COVID-19 Tax Relief - Explained
Updated: Jul 26, 2022
The $2,200,000,000,000 (yes, that’s what a trillion looks like) Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law last Friday. In this post we are breaking down the specific individual and business tax provisions that were included in there.
Starting with the big one, at least if you make less than $150,000 as a married couple or $75,000 as a single taxpayer, the stimulus checks that the government is going to issue to individuals. The total is $1,200 per person ($2,400 joint) plus $500 for each qualifying child. The check starts to get smaller once your income is higher than those $150,000/$75,000 limits with the check going down by $5 for every $100 of income over the limit. The Tax Foundation provided a great chart that shows how much you can expect to get back. Note that the income the government uses to determine your eligibility is based off your most recently filed tax return. If you had a large swing (up or down) in income in 2019 when compared with 2018, filing your tax return before the checks are issued may impact how much you receive.
Changes to Retirement Plans:
The IRS is also waving the 10% early withdrawal penalty on retirement account distributions for taxpayers that need to tap into their retirement savings in order to cover COVID-19 costs. Virus-related withdraws are still subject to normal income tax but can be paid over three years instead of coming due in the year of withdraw. Plus, you can re-contribute the withdrawn money back into your retirement account within three years without regard to or impact to the usual limits on retirement plan contributions. Required minimum distributions from certain retirement plans are also waived during calendar year 2020.
Individual charitable deductions limitations are waived for 2020, allowing full write-off of all charitable donations made this year to qualified organizations. Additionally, the IRS is allowing $300 of contributions as an “above-the-line” deduction for all taxpayers in 2020.
Student Debt Payoff:
And finally, employees may receive a tax-free benefit from employers related to student loan debt. An employer may repay (and deduct for taxes) up to $5,250 of student loans paid on behalf of an employee without tax consequence to the employee.
Payroll Tax Credits:
On the business side of things, it gets more complicated. There is a significant, refundable payroll tax credit included in this bill, 50% of the first $10,000 of wages paid during the crisis. However, eligibility for this is based on the specific facts and circumstances of the business, and the calculation for employers with more than 100 full-time employees is different than employers with 100 or fewer full-time employees. Eligibility is determined based on whether your business was shut-down by COVID-19 or gross receipts dropped by more than 50% when compared to the same quarter last year. Once the business is eligible for the credit, the credit is computed based off the amount of ‘qualified wages’ paid.
For employers with 100 or fewer full-time employees, all compensation costs including health care costs are potentially ‘qualified’ for inclusion in the credit. For employers with more than 100 full-time employees, only wages paid during a shutdown when the employee is “not providing services” to the company count toward the credit. Effectively, small employers get a credit if they pay their employees anything and large employers get the credit only when they continue to pay their employees while the business is shutdown.
In addition to the refundable credit above, payments for the employer portion of certain social security taxes or self-employment taxes (6.2%) are deferred through the end of 2020. The deferred taxes need to be repaid 50% by the end of 2021 and the remaining 50% by the end of 2022.
Changes to Federal Income Tax:
The rules for carrying back Net Operating Losses (NOLs) have been retroactively amended so that any tax losses incurred in 2018, 2019, or 2020 can be carried back up to 5 years to offset income from an earlier year and recoup taxes previously paid. And the full amount of taxable income (rather than 80% under previous law) can be offset by an NOL.
The prohibition on Excess Business Losses, a new concept under the 2017 tax reform act, has been removed for 2018, 2019, and 2020. This allows the full amount of a taxable loss from a business to offset other income.
The limitation on deduction for business interest, previously 30% of Adjusted Taxable Income, has been increased to 50% for 2019 and 2020.
Qualified Improvement Property subject to depreciation has gotten the technical correction needed to allow it to be eligible for immediate write-off. This means that, going back to 2018, the cost of non-structural improvements to a building (effectively anything done to the inside of a building) can be immediately deducted and can reduce taxable income. Taxpayers may either file an amended tax return or they can file a Form 3115 with the current tax return to take advantage of this. This is a fix to what has often been referred to as the ‘retail glitch’.
And finally, the alcohol used in hand sanitizer will not be subject to federal excise tax during 2020.
This only scratches the surface of what the CARES Act has to offer. We will be reporting on other provisions that are relevant to our clients and community. Stay tuned and stay healthy.