Howard, LLP

CARES Act: Provisions Summary

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Friends and Clients!

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), Congress’s substantial stimulus package, was signed into law on March 27, 2020.  We highlighted the Paycheck Protection Program in last week’s News update (howard-cpas.com/news/cares-act-paycheck-protection-program).  Below is a brief summary of the other provisions in the CARES Act that we believe will be of the most interest to our clients.

Individual Provisions

  • 10% Early Distribution Penalty:
    • The additional 10% tax on early distributions from IRA’s and other eligible retirement plans is waived for distributions made in calendar year 2020 by a qualified individual.
    • A qualified individual is a person who (or whose family) is infected with COVID-19, or who is economically harmed by the COVID-19.
    • Penalty-free distributions are limited to $100,000.
    • The distributions may be re-contributed to the plan or IRA within 3 years of receiving the distribution, or may be included in income ratably over the 3-year period, starting in the year of the distribution.
  • Required Minimum Distributions (RMD):
    • RMD for 2020 from are waived.
    • This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned 70 ½ years old in 2019.
    • In addition, if 5-year rule applies after owner’s dead, year 2020 does not count in determining end of 5-year deadline.
  • Charitable Contributions:
    • Individuals who do not elect to itemize deductions can deduct $300 for cash contributions made generally to public charities in calculating gross income (above-the-line deduction).
    • For those that do itemize, the limitation on qualified charitable contributions, generally 60% of modified adjusted gross income, will not apply, so that the contribution base is 100% of modified adjusted gross income.
    • Contributions to private foundations, supporting organizations or donor advised funds are not qualified charitable contributions.

Business Provisions

  • Employee Retention Credit:
    • This is a fully refundable tax credit for employers equal to 50% of qualified wages that Eligible Employers pay their employees.
    • The credit applies to wages paid after March 12, 2020 and before January 1, 2021. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of government limiting commerce, travel, or group meetings.
    • The credit is also available to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
    • The credit is not available to employers receiving Small Business Interruption Loans.
    • The maximum amount of qualified wages considered with respect to each employee is the first $10,000 of eligible wages, so that the credit is a maximum of $5,000 per employee.
    • For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether the employee is furloughed.
    • For employers with an average of more than 100 full-time employees, only wages of employees who are furloughed or had reduced hours as a result of their employer’s closure or reduced gross receipts are eligible for the credit.
  • Employer Payroll Taxes:
    • Taxpayers can defer paying the employer portion of certain payroll taxes through the end of 2020.
    • The deferred amounts will be due in two equal installments, one at the end of 2021, and the other at the end of 2022.
    • Taxes that can be deferred include the 6.2% employer portion of the Social Security payroll tax.
    • For self-employed individuals, the deferral applies to 50% of the self-employment tax.
  • Net Operating Loss (NOL):
    • For NOL’s arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior 5 years.
    • For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit).
    • For tax years beginning after 2021, taxpayers will be eligible for (1) a 100% deduction of NOL’s arising in tax years before 2018, and (2) a deduction limited to 80% of taxable income for NOL’s arising in tax years after 2017.
  • Losses for Noncorporate Taxpayers: The CARES Act repeals the excess business loss limitation under Sec. 461(l) for tax years beginning before January 1, 2021.
  • Corporate Minimum Tax Credit: The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully refundable and provides an election to accelerate the refund to 2018.
  • Interest Expense:
    • Under the CARES Act, taxpayers would be able to deduct interest expense up to 50% (formerly 30%) of adjusted taxable income (ATI) for 2019 and 2020.
    • Taxpayers can elect to use their 2019 ATI in calculating the 2020 limitation.
    • They may also elect out of 50% increased limitation, but once made the election can be revoked only with IRS consent.
    • For partnerships, the 30% of ATI limit remains in place, but is 50% for 2020.
    • Unless a partner elects otherwise, 50% of excess business interest will be treated as paid or accrued by the partner in its first tax year beginning in 2020 and will not be subject to any limits. The other 50% will be subject to the ATI limitations.
  • Charitable Contributions:
    • The CARES Act increased the limitations on deductions for corporations who make qualified cash contributions in 2020 from 10% of taxable income to 25% of taxable income.
    • For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income.
  • Qualified Improvement Property:
    • The CARES Act makes a technical correction the 2017 TCJA, and specifically designates qualifies improvement property (QIP) as 15-year MACRS property and 20-year for Alternative Depreciation System (ADS).

Ongoing information on the IRS and tax legislation response to COVID-19 can be found at www.irs.gov/coronavirus.

Please contact our office if you have any questions about the above information or any other matter, related to COVID-19 or not.