CARES Act Tax Relief
Congress Passes $2.2 Trillion Bill to Support Economy During Virus Pandemic, President Trump signs into law on Friday, March 27, 2020.
As COVID-19 continues to upend nearly every aspect of life in the United States, Congress has been working to relieve suffering Americans. Having passed the Families First Coronavirus Response Act on March 18 in an effort to limit the spread of the pandemic and support relief efforts, Congress turned to stabilizing the economy. After days of furious negotiations between Republicans and Democrats on the Hill and Trump Administration officials, the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. With a $2.2 trillion price tag, the bill is the most expensive piece of legislation ever passed.
The CARES Act looks to make a significant impact on the economy by providing loan forgiveness, supporting small businesses, enhancing unemployment insurance, and providing federal loans to industries severely impacted by the pandemic. In addition, it provides tax relief and tax incentives for individuals and businesses alike. The majority of the tax relief is designed to increase liquidity in the economy, largely through the relaxation of limitations on business deductions and the deferral of taxes, but also with the introduction of recovery rebates for individuals.
INDIVIDUAL TAX RELIEF
The most well-publicized provision is the $1,200 recovery rebates for individual taxpayers. The rebate amounts are advance refunds of credits against 2020 taxes, and equal to $1,200 for individuals, or $2,400 for joint filers, with a $500 credit for each child. The amount of each rebate is phased out by $5 for every $100 in excess of a threshold amount. This threshold amount is based upon 2018 adjusted gross income (unless a 2019 return has already been filed), and the phaseout begins at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. Thus, the rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of household with $136,500, and joint filers with $198,000.
In order to be eligible for a recovery rebate, the individual must not be: (1) a nonresident alien, (2) able to be claimed as a dependent on another taxpayer's return, (3) an estate or trust, and (4) must have included a Social Security number for both the taxpayer, the taxpayer's spouse, and eligible children (or an adoption taxpayer identification number, where appropriate). The bill includes additional rules for the application of the credit.
The Secretary of the Treasury is directed to provide the rebate as rapidly as possible. It has been suggested that taxpayers who use direct deposit will receive their recovery rebate by direct deposit also, and others by check.
An important provision to understand is that the recovery rebates will use 2019 tax returns (2018 if the taxpayer has not filed in 2019) to determine the advanced rebate amount and reconcile the rebate based on 2020 income. This means that taxpayers who receive a smaller rebate than they are eligible for based on 2020 income will receive the difference after filing a 2020 tax return, but overpayments of rebates due to a higher income in 2020 will not be clawed back.
The bill also waives the 10-percent penalty on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions. For purposes of the penalty waiver, a coronavirus-related distribution is one made during the 2020 calendar year, to an individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus. Any income attributable to an early withdrawal is subject to tax over a three-year period, and taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years.
The bill also waives all required minimum distributions for 2020, regardless of whether the taxpayer has been impacted by the pandemic.
The bill enhances tax incentives for making charitable contributions for the 2020 tax year. First, it allows an above-the-line deduction of up to $300 for charitable contributions made by individuals. This allows an individual to claim a deduction for a charitable contribution, even if the individual does not itemize deductions.
Additionally, the percent-of-adjusted gross income (AGI) limitations are increased for all taxpayers as well as for specific types of contributions. For the 2020 tax year, individuals can claim an unlimited itemized deduction for a charitable contribution, which is normally limited to 50 percent of AGI. In the case of corporations, the usual 10-percent-of-AGI limitation is increased to 25 percent for the 2020 tax year. Finally, the contribution of food inventory, the deduction for which is normally limited to 15 percent of AGI, is increased to 25 percent for the 2020 tax year.
BUSINESS TAX RELIEF
There are also many provisions for business tax relief included in the CARES Act, including employee retention credits, payroll tax deferral, net operating losses, and more.
If you have any questions on how these provisions impact you or your business, please contact my office for a consultation.