;
- Individuals who itemize can deduct such contributions up to 100% of adjusted gross income (AGI);
- C corporations can deduct such contributions up to 25% of taxable income; and
- Business deduction limits for contributions of food inventory is increased from 15% to 25% of the business’s taxable income.
Exclusion for student loan repaymentEmployees can exclude up to $5,250 from income for student loan repayments made by an employer between March 27, 2020, and December 31, 2020. The exclusion appears to be available regardless of whether the student loan repayment has any connection to COVID-19.
Review additional CARES Act opportunitiesThe CARES Act provides opportunities for timely cash tax savings. Amended return opportunities are available for the following changes brought by the CARES Act, among others:
- Five-year NOL carryback for losses generated in the 2018 and 2019 tax years
- Two-year NOL carryback for losses generated in a year beginning in 2017 and ending in 2018
- Repeal of the excess business loss rules for 2018 or 2019
- Apply 50% of ATI limit instead of 30% of ATI in computing business interest limitation for 2019
- Apply 100% bonus depreciation to QIP placed in service in 2018 or 2019