The Senate has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the third phase of the government’s response to the impact of the Coronavirus. It is estimated that this package will exceed $2 trillion in cost, the largest relief package yet, dwarfing President Obama’s 2008 financial crisis stimulus package of $800 billion. The House is scheduled to bring the Act to vote on Friday March 27, 2020, and President Trump has indicated his support of the Act.
The Act contains many provisions including small business loans, help for distressed sectors, health provisions, and tax provisions. Below is a summary of the tax related provisions of the CARES Act.
Generally, subject to limitations, the CARES Act will provide an advanced payment to individuals of not more than $1,200 ($2,400 for joint filers) increased by $500 for each child under the age of 17. The advanced payment will be reduced for individuals with 2018 adjusted gross income (AGI) greater than $75,000 ($150,000 for joint filers, $112,500 for head of household). The reduction will be 5% of the amount that the taxpayer’s AGI exceeds the aforementioned thresholds. Therefore, a single taxpayer with no children would not receive an advanced payment if their AGI exceeded $99,000 (calculated – 1,200-5%*(99,0000-75,000)). Likewise, joint filers with no children would receive no credit if their AGI exceeded $198,000. Amongst other limitations, individuals that are non-resident or are claimed as a dependent will not be eligible for the advance payment. The advance payments will be coordinated with a credit on the individual’s 2020 return for true-up of the actual amount due to the individual based on their 2020 adjusted gross income.
The Act will increase the ability for many individuals to deduct a portion of their charitable contributions:
- Beginning in 2020, individuals that do not itemize and instead use the standard deduction, will be allowed to deduct up to $300 of qualified cash charitable contributions.
- Temporarily suspends the deductibility limitations based on adjusted gross income for qualified cash charitable contributions made during 2020. In essence, if all of an individual’s contributions are qualifying they will be able to deduct the full amount of these contributions up to their adjusted gross income.
The Act provides relief for individuals that must use funds from their retirement fund; that is a coronavirus related distribution.
- Exempts coronavirus related distributions of up to $100,000 from the 10% early distribution penalty.
- The distribution will be taxable, but will be taxable over a 3-year period. In addition, the individual has an opportunity to repay the distributions within a 3-year period, beginning on the day after the distribution, to avoid taxability of the distribution.
- A coronavirus distribution is a distribution from an eligible retirement plan on or after January 31, 2020 and before December 31, 2020 to an individual:
o Who has been diagnosed with SARS-CoV-2 or COVID-19
o Whose spouse or dependent is diagnosed
o Who experiences adverse financial difficulty as a result of being quarantined, furloughed, laid off or a reduction in hours due to the virus, unable to work due to lack of child care due to the virus, or the closing or reduction of hours of a business owned or operated by the individual due to the virus
- Increases the amount an individual may borrow from a plan, within 180-days of enactment of the Act, from $50,000 to $100,000
- Delays the repayment of plan loans due between date of enactment and December 31, 2020 by one year, with a corresponding adjustment to subsequent repayments.
- Waives the requirement to take a required minimum distribution for 2020
The Tax Cuts and Jobs Act (TCJA), passed at the end of 2017, limited the amount of net business losses an individual could deduct against other types of income to $250,000 ($500,000 for a joint return) for years 2018 through 2025. CARES modifies the effective date of the loss imitation provisions to 2021 through 2025. This will allow individuals with otherwise allowable business losses to fully deduct the losses against all income for taxable years 2018, 2019 and 2020. This may also create a net operating loss that may be carried back as discussed below in the business provisions.