Individual Tax Provisions Contained in the CARES Act

Individual Tax Provisions Contained in the CARES Act

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Our team is closely monitoring the developments of the COVID-19 pandemic and are working to keep you informed of the implications to you and your business. We have dedicated teams and resources to focus on all aspects of the CARES Act so that we can provide you with meaningful guidance and concise information.

PLEASE NOTE:  Virginia tax law conforms to the Federal tax law as of December 31, 2019.  As of this writing, many of the tax provisions discussed here are not allowable under Virginia law. We will need to wait for the Virginia General Assembly to pass legislation conforming Virginia tax law to these Federal tax law changes.

If you have questions about how these changes impact your unique individual or business tax situation, please contact your Keiter advisor. We are here to listen and provide sound advice.


The CARES Act: Overview of Tax Relief Provisions for Individuals

In addition to the CARES Act’s provision for individual taxpayer recovery rebates, the new law provides individual tax relief.  The following is a summary of some of the individual tax provisions contained in the CARES Act:

PENALTY FREE WITHDRAWALS FROM IRA AND RETIREMENT ACCOUNTS

Normally, a distribution from an IRA or retirement plan is subject to a 10% penalty if taken prior to age 59 ½. The CARES Act provides that the 10% penalty does not apply to any coronavirus-related qualifying distribution.

  • A “qualifying distribution” (subject to dollar limits discussed below), is one made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan made to a qualified individual.
  • A “qualified individual” is an individual (1) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (2) whose spouse or dependent is diagnosed with such virus or disease by such a test, or (3) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease.
  • The aggregate amount of distributions received by an individual which may be treated as coronavirus-related distributions for any tax year cannot not exceed $100,000.
    • The distribution can be paid back to the IRA or retirement plan at any time during the 3-year period beginning on the day after the date on which such distribution was received, in a lump sum or series of payments and avoid paying income tax on the distribution.
  • In the case of any coronavirus-related distribution, unless the taxpayer elects not to, any amount required to be included in gross income for such tax year will be so included ratably over the 3-tax year period beginning with the first tax year of the distribution.

INCREASE IN AMOUNT OF QUALIFIED PLAN LOANS

The maximum allowable employer plan loan for a “qualified individual” (as described above) is increased from $50,000 to $100,000 for loans made during the 180-day period beginning March 27, 2020. In addition, if a qualified individual has an outstanding loan from a qualified plan, the due date for any payments due during the period March 27,2020, through December 31, 2020, is extended for one year.

REQUIRED MINIMUM DISTRIBUTION (RMD) RULES WAIVED FOR 2020

  • IRA owners and retirement plan participants who turned age 70 ½ prior to and during 2019 are not required to take RMDs for 2020. These waived rules also apply to inherited IRAs and retirement plans.
  • IRA owners that turn 70 ½ after December 31, 2019 are not impacted by this change, as their RMDs do not have to start until age 72.
  • A RMD that has already been taken in 2020 can be paid back to the IRA or qualified plan and not be subject to tax or penalty for 2020, if the distribution is paid back within 60 days of the distribution.
  • Qualified IRA owners can still take advantage of the favorable direct payments to a charity during 2020

CHARITABLE CONTRIBUTION DEDUCTION CHANGES

Many charitable organizations are experiencing increasing stresses during this pandemic as well as increasing demands for their services. The CARES Act contains two key changes for individuals that want to make charitable contributions in 2020.

  1. Individuals that take the standard deduction will be allowed to take a $300 above-the-line deduction for calculating adjusted gross income (AGI) for qualifying charitable contributions made in 2020.
  2. The AGI limitation for determining the amount of the contribution deduction for qualifying contributions made in 2020 is basically increased to 100% of AGI. For 2020, the amount of the deduction for qualifying contributions is AGI minus the amount of all other contributions claimed as a deduction by the taxpayer.

A “Qualified Contribution” is a charitable contribution paid in CASH during calendar year 2020 to a qualifying 501(c)(3) organization. Contributions made to private foundations and donor advised funds are not considered qualifying contributions under the new law.

EXCLUSION FOR EMPLOYER PAYMENTS OF STUDENT LOAN DEBT

IRC section 127 provides that expenses paid by an employer for educational assistance for an employee can be excluded from the taxable income of the employee for up to $5,250 of such payments in a taxable year.

Under the CARES Act, educational assistance now includes payment by an employer during the period March 27, 2020, and before January 1, 2021, of principal or interest on an employee’s qualified higher education loan. The payments can qualify if made to the student loan lender or directly to the employee.

  • To the extent the employer pays student loan interest, the employee cannot take a deduction on their personal tax return for the amount of the interest paid.

NET OPERATING LOSS (NOL) CARRYBACK RULES CHANGED

The 2017 Tax Cuts and Jobs Act (TCJA) provided that NOLs incurred in tax years beginning after 2017 could no longer be carried back to a prior tax year of the taxpayer. Instead, NOLs had to be carried forward and could be carried forward for an unlimited period. In addition, under TCJA NOLs carried forward could only offset 80% of a taxpayer’s taxable income in the carryover year.

The CARES Act makes some important changes to these carryback and carryover rules.

  1. NOLs incurred in tax years, 2018, 2019, and 2020 may be carried back to each of the five preceding taxable years.
  2. NOLs incurred in 2018, 2019, and 2020 when carried back or carried over may offset 100% of the taxable income for the carryback/carryover year.

Many taxpayers may have incurred NOLs in 2018 and 2019 expecting to have to carryover the NOLs under the TCJA Rules. Those taxpayers now need to consider if they want to carryback those NOLs to a preceding tax year and claim refunds from the NOL carryback.  The IRS and Treasury Department need to provide guidance to taxpayers as whether they can use Form 1045 to carryback the NOL or does the carryback claim have to be made on an amended individual tax return for the carryback year.

The NOL rules that were in place prior to TCJA mandated that an NOL had to be carried back unless the taxpayer made an irrevocable election in the tax return in the tax return for the year of the NOL to forgo the carryback. A taxpayer that incurred an NOL in 2018 and 2019 that does not wish to carryback those NOLs now must make that same election. That election must now be made by the due date, including extensions, for the taxpayer’s tax return for the first taxable year ending after March 27, 2020.  The IRS needs to issue guidance as to how a taxpayer makes that election.

BUSINESS TAX CHANGES THAT WILL IMPACT INDIVIDUAL TAX RETURNS FOR 2018, 2019, AND 2020

The CARES Act contains a number of business tax changes that will impact individual tax returns for sole proprietors, members of partnerships and shareholders of S corporations. Among those changes are the following:

  • Temporary removal of the $500,000/$250,000 limitation on deducting excess business losses. Taxpayers who had losses limited under these provisions for 2018 and 2019 should consider whether to amend their 2018 or 2019 tax returns and claim the full amount of the business losses.
  • The excess business interest deduction, currently 30% of the adjusted taxable income of the business or businesses, is increased to 50% of adjusted taxable income of the business.
  • Qualified Improvement Property (QIP) qualifies for 15-year depreciable life and 100% first year bonus deprecation under IRC section 168(k) retroactive for property placed in service after 2017. QIP is property or improvements made to the interior portion of a commercial building if the improvement is placed in service after the building was first placed in service. Taxpayers need guidance from the IRS as to how to claim the deduction for the additional depreciation allowed for QIP placed in service in 2018 and 2019.

We are closely monitoring this evolving and unique economic situation. We will keep you updated and informed on how to respond to these and additional tax and regulation changes as they are announced.

Question on the CARES Act provisions? We can help. Contact your Keiter representativeEmail | 804.747.0000

Additional Resources:

COVID-19 Business Resource Library


About the Author

Keiter CPAs is a certified public accounting firm serving the audittax, accounting and consulting needs of businesses and their owners located in Richmond and across Virginia. We focus on serving emerging growth businesses and companies in the financial servicesconstructionreal estatemanufacturingretail & distribution industries and nonprofits. We also provide business valuations and forensic accounting servicesfamily office services, and inbound international services.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

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