April 2, 2020
Written by Mike Hirte, CPA, Managing Partner
To view and download a PDF of this commentary, click here.
No one has been immune to the impact of COVID-19. At MRA, we are available to provide you with financial guidance and support through these unprecedented times. In addition to our financial relationship, we want to be sure you know how much we value our personal relationship with each of you. Please take care of yourselves and your loved ones.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. This legislation is massive in scope and we are working with our clients to find ways each can benefit from the $2 trillion of relief it is intended to provide.
Below are the highlights from the CARES Act. For coronavirus-related guidance from the IRS, you can visit: https://www.irs.gov/coronavirus
DUE DATES FOR FILING INCOME TAX RETURNS AND MAKING INCOME TAX PAYMENTS
For individual taxpayers with a federal income tax return or payment due on April 15, 2020, the IRS has postponed the due date for both filing a return and for making income tax payments to July 15, 2020.
The postponement is automatic, so no action is required.
Payments that may be postponed are limited to federal income tax payments for a taxpayer’s 2019 taxable year and federal estimated income tax payments for a taxpayer’s 2020 taxable year that are traditionally due on April 15, 2020.
There is no limit on the amount of payment that may be postponed.
The period from April 15, 2020 to July 15, 2020 will be disregarded in the calculation of interest, penalty, or addition to tax for failure to file returns or pay taxes.
Gift tax and GST tax returns and related taxes are now eligible for the deferred filing and payment date of July 15, 2020.
A one-time tax credit is provided for 2020. Treasury Secretary Mnuchin stated that the IRS could start issuing advance payments for this credit within three weeks.
The payment will be up to $1,200 for individuals and $2,400 for couples AND $500 added for each dependent child under age 17. Dependent children age 17 or older (including full-time students) and elderly or disabled taxpayers who are dependents of another taxpayer are not eligible for either the $1,200 or $500 stimulus payment.
The benefit starts to phase out above $75,000 of adjusted gross income for individuals and $150,000 for couples, up to a threshold of $99,000 for individuals and $198,000 for joint filers.
The IRS is basing payments on 2019 tax returns (or on 2018 tax returns if the 2019 return has not yet been filed). People who typically do not file a tax return will need to file a simple tax return to receive a payment. Low-income taxpayers, senior citizens, veterans, etc. who are otherwise not required to file a return will not owe tax when the 2019 return is filed. You can file for free here: https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free
The IRS has announced that Social Security benefit recipients who are not otherwise required to file a tax return do not need to file a return to receive an Economic Impact Payment. The IRS will use the information from Form 1099-SSA and Form 1099-RRB to generate the payment.
If you have filed your 2018 or 2019 tax returns and provided the IRS with your banking information for either direct deposit or electronic withdrawal, the payment will be direct deposited. All others will receive a check.
TAX-FAVORED WITHDRAWALS FROM RETIREMENT PLANS
If a withdrawal from an IRA or eligible retirement plan is determined to be coronavirus related, the 10% early withdrawal penalty tax under IRC Sec. 72(t) is waived on withdrawals occurring on or after January 1, 2020 through December 31, 2020.
The maximum aggregate amount eligible for the waiver is $100,000.
A coronavirus-related distribution is one made by an individual who is diagnosed with COVID-19; whose spouse or dependent is diagnosed with COVID-19; who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.
The legislation also permits those individuals to pay tax on the income from the distribution ratably over a three-year period beginning in 2020.
Taxpayers can choose to repay the amount tax-free back into the plan within three years of receipt. These repayments would not be subject to the retirement plan contribution limits.
TEMPORARY WAIVER OF REQUIRED MINIMUM DISTRIBUTION RULES
This waiver omits the required minimum distribution (RMD) rules for IRAs and other individual account retirement plans for the 2020 calendar year. The waiver applies to all required minimum distributions that would have been required in 2020, including those for individuals who first attained age 70½ in 2019 and delayed taking the first RMD until up to April 1, 2020.
If an individual has already made a 2020 RMD withdrawal, the withdrawn amount can be undone if the withdrawal has occurred within the last 60 days. If the distribution is “rolled back”, it will not be taxable in 2020. You can use the 60-day rule only once in a 365-day period.
The rollback rule does not apply to a distribution made to a beneficiary from an inherited IRA nor from a deceased participant in a retirement plan.
In addition, the calculation for distributions required to be made over a five-year period that includes 2020 can disregard 2020.
LOANS FROM RETIREMENT PLANS
The CARES Act effectively doubles the qualified employer plan loan limit. The plan loan limits are now the lesser of $100,000 or 100% of the participant’s vested account balance in the plan (formerly $50,000 and 50% of vested account balance). This applies to loans secured during the 180-day period beginning March 27, 2020.
Furthermore, individuals with an outstanding loan from their plan with a loan repayment due from March 27, 2020 through December 31, 2020, can delay those payments for one year. Subsequent payments as well as interest accrued are adjusted accordingly.
INDIVIDUAL TAXPAYERS – CHARITABLE CONTRIBUTIONS
A provision to encourage donations allows a limited above-the-line deduction and a modification to the 60% of AGI limitation for cash contributions to a tax-exempt charitable organization during 2020.
The CARES Act permits an above-the-line deduction of up to $300 for cash contributions made by a taxpayer that does not itemize deductions.
The legislation suspends the 60% of AGI limitation in its entirety for qualified contributions made in 2020. The limit for 2020 is 100% of AGI. The election for this treatment is automatic but is required to be included with the 2020 return.
LIMITATION ON BUSINESS LOSSES
The recently enacted TCJA contained a provision (IRC Sec. 461(l)) for tax years beginning after December 31, 2017 that limited the deductibility of current year business losses for pass-through businesses and sole proprietorships. The limitation was $500,000 on a joint tax return and $250,000 for all other filers. A business loss in excess of these amounts was disallowed in the year in which it was incurred and was converted into an NOL that could be utilized in a future tax year. The CARES Act suspends the implementation of IRC Sec. 461(l) until tax years beginning after December 31, 2020, thus allowing non-corporate taxpayers to deduct excess business losses arising in 2018, 2019 and 2020.
U.S. SMALL BUSINESS ADMINISTRATION LOANS
In order to help small businesses and their employees, the CARES Act provides for loans to small businesses.
The U.S. Chamber of Commerce has provided an overview of the SBA loans here: https://www.uschamber.com/co/start/strategy/cares-act-small-business-guide
ECONOMIC INJURY DISASTER LOAN
If you are interested in applying or reviewing the application package click here: https://www.sba.gov/page/disaster-loan-applications
PAYCHECK PROTECTION PROGRAM LOANS
Small businesses and sole proprietorships affected by the coronavirus pandemic can apply for loans under the federal Paycheck Protection Program (PPP) beginning Friday.
Starting April 10, 2020, independent contractors and self-employed individuals can apply.
If interested in the Paycheck Protection Program Loan you should reach out to your banker now as funding is capped.
For an overview of the Paycheck Protection Program loan please click here: https://home.treasury.gov/system/files/136/PPP%20Borrower%20Information%20Fact%20Sheet.pdf
The application is located here: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
Forgiveness or cancellation of all or part of loans provided to businesses under the CARES Act (SBA loans) will not be treated as income for tax purposes.
FEDERAL RESERVE LENDING PROGRAMS
The Department of the Treasury will provide additional support to Federal Reserve lending programs including the ability to seek the implementation of a specific lending program that targets U.S. eligible businesses with between 500 and 10,000 employees. The Federal Reserve is likely to establish a Main Street Lending Program or facility that supports lending to small and midsized businesses. This is still a work in process.
PAID SICK AND FMLA LEAVE
Families First Coronavirus Response Act (FFCRA) has two tax-related provisions impacting many employers, employees, and self-employed individuals:
- EPSLA (Emergency Paid Sick Leave Act)
- EFMLEA (Emergency Family and Medical Leave Expansion Act)
Notice 2020-21 issued March 28, 2020 – EPSLA and EFMLEA applies to wages paid from April 1, 2020 and ending on December 31, 2020.
These provisions require employers (including nonprofit organizations) with less than 500 employees to provide minimum amounts of paid sick/absent leave if time off is required due to specific COVID-19 related issues. A credit is provided to cover the cost of this requirement.
EMPLOYEE RETENTION CREDIT
Employers are eligible for up to a 50% refundable payroll tax credit on qualified wages paid during the crisis. The credit is capped at $5,000 per employee.
For purposes of the credit, up to $10,000 of qualified wages per employee paid after March 12, 2020 through December 31, 2020 are taken into account. Qualified wages include health benefits.
Eligible employers (including nonprofits) include employers (1) whose trade or business activity during the calendar quarter is partially or fully suspended due to orders from an appropriate governmental authority limiting commerce due to COVID-19, or (2) who have a 50% decrease in gross receipts for the current quarter when compared to the same calendar quarter in the prior year.
Taxpayers that receive proceeds under the Paycheck Protection Program Loan are not eligible.
DELAY OF PAYMENT OF EMPLOYER PAYROLL TAXES
Employers can delay payment of the 6.2% employer portion of Social Security tax through the end of 2020. The deferral does NOT include the 1.45% employer portion of Medicare tax. The employer must pay half of the deferred tax by December 31, 2021 and the other half must be paid by December 31, 2022.
50% of the Social Security tax for self-employed persons also qualifies for the deferral.
Taxpayers that receive proceeds under the Paycheck Protection Program Loan are not eligible.
SINGLE-EMPLOYER PLAN FUNDING RULES
The CARES Act provides single employer defined-benefit plans an extended due date of January 1, 2021 for funding minimum required contributions otherwise due in 2020. Delayed contributions must be increased by interest accruing for the period between the original due date for the contribution and the actual payment date at the effective rate of interest for the plan year that includes the payment date.
POTENTIAL BENEFIT THROUGH INCOME TAX LAW CHANGES
INCREASED ABILITY TO USE BUSINESS LOSSES (NOLs)
The CARES Act allows for the carryback of net operating losses (NOLs) arising in 2018, 2019, and 2020. NOLs can be carried back to each of the five tax years preceding the taxable year of such loss. Furthermore, the former 80% offset to taxable income limitation has been removed so NOLs can now fully offset taxable income in prior years. NOLs continue to be carried forward indefinitely.
BUSINESS INTEREST DEDUCTION LIMITATIONS INCREASED
The legislation increases the amount of 2020 interest expense businesses are allowed to deduct from 30% of adjusted taxable income (ATI) to 50% of ATI. Given that many taxpayers may have significantly reduced income in 2020, taxpayers may elect to substitute 2019 ATI for 2020 ATI when making the calculation for 2020.
BONUS DEPRECIATION ON QUALIFIED IMPROVEMENT PROPERTY
The drafting error in TCJA which unintentionally resulted in “qualified improvement property” being depreciated as 39-year property and not eligible for bonus depreciation, is now corrected. “Qualified improvement property” is now classified as 15-year property under MACRS, which accelerates cost recovery and makes it eligible for bonus depreciation. Qualified improvement property generally is any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date the building was first placed in service (excluding expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building).
C-CORPORATION TAXPAYERS–INCREASED LIMIT ON CHARITABLE CONTRIBUTIONS
Modification to charitable contribution limitation for 2020 was included in the CARES Act. This provision increases the limitation on charitable contribution deductions. For corporations, the “10% of taxable income” limitation is increased to “25% of taxable income” for the 2020 tax year. Additionally, the limitation on deductions for contributions of food inventory is increased, from a 15% limitation to a 25% limitation.
MRA Associates is not engaged by this text or any accompanying website links in the rendering of legal, tax, accounting, or similar professional services. While the legal, tax and accounting issues discussed in this material have been reviewed with sources believed to be reliable, concepts discussed can be affected by changes in the law or in the interpretation of such laws since this text was printed. For that reason, the accuracy and completeness of this information and the author’s opinions based thereon cannot be guaranteed. In addition, state or local tax laws and procedural rules may have a material impact on the general discussion. As a result, the strategies suggested may not be suitable for every individual. Before taking any action, all references and citations should be checked and updated accordingly. If legal advice or other expert advice is required, the services of a competent professional should be sought.