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2020 CARES Act Taxpayer Highlights

This year, the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020, resulted in numerous opportunities aimed at assisting taxpayers during the Coronavirus pandemic.

Don’t Overlook These Cash-Generating Opportunities!

Employee Retention Credit for Employers

Subject to closure due to COVID-19. Refundable payroll tax credit for 50% of qualified wages paid from March 13, 2020, through December 31, 2020, for employers whose (i) operations were fully or partially suspended due to a COVID-19 related shut-down order, or (ii) gross receipts declined by more than 50% when compared to the same quarter in the prior year. The amount of qualified wages depends on whether the employer has more than 100 full-time equivalents (FTE)s; the amount is larger for employers with 100 or fewer employees. The credit is capped at 50% of the first $10K of compensation (including health benefits) paid to each employee, and no credit can be claimed if a covered loan is obtained under the payroll protection program (PPP), i.e., the forgivable-loan program also enacted in the CARES Act.

Employer Payroll Tax Deferral

Employers and self-employed individuals can defer payment of the employer’s share (6.2%) of the Social Security payroll tax, but the deferred amount must be repaid in equal installments by December 31, 2021, and December 31, 2022. When originally enacted, this deferral opportunity was available to borrowers under a PPP loan only until the borrower obtained loan forgiveness from its lender. Subsequent legislation enacted on June 5, 2020, eliminated this restriction. Also, note that this deferral provision is different from the executive order signed by the President on August 8, 2020. That executive order allows for employee payroll tax deferrals over a more limited period – from September 1, 2020, through December 31, 2020, and the repayment period is sooner as well.

Net Operating Losses

The CARES Act allows for net operating losses (NOLs) arising in tax years 2018, 2019, or 2020 to be carried back up to 5 years, which is favorable because it allows carrybacks to years in which the top corporate tax rate was 35%. The carrybacks cannot be applied against the 2017 one-time repatriation tax on offshore income, however. The CARES Act also removes the 80% of taxable income limitation, retroactively, so that NOLs can fully offset taxable income in 2018, 2019, and 2020, regardless of the year in which they arose; however, in 2021, the 80% rule goes back into effect, including for tax years 2018 through 2020. The CARES Act does not change the rules for capital losses, which can be carried back three years and forward five years.

Modification of §461(l) Excess Business Loss Rules

The CARES Act modifies various aspects of the excess business loss (EBL) limitation applicable to pass-through businesses and sole proprietors so that they can utilize losses sooner. Specifically, it repeals the EBL limitation for tax years 2018 through 2020.

Refunds For AMT Credits

Since the repeal of the corporate AMT in 2017, carryover AMT credits are currently refundable over several years, with the balance fully refundable in 2021. The CARES Act accelerates this recovery time, enabling C corporations to obtain a refund of 50% in 2018 and the balance in 2019 unless the taxpayer elects to claim the entire refundable credit in 2018. This is also helpful for a corporation that lost its AMT credits because it went out of business; now, it can file for a quick refund to claim all of the credits in 2018 or 2019.

Temporary Modification of §163(J) Interest Deduction Limitation

The CARES Act increases taxpayers’ permitted interest deduction by increasing the 30% of adjusted taxable income (ATI) limitation to 50% (with adjustments) for 2019 and 2020 (with special rules for partnerships 2019). Also, taxpayers can elect to use their 2019 ATI in the 2020 tax year, which will increase their limitation, assuming there is less taxable income in 2020.

Technical Amendment Regarding Qualified Improvement Property

Qualified improvement property (QIP) is any improvement to a non-residential building’s interior after the building was placed in service, other than elevators, escalators, building enlargements or changes to the building’s internal structural framework. Examples include ceilings, interior doors, replacement of drywall, electrical and plumbing. Due to a previous drafting error, QIP was not eligible for bonus depreciation, but the CARES Act changed that, retroactive to January 1, 2018. QIP now has a recovery period of 15 years for general depreciation and is eligible for bonus depreciation. If the alternative depreciation system (ADS) is used because the real property business opted out of §163(j), for example, then QIP has a 20-year recovery period and is not eligible for bonus depreciation. This “retail quitch” fix in the CARES Act is especially helpful to the retail, restaurant, and hospitality industries because it speeds up the depreciable period of QIP.

Special Rules for Retirement Accounts

The 10% early withdrawal penalty is waived for distributions on or after January 1, 2020, if made for certain coronavirus-related purposes. The distributions will be taxed over a three-year period. The amount can be re-contributed to an eligible retirement plan during that time without regard to the contribution limits. Also, loan limits from certain retirement plans are increased for coronavirus-related relief.

RMD Rules Temporarily Waived

The required minimum distribution (RMD) rules for certain defined-benefit contribution plans and IRAs are waived for the 2020 calendar year.

Above-The-Line Charitable Education

For 2020, taxpayers are entitled to an above-the-line deduction of up to $300 for cash contributions to churches and charitable organizations, but only if they take the standard deduction. Normally, charitable deductions are only available to taxpayers that itemize, so this relief provision benefits those taxpayers that take the standard deduction.

Increased Income Limitation on Charitable Contributions

The CARES Act increases the adjusted gross income (AGI) limit for cash contributions made in 2020; individual donors can now deduct cash charitable contributions in an amount up to 100% of their AGI (increased from 60%). For corporations, the limit increased from 10% to 25% of taxable income.

Exclusion From Income of Employer Payments of Student Loans

For 2020, employers may contribute up to $5,250 toward an employee’s student loans, and the payment will not be taxable to the employee. The cap applies to this new student-loan repayment benefit as well as other educational assistance.

No action should be taken without advice from a Withum Tax Professional because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities. Reach out to discuss your individual situation as year-end approaches.

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