CARES Act: A summary of tax issues
Forgiveness of CARES Act Loans: Amounts forgiven on loans made under the CARES Act loan program will not be includable in taxable income.
Recovery Rebates: Taxpayers will receive “2020 recovery rebates” of $1,200 ($2,400 for joint filers) plus $500 per child under age 17 claimed as a dependent. Payments are phased out based on 2018 or 2019 taxable income starting at $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals and are fully phased out at $198,000 (for joint filers), $146,500 (for heads of household), and $99,000 for other individuals. Nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts do not qualify for payment. Payments will either be mailed or sent via direct deposit (if information is available) by the IRS without any action needed by taxpayers.
Charitable deductions: For contributions made in cash to charitable organizations during 2020:
- Individual taxpayers claiming the standard deduction also may claim a charitable deduction of up to $300.
- Individual taxpayers who itemize may deduct the full amount of their contributions without regard to taxable income.
- Corporate taxpayers may a claim deductions up to 25% of taxable income (increased from 10%).
In addition, businesses may claim a deduction for contributions of food inventory up to 25% of taxable income (increased from 15%).
Employer payments of student loans: An employer may pay up to $5,250 towards an employee’s student loans, tuition, fees and books during 2020 at any time after the date of enactment and the employee will not have to include the amount paid in taxable income.
Payroll tax payment delay: An employer may defer payment of the 6.2% Social Security tax on employee wages that would otherwise be payable during 2020 unless the employer had loans made under the CARES Act forgiven. The amounts deferred will be due in two equal installments on December 31, 2021 and December 31, 2022. Self-employed individuals may defer payment of 25% of their self-employment taxes on income earned in 2020 until December 31, 2021 and 25% until December 31, 2022. However, an employer that obtains a loan through the Paycheck Protection Program created by the CARES Act (discussed here) and has the loan forgiven may not defer payment.
Modification of treatment of net operating losses: Taxpayers may fully utilize net operating losses (NOL’s) to offset taxable income for taxable years beginning before Jan. 1, 2021, and NOL’s arising in tax years beginning in 2018, 2019 and 2020 may be carried back five years. Taxpayers should consider amending returns for open prior tax years to take advantage of these changes and possibly obtain refunds. REIT’s and insurance companies are subject to special rules that limit the benefit of this provision.
Delay in limitation on excess business losses for non-corporate taxpayers: Implementation of the $250,000 limitation ($500,000 in the case of joint filers) on excess business losses imposed under the 2017 Tax Cuts and Jobs Act (TCJA) is now delayed until 2021.
Acceleration of corporate AMT credits: Corporations may accelerate the refund of remaining corporate AMT credits and claim them in full starting with their 2018 or 2019 taxable year.
Temporary increase in business interest limitation: For the 2019 and 2020 tax years, business may deduct interest expense up to 50% of taxable income (with adjustment). This amount drops back to 30% of taxable income in 2021.
Fix for depreciation of qualified improvement property: A technical error in the TCJA made qualified improvement property (such as tenant improvements) subject to depreciation over 39 years, which has now been changed to 15 years. This change will permit investments in qualified improvement property to qualify for accelerated bonus depreciation, meaning that taxpayers should consider amending prior year returns to fully write off investments in qualified improvement property made in those years.