COVID-19 has brought significant financial challenges to many communities and caused historic disruptions for businesses. Congress’s relief response includes provisions that run through the tax code. For both individuals and businesses, this means there are some key considerations for year-end tax planning.
Cares Act Impact on Business Taxes
The Coronavirus Aid, Relief, and Economic Security (CARES) Act accelerated the timeline created by the Tax Cuts and Jobs Act (TCJA). In turn, this repealed the Corporate Alternative Minimum Tax (AMT) and allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020, and 2021. The CARES Act allows corporations to claim all remaining AMT credits in either 2018 or 2019. This gives companies several different options to file for quick refunds, of which the fastest method for many companies will be filing a tentative refund claim on Form 1139.
Additionally, the CARES Act included a provision allowing businesses to use current losses against past income for more immediate refunds. Net operating losses (NOLs) in tax years beginning in 2018, 2019, and 2020 can be carried back five years for refunds against prior taxes.
Losses from years with lower tax rates can offset income from previous years with higher tax rates, however, carrying back NOL to a specific year may impact the application of other IRS provisions for that year. It’s important to note that this carryback provision is mandatory unless an election is made. To opt-out, a formal election statement must be filed along with a 2020 return or an amended return must be filed for previous years.
Social Security Taxes and the CARES Act
The CARES Act also allows employers to defer paying their 6.2% share of Social Security taxes for the remainder of 2020, and for self-employed individuals to defer payment of certain self-employment taxes. This applies to taxes required to be remitted between March 27, 2020, and December 31, 2020.
The deferred amount is due in two parts with the first half due by December 31, 2021, and the second half due by December 31, 2022. This can provide a liquidity benefit, but the impact on deductions should be considered. Businesses can’t deduct their share of payroll taxes until paid. Therefore, there may be some benefits for paying early to take the deduction in 2020, such as increasing an NOL for the provision benefits discussed above.
PPP Expenses and Taxes
Initially, some states ruled that expenses paid for with PPP funds are not eligible deductions. It was originally unclear whether Congress would agree, but the Consolidated Appropriations Act, 2021 put these concerns to rest and confirmed that otherwise deductible business expenses paid for with a forgiven PPP loan are deductible.
Cares Act Impact on Individual Taxes
For individuals, the CARES Act directed the IRS to issue stimulus checks of up to $1,200 per taxpayer and $500 per qualified child dependent earlier this year. These payments were paid based on 2018 or 2019 tax returns, but are structured as advances of 2020 tax credits. Because of this, the amount received may not match the amount of credit calculated on a 2020 return. If the 2020 credit calculation is less than what was received, there is no requirement to pay it back; however, if the amount received was less than the credit calculated for 2020, it can be claimed as an additional refund.
Additionally, the CARES Act offers two opportunities for charitable taxpayers in 2020. Individuals who do not itemize their charitable contributions will be allowed an “above the line” deduction of up to $300 in 2020. For those who do itemize, the CARES Act increases the limit on charitable deductions to 100% of the individual’s Adjusted Gross Income (AGI) for cash contributions made to public charities in 2020.
Individuals can also exclude up to $2 million (or $1 million if not married filing jointly) of Cancellation of Debt income from qualified principal residence indebtedness that is canceled in 2020 because of their financial condition or decline in value of the residence. Debt canceled after December 31, 2020 can still qualify, only if discharged pursuant to a written agreement entered into prior to January 1, 2021.
The CARES Act allows eligible individuals to withdraw up to $100,000 from qualified retirement plans during 2020 without incurring the standard 10% early distribution penalty. These taxable distributions can be included in gross income ratably over three years. Taxpayers may re-contribute the withdrawn amounts to a tax-qualified plan or IRA at any time within three years after the distribution, with these repayments being treated as a tax-free rollover and not subject to that year’s cap on contributions.
Calculating the CARES Act Impact on Your Taxes
As new bills begin to pass, lawmakers are still considering further stimulus and economic recovery legislation. With new information constantly coming forth, sitting down with an experienced tax attorney or CPA can keep businesses and individuals on track to take advantage of all tax-beneficial opportunities.