CARES Act Benefits for Individuals and Businesses due to COVID-19

On Friday March 27th The House passed the Cares Act which was signed into law by President Trump shortly after. The $2.2 trillion dollar relief package can be described as a first aid kit for taxpayers. It’s got a little bit of everything in it for everyone and everyone should be thinking how they can take advantage of this bill.

CARES Act Benefits for Individuals

Starting with tax benefits of individuals, the CARES Act provides several benefits that all taxpayers should consider:

Recovery Rebates

This has been a hot topic in the news because it sends money directly to individual taxpayers. Who have filed in the past. I am not going to get into the specifics in this article since it has been pretty well covered by most news outlets (You can calculate your refund here). I would like to point out a few things to consider. First, the rebates are going to initially be based on your 2019 taxes (2018 if 2019 hasn’t been filed) and your 2020 tax return will be used to essentially true up what taxpayers should have received based on 2020 income. In other words, depending on your 2020 income, the IRS may try to claw back some of the stimulus payment you receive now or issue additional funds based on what you should have received.

There are several things to consider here. First, if you 2018 income was higher than you 2019 income taxpayers will want to try and get their 2019 tax return filed as soon as possible. Alternatively, if you 2019 income was higher than your 2018 income than you may want to wait to file until after the money has been deposited into your account. Please note that those who do not qualify for the rebate credit based on 2018 and 2019 income will be able to claim the credit on thier 2020 tax return if they become eligible in 2020. The IRS will not require taxpayers to payback a rebate credit if their 2020 income exceeds the phaseout thresholds.

Partial above the line deduction for charitable contributions

In an effort to promote contributions to non profit organizations affected by COVID-19, the CARES Act offers taxpayers an above the line deduction (Pre AGI) of cash contributions to charitable organizations up to $300. This is beneficial to most taxpayers who have seen the benefit of their contributions eliminated by the Tax Cuts and Jobs Act which essentially eliminated itemized deductions for many Americans.

Retroactive allowance of limited business losses on an individuals tax return

Taxpayers who had business losses limited under section 461(l) can now retroactively deduct those losses for tax years 2018 and 2019 by filing an amended return.

Penalty Free Early Access to Retirement Plan Funds

The CARES Act waives the 10% early withdrawal penalty from distributions from employer sponsored retirement plans and IRA’s on distributions made in 2020 for individuals affected by the Coronavirus. Furthermore, individuals qualifying for the 10% waiver may also include the amount in income ratably over a three year period thereby deferring ⅔ of the tax due to 2021 and 2022 tax years.

Inclusion of certain over-the-counter medical products as qualified medical expenses

The CARES Act includes amendments to allow for menstrual products to meet the definition of qualified medical expenses for a wider range of tax favored health plans including HSA, FSA, and Archer Medical Savings Accounts. The amendment applies to amounts paid after December 31, 2019.

Next, we will discuss the benefits that the CARES Act provides businesses.

CARES Act Benefits for Businesses

Modification of Net Operating Losses

The TCJA had previously disallowed the carryback of business losses incurred after December 31, 2017 and provided that those losses could only be carried forward to be utilized in future years. Furthermore, those losses would be limited to 80% of taxable income. The Cares act repeals the 80% limitation to tax years beginning before January 1, 2021. Additionally, businesses are now allowed to carryback NOL’s generated in 2018, 2019, 2020 up to 5 years. This is a major win for small businesses who can now carryback losses to tax years with potentially much higher income .

Technical Amendment Regarding Qualified Improvement Property

The TCJA inadvertently treated improvements made to the interior portion of a nonresidential property as 39 year property and thereby disallowing those expenditures from bonus depreciation. The CARES Act corrects this technical error by including Qualified Improvement Property as 15 year property and thereby making it eligible for 100% bonus depreciation. Returns can be amended for businesses who previously were forced to include Qualified Improvement Property as 39 year property for 2018 and 2019 tax years.

Employee Retention Credit

This credit applies to certain employers who were forced to close due to CoronaVirus and continued to pay employees their wages during the period of closure. The credit is the lesser of 50% of the eligible wages per employee or $10,000. The credit is allowable against the tax imposed on an employer under section 3111(a) (6.2% FICA tax). This credit is for eligible employers who were forced to close due to government regulations imposed to limit the spread of the Coronavirus or those businesses who suffered a significant decline in business of at least 50%.

Delay in deposit of employer payroll taxes

The CARES Act provides for a delay in the required deposit of employer payroll taxes typically applicable under section 3111(a) of the IRC. For self employed individuals, the taxpayer may delay half of the self employment tax liability. All delayed amounts are due in two equal installments on December 31, 2021 and December 31, 2022.

Advanced refunds of credits for Paid Sick Leave and Paid Family Leave incurred under the Families First Act

The CARES Act provides that the tax credits for the paid sick leave and paid family leave me be advanced to an employer. Forms and instructions of how to request this credit will be made available to employers. SmartBooks recommends that employers consult legal counsel in navigating the Paid Sick and Paid Leave as a result of the Families First Act.

Extension of plan funding deadlines

Employers who sponsor qualified defined benefit pensions who have a minimum funding obligation and must make the payment within 8 ½ months of year end are now allowed to defer that contribution to a date after January 1, 2021. This relaxed due date applies to both annual contributions and quarterly contributions due in 2020.

Extension of Certain Employer Payments of Student Loans

The CARES Act amends section 127 to allow payment made before January 1, 2021 for student loans to be treated as educational assistance. An employer may provide educational assistance to employees on a tax free basis up to a maximum exclusion amount of $5250 annually. This amount can also be excluded from gross income of the employer.

Need Expert Tax Guidance?

For businesses or individuals who think they may qualify or can take advantage of any of the above incentives provided by the Stimulus act, SmartBooks suggests a consultative phone call to ensure compliance is met for each incentive taken. You can book a meeting with our Head of Tax, here.