The Coronavirus Aid, Relief and Economic Security Act (CARES Act) that was enacted on March 27, 2020 included the following tax related provisions that will affect the following tax years for federal returns:
Tax Years 2018, 2019 and 2020
Qualified Improvement Property – Technical Amendment
Allows qualified improvement property to be depreciated over 15 years and be eligible for bonus depreciation. This is a retroactive change which means that taxpayers can amend their 2018 and 2019 returns for eligible qualified improvement property.
Net Operating Loss Changes
- Net operating losses that occur in 2018, 2019 or 2020 can be carried back 5 years
- These NOLs can fully offset income in the prior years
- Applicable to individuals and corporations
- Temporarily suspends the loss limitation of $250,000 ($500,000 for joint filers) for non-corporate taxpayers for losses arising in 2018, 2019 and 2020.
Tax Years 2019 and 2020
Business Interest Limitation Changes
For 2019 and 2020 the interest expense that businesses are allowed to deduct is increased to 50% of taxable income.
Tax Year 2020:
Economic Impact Credit
The Economic Impact payments that most taxpayers will or have received during 2020 is really an advance of the Economic Impact refundable credit which will be part of the federal 2020 federal return. This means there will be a new refundable credit form that all taxpayers will have to include with their 2020 federal return. The credit will be calculated based on income information on the 2020 federal return.
For the vast majority of taxpayers this credit will calculated as zero since they already received the advance of the credit during 2020. This credit will be calculated based on their 2020 income filing status and number of children under 17 that are reported on their return. The amount of the credit will be reconciled with the payment they received in 2020.
For those taxpayers who did not receive an economic impact payment, they will receive a refundable credit on their 2020 federal return.
For those who might have received a lesser economic impact payment because of the AGI limitation they may receive a refundable credit if their 2020 AGI is lower than it was in 2019.
Retirement Distributions Related to COVID-19
- For qualified COVID-19 distributions, an individual can withdrawal funds (up to $100,000) from a retirement account free of the 10 percent early withdrawal penalty and can spread the taxable portion on that distribution over a three year period.
- Any qualified COVID-19 withdrawal will not be taxable if it is recontributed within three years of the date of distribution.
- Increases the maximum loan amount for COVID-19 purposes to $100,000.
There are two provisions for individuals for charitable contributions as follows:
- Above the Line Charitable Contribution Deduction
Taxpayers can take up $300 as an adjustment to income beginning in 2020
- Modification of limitation on charitable contributions for 2020
The 50 percent of AGI limitation is suspended for 2020
- Allows corporations to take a charitable contribution of up to 25% of their taxable income for tax year 2020
Employee Retention Credit
Legislation provides eligible employers a refundable payroll tax credit equal to 50% of qualified wages paid to employees. Eligible employers must have carrying on a trade or business in calendar year 2020 whose:
- Operations were fully or partially suspended due to the COVID 19 crisis
- Gross receipts declined by more than 50% compared to the same quarter in the prior year
For employers with greater than 100 full-time employees, qualified wages are wages paid to employees (between March 12, 2020 and December 31, 2020) when they are not providing services due to COVID-19 circumstances.
For employers with 100 or fewer full time employees, all employee wages qualify for the credit.
The credit is capped at the first $10,000 of compensation, including health benefits, paid to the employee. The credit is refundable to extent it exceeds the employer portion of social security taxes reduced by paid sick leave and paid extended FMLA established by the Families First Coronavirus Response Act.
Eligibility for the credit begins in the first in which the employer’s gross receipts declined by greater than 50% of the corresponding calendar quarter of the prior year, and ends with the quarter following the calendar quarter in which the gross receipts excess 80% or corresponding calendar quarter in the prior year.
For more information see the FAQs: Employee Retention Credit page on the IRS website.
For more information on the CARES Act see the following:
- Description of the Tax Provisions of Public Law 116-136 document on the Joint Committee on Taxation website.