CARES Act provides COVID-19 pandemic relief to businesses

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) represents the third phase of Congress’s legislative efforts to address the financial and health care crisis resulting from the coronavirus (COVID-19) pandemic. In addition to providing relief to individuals and mustering forces to shore up the medical response, the CARES Act includes numerous provisions intended to help affected businesses, including eligible self-employed individuals, weather the crisis.

Employee retention tax credit

To encourage employers to keep their workforces intact, the CARES Act creates a new refundable credit against payroll tax. The credit is generally available to employers whose:

• Operations have been fully or partially suspended due to a COVID-19-related governmental shutdown order, or

• Gross receipts have dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter).

Employers with more than 100 employees can receive the credit for employees who’ve been furloughed or who’ve had their hours reduced due to one of the reasons above. Those with 100 or fewer employees can receive the credit regardless of whether employees have been furloughed.

The credit equals 50% of up to $10,000 in compensation — including health care benefits — paid to an eligible employee from March 13, 2020, through December 31, 2020. Additional rules and limits apply.

Payroll tax deferral

The new law allows employers to delay their payment of the employer share (6.2% of wages) of the Social Security payroll tax. These taxpayers can pay the tax over the next two years, with the first half due by December 31, 2021, and the second half due by December 31, 2022.

Self-employed individuals receive similar relief under the law.

Relaxed restrictions on losses

Before the Tax Cuts and Jobs Act (TCJA), taxpayers could carry back net operating losses (NOLs) two years, and carry forward the losses 20 years, to offset taxable income. The TCJA limited the NOL deduction to 80% of taxable income for the year, eliminated the carryback of NOLs and removed the time limit on carryforwards.

The CARES Act loosens the TCJA restrictions. It allows NOLs arising in 2018, 2019 or 2020 to be carried back five years and temporarily removes the taxable income limitation for years beginning before 2021, so that NOLs can fully offset income.

The new law also amends the TCJA to temporarily eliminate the limitation on excess business losses for pass-through entities and sole proprietors. These taxpayers can now deduct excess business losses arising in 2018, 2019 and 2020.

Taxpayers may need to file amended tax returns to obtain the full benefits of these changes.

Modified limitation on business interest deductions

For tax years beginning after 2017, the TCJA amended the Internal Revenue Code to limit the deduction for business interest incurred by both corporate and noncorporate taxpayers. It generally limits the deduction to 30% of the taxpayer’s adjusted taxable income (ATI) for the year.

The CARES Act allows businesses to deduct up to 50% of their ATI for the 2019 and 2020 tax years. (Special partnership rules apply for 2019.) It also permits businesses to elect to use 2019 ATI, rather than ATI in 2020, for the calculation, which will increase the amount of the deduction for many businesses.

Expedited depreciation of qualified improvement property

Prior to the TCJA, qualified retail improvement property, restaurant property and leasehold improvement property were depreciated over 15 years under the modified accelerated cost recovery system (MACRS). The TCJA classifies all of these property types as qualified improvement property (QIP).

The legislative history of the TCJA is clear that Congress intended QIP placed in service after 2017 to have a 15-year MACRS recovery period and, in turn, qualify for 100% bonus depreciation through 2023, when the allowable deduction will begin to phase out. But, in what’s been called “the retail glitch,” the statutory language didn’t define QIP as 15-year property, so QIP defaulted to a 39-year recovery period, making it ineligible for bonus depreciation.

The CARES Act includes a technical correction to fix this drafting error. Hotels, restaurants and retailers that have made qualified improvements during the past two years can claim an immediate tax refund for the bonus depreciation they missed. They also can claim bonus depreciation going forward, according to the phaseout schedule.

Expanded SBA assistance for small businesses

The CARES Act expands the ways the Small Business Administration (SBA) can help small businesses remain open and meet payroll. For example, it temporarily doubles the maximum loan amount under its primary low-interest loan program from $5 million to $10 million (or 2.5 times the average total monthly payroll costs for the prior year, whichever is less).

The law expands the allowable use of the so-called “Section 7(a)” funds to include payroll support, including paid leave, mortgage payments, insurance premiums and debt obligations, and waives many of the usual requirements, such as collateral and personal guarantees. Moreover, if employers maintain their payrolls for eight weeks after the loan origination, the portion of the loan applied to payroll, mortgage interest, rent and utilities will be forgiven.

To qualify, businesses generally must have 500 or fewer employees and have been operational on February 15, 2020. Sole proprietors, independent contractors and other self-employed individuals may qualify.

Amendments to the new paid leave law

The CARES Act also makes some critical modifications to the Families First Coronavirus Response Act, which was signed into law on March 18. That law temporarily requires certain employers to provide expanded paid sick and family leave for certain employees affected by COVID-19.

The CARES Act provides a new rule that defines “eligible employee” for purposes of paid sick and family leave to include employees who:

• Were laid off by the employer March 1, 2020, or later,

• Had worked for the employer for at least 30 days in the 60 calendar days prior to the layoff, and

• Have been rehired by the employer.

And the CARES Act allows advances on anticipated tax credits for employers’ paid leave costs and provides penalty relief for employers that don’t deposit tax amounts because they expect credits.

More to come?

Several members of Congress have suggested that the CARES Act won’t be the end of the federal legislative relief in response to the COVID-19 pandemic. We’ll keep you informed of new developments that could affect your bottom line and help you navigate the best financial course forward during these uncertain times.

The IRS announces that income tax payments due April 15 can be deferred to July 15, regardless of the amount

The IRS and the U.S. Treasury Department have been making a series of announcements to provide tax relief in the wake of the coronavirus (COVID-19) pandemic. After previously announcing that taxpayers could defer making federal income tax payments up to certain limits for three months, the IRS has now announced that taxpayers can postpone payments without penalties or interest “regardless of the amount.”

Filing and payment extension

According to new Notice 2020-18, any person with a federal income tax return or payment due on April 15, 2020, has until July 15, 2020, to file a return or make a payment. Specifically, a “person” includes an individual taxpayer, trust, estate, partnership, association, company or corporation. Taxpayers can defer payment of federal income tax (including any self-employment tax) owed for the 2019 tax year from the normal April 15 deadline until July 15. They can also defer their initial quarterly estimated federal income tax payments for the 2020 tax year (including any self-employment tax) from the normal April 15 deadline until July 15.

Previously, the IRS had issued guidance (in Notice 2020-17) stating that corporations could postpone tax payments up to $10 million and all other taxpayers could postpone payments up to $1 million without penalties or interest. In Notice 2020-18, the IRS now states: “There is no limitation on the amount of the payment that may be postponed.”

Normally, when you file an extension, you must still make a good-faith estimate of your tax liability and, by the normal filing deadline, pay the full amount estimated to be due. The relief in Notice 2020-18 is an exception to the general rule.

Taxpayers don’t need to file any additional forms to qualify for this automatic federal tax filing and payment relief. But, if you’re due a refund, you probably still want to file your income tax return as soon as possible so you can receive your money. The IRS stated that “most tax refunds are still being issued within 21 days.”

We’re here to help

Individual states are also announcing state tax relief measures for their residents. Contact us to learn more about the federal and state tax relief opportunities that are available. We can answer all of your tax filing and payment questions.

House passes bill to provide coronavirus relief; Senate expected to act this week

Several arms of the federal government have taken, or are weighing, significant steps to help the country deal with the spread of the coronavirus (COVID-19) and the implications for individuals and businesses. On March 14, the U.S. House of Representatives overwhelmingly passed a bipartisan 110-page bill that has received support from President Trump and, as of this writing, is expected to be taken up by the Senate this week. The Families First Coronavirus Response Act includes a wide range of provisions, including some addressing insurance coverage and reimbursement of diagnostic testing costs and others expanding safeguards for economically disadvantaged individuals. It also includes two significant groups of measures that will affect certain employers and workers through December 31, 2020.

Expanded family and medical leave

The act amends the Family and Medical Leave Act (FMLA) for employees who 1) work for employers with fewer than 500 employees, and 2) have been on the job at least 30 days. Under the bill, these employees (including those who work under a multiemployer collective agreement and whose employers pay into a multiemployer plan) will have the right to take up to 12 weeks of job-protected leave to: Comply with a requirement or recommendation to quarantine due to exposure or symptoms of COVID-19, Care for an at-risk family member who’s quarantined due to exposure or symptoms of COVID-19, and Care for their children if the children’s school or place of care has been closed, or the childcare provider is unavailable, because of COVID-19.Although the FMLA generally requires only job-protected leave — not paid leave — the bill mandates paid leave after 14 days at two-thirds of the employee’s usual rate. (The first 14 days are covered under the paid sick leave provisions discussed below).Note, though, that the bill gives the U.S. Secretary of Labor the power to issue regulations that exempt small businesses with fewer than 50 employees from this expansion if it would jeopardize the viability of the business. Because of this potential exemption and the fact that these provisions don’t apply to employers with 500 or more employees, many American workers won’t be protected by them. The act will help employers subject to the provisions by allowing them to take a tax credit against their share of Social Security taxes for 100% of the qualified family leave wages they pay each quarter. The amount of wages taken into account for each employee is capped at $200 per day and $10,000 for all calendar quarters. Any excess credit over its Social Security tax liability is refundable to the employer. No deduction is allowed for the amount of the credit, and no credit is allowed for wages that are subject to the existing Section 45S business tax credit for paid family and medical leave. Employers can elect to not have the credit apply. The 100% refundable family leave credit also is available for certain self-employed individuals, applicable against income taxes. Self-employed people who would be entitled to paid leave under the expanded FMLA if they were employees of a business are eligible. The qualified leave amount is capped at the lesser of $200 per day or the average daily self-employment income for the taxable year per day. These individuals can count only those days they’re unable to work for reasons covered by the expanded FMLA. The Treasury Department will establish documentation requirements.

Paid sick leave

The act requires employers with fewer than 500 employees to provide two weeks of paid sick leave, at the employee’s regular rate, to quarantine or seek a diagnosis or preventive care for COVID-19. If the employee must take leave to care for a family member for such purposes, or to care for a child whose school has closed or childcare provider isn’t available, these employees must provide leave paid at two-thirds of the employee’s regular rate. Full-time employees are entitled to 80 hours of paid sick leave, and part-time employees are entitled to the typical number of hours that they work in a typical two-week period. As with expanded family leave, covered employers can claim an elective refundable 100% tax credit for qualified paid sick leave wages, also against Social Security taxes. But the bill makes a distinction between those wages paid for employee who must self-isolate or obtain a diagnosis and those paid for to employees caring for a family member or child. For the former, the amount of wages taken into account per employee is capped at $511 per day; for the latter, it’s capped at $200 per day. The total number of days taken into account per employee can’t exceed the excess of 10 over the total number of days taken into account for all preceding calendar quarters. Again, any excess credit over their Social Security tax liability is refundable, no deduction is allowed for the amount of the credit and no credit is allowed for wages that are subject to the Section 45S business tax credit. The self-employed are similarly eligible for the refundable credit at differing amounts — 100% for their personal needs and 67% to care for a family member or child. The amount of wages is capped at $511 per day or the average daily self-employment income for the taxable year per day.

Extended tax filing deadline

The U.S. Department of Treasury has announced an extension on the traditional April 15 federal income tax return filing deadline for certain individuals and small businesses. Not only will eligible taxpayers be permitted to file their returns later, they also need not worry about incurring penalties or interest if they don’t pay by the April 15 deadline. According to Treasury Secretary Steven Mnuchin, “virtually all Americans, other than the super rich,” can take advantage of the delay. Taxpayers already generally can obtain extensions that push out their filing deadlines six months. But without the relief, those taxpayers still are required to pay any tax liability by the April deadline. That liability incurs penalties and interest until paid. At this writing, we don’t have information about when the new filing deadline will be.

Other relief 

Some states have announced tax relief related to COVID-19. Check with us for more information. On March 13 as part of the national emergency declaration, President Trump waived interest payments on federal student loans “until further notice.” This allows borrowers to pause their payments without penalty. It remains to be seen whether any relief will be provided regarding the quarterly estimated tax payments made by businesses and self-employed individuals. And, as of this writing, no further information, such as the new deadline, has been provided. An extension isn’t included in the Families First Coronavirus Response Act.

HDHP coverage

The IRS has published new guidance making clear that high-deductible health plans (HDHPs) can pay for COVID-19-related testing and treatment without putting their status at risk. That means individuals with HDHPs that provide such coverage can continue to contribute to their health savings accounts (HSAs) and deduct the contributions on their 2020 tax returns (or make pre-tax contributions their employer-sponsored HSAs).Health insurance plans generally must satisfy several requirements to qualify as an HDHP. For example, providing nonpreventive health care coverage without a deductible, or with a deductible below the requisite minimum, would forfeit HDHP status. (Vaccinations are considered preventive care.) The IRS is temporarily suspending this rule to avoid administrative delays or other financial disincentives that could impede testing and treating for COVID-19.

Stay tuned

Congress and the Trump administration are weighing other actions to increase access to health care, as well as stabilize and stimulate the economy. We’ll keep you updated as new relief becomes available. Contact us for help to determine how best to minimize the financial impact.© 2020

The SECURE Act likely to affect your retirement and estate plans.

In late 2019, the first substantial legislation related to retirement savings since 2006 became law. The Setting Every Community Up for Retirement Enhancement (SECURE) Act brings numerous changes to the retirement and estate planning landscape, and some of them should prompt careful review of your existing plans to ensure they’ll accomplish the desired outcomes, including minimizing taxes.

The most significant provisions include the following changes:

Later IRA contributions. Prior to the SECURE Act, you couldn’t contribute to traditional IRAs starting in the year for which you reach age 70½, even if you continued to work. The new law eliminates that restriction, instead allowing anyone with earned income to contribute. This change brings the rules for traditional IRAs in line with those for 401(k) plans and Roth IRAs.

The longer period to contribute takes effect for contributions for the 2020 tax year. While contributions for 2019 can be made as late as April 15, 2020, those contributions are permitted only for individuals under the age of 70½ as of the end of 2019.

Delayed RMDs. The SECURE Act eases the rules for required minimum distributions (RMDs) from traditional IRAs and other qualified plans. It generally raises the age at which you must begin to take RMDs — and pay taxes on them — from age 70½ to 72. This new rule, however, applies only to individuals who hadn’t reached the age of 70½ as of the end of 2019.

Some taxpayers have turned to qualified charitable distributions (QCDs) as a tool for satisfying both their RMD requirements and their charitable inclinations. QCDs may be an attractive option because the Tax Cuts and Jobs Act (TCJA) has led more taxpayers to claim the standard deduction on their taxes, losing out on the federal tax benefits previously enjoyed by virtue of charitable contributions. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity once you reach age 70½, even if your RMD age is now 72. You don’t receive a charitable deduction, but the distribution is excluded from your taxable income.

One wrinkle to note is that the aggregate amount of deductible IRA contributions made under the new rule extending the age for which deductible IRA contributions may be made (that is, those for years in which you’ve reached age 70½ and beyond) will reduce your QCD allowance going forward. This is the case only if those deductible IRA contributions haven’t already been used to reduce your QCD and aren’t below zero. Perhaps an oversimplified way of looking at it is that any deductible IRA contributions allowed because of the new rules will reduce what would otherwise be allowed as a QCD.

For example, suppose that at ages 71 and 72 you made deductible IRA contributions that, in total, equal $10,000. Then, at age 73, you make a QCD of $50,000. The QCD is limited to $40,000 – $50,000 less $10,000. Thus, $10,000 of your distribution is taxable. Note, however, that because $10,000 went to charity you’ll be eligible to claim that amount as an itemized deduction.

Effectively eliminated “stretch” RMDs. Perhaps more important for some estate plans, the SECURE Act eliminates so-called “stretch” RMD provisions that have allowed the beneficiaries of inherited defined contribution accounts to spread the distributions over their life expectancies. Younger beneficiaries could use the provision to take smaller distributions and defer taxes while the accounts grew.

Under the SECURE Act, most beneficiaries must withdraw the entire balance of an account within 10 years of the owner’s death, albeit not according to any set schedule; they can wait and withdraw the entire amount at the end of 10 years if they wish.

Be aware that the new rules apply only to those inheriting from someone who died after 2019. Thus, if you inherited an IRA years ago you won’t be subject to the new rules with respect to your RMDs. However, when your beneficiaries inherit the IRA from you, they’ll be subject to the new rules.

The law recognizes exceptions for the following types of beneficiaries:

• Surviving spouses,

• Children younger than “the age of majority” (the 10-year rule applies when such beneficiaries reach the age of majority),

• Disabled or chronically ill individuals, and

• Individuals who are no more than 10 years younger than the account owner.

The 10-year requirement also applies to trusts, including see-through or conduit trusts, that use the age of the oldest beneficiary to stretch RMDs and prevent young or spendthrift beneficiaries from quickly depleting the inherited accounts.

If you’ve counted on stretch RMDs, you might achieve the same goals by naming a charitable remainder trust (CRT) as the beneficiary of your account, with your children as the trust’s income beneficiaries. The CRT would provide your children an income stream for a specified number of years or until their deaths and then pass the remainder to charity. Plus, your estate could take a deduction equal to the present value of the charity’s remainder interest.

Roth conversions are another avenue to consider. Moving money from a pre-tax IRA account to an after-tax Roth IRA during your retirement preempts RMDs during your life, and any subsequent growth in the account would be tax-free. Plus, your beneficiaries won’t be subject to tax on any distributions they take.

Keep in mind that you’ll owe tax as a result of the conversion, though you needn’t convert the entire account at once. Making the conversions strategically, over a number of years, may help to manage the tax implications. Roth conversions require consideration of several factors, so consult with us before taking the plunge.

Penalty-free withdrawals for birth or adoption. The SECURE Act creates a new exemption for qualified births or adoptions from the 10% tax penalty on early withdrawals from defined contribution plans. You can withdraw an aggregate of $5,000 from a plan without penalty within one year of the birth of a child or an adoption of a minor or an individual physically or mentally incapable of self-support.

Couples in which both parents have separate retirement plans can withdraw an aggregate of $10,000 penalty-free. (Eligible adoptees don’t include the child of your spouse.) Such withdrawals are subject to ordinary income tax.

Expanded options for use of 529 plans. Under the SECURE Act, you can use 529 plans to pay as much as $10,000 of principal and interest on qualified education loans for a plan beneficiary. The law also permits plan distributions, subject to the same limit, to pay off qualified student loan debt for the beneficiary’s siblings.

529 plans are expanded to include apprenticeship programs, too. Distributions can be made to such programs for costs related to fees, books, supplies and equipment necessary for program participation.

Kiddie tax reversion. The TCJA changed the kiddie tax rules, generally making unearned income generated by children over a certain threshold taxable at the tax rates for trusts and estates, rather than the generally lower rates of their parents. The SECURE Act reverses course, so a child’s unearned income will return to being taxed at the parents’ highest marginal rate.

The law provides the option to calculate the kiddie tax for 2019 under the TCJA or SECURE Act rules. You can also amend your 2018 tax returns to apply the new rule if financially worthwhile.

Act now

With most of the SECURE Act’s provisions already in effect, you can’t afford to stall on reviewing your plans and making the necessary adjustments to satisfy long-term objectives. Please contact us with any questions.

It’s not too late to trim your 2019 tax bill

Fall is in the air and that means it’s time to turn your attention to year-end tax planning. While several clear strategies and tactics emerged during the first tax filing season under the Tax Cuts and Jobs Act (TCJA), 2019 and subsequent years bring potential twists that must be considered, too. Let’s take a closer look at year-end tax planning strategies that can reduce your 2019 income tax liability.

Deferring income and accelerating expenses

Deferring income into the next tax year and accelerating expenses into the current tax year is a time-tested technique for taxpayers who don’t expect to be in a higher tax bracket the following year. Independent contractors and other self-employed individuals can, for example, hold off on sending invoices until late December to push the associated income into 2020. And all taxpayers, regardless of employment status, can defer income by taking capital gains after January 1. Be careful, though, because by waiting to sell you also risk the possibility that your investment might become less valuable.

Bear in mind, also, that there may be other reasons that taking the income this year can be more beneficial. For starters, future tax rates can go up. It’s possible that income tax rates might increase substantially by 2021, especially for those with higher incomes, depending on 2020 election results. In any event, in 2026, the higher tax rates that were in place for 2017 are scheduled to return.

Moreover, taxpayers who qualify for the qualified business income (QBI) deduction for pass-through entities (that is, sole proprietors, partnerships, limited liability companies and S corporations) could end up reducing the size of that deduction if they reduce their income. It might make more sense to maximize the QBI deduction — which is scheduled to end after 2025 — while it’s available.

Timing itemized deductions

The TCJA substantially boosted the standard deduction. For 2019, it’s $24,400 for married couples and $12,200 for single filers. With many of the previously popular itemized deductions eliminated or limited, some taxpayers can find it challenging to claim more in itemized deductions than the standard deduction. Timing, or “bunching,” those deductions may make it easier.

Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions. You could, for example, bunch your charitable contributions if it means you can get a tax break for one tax year. If you normally make your donations at the end of the year, you can bunch donations in alternative years — say, donate in January and December of 2020 and January and December of 2022.

If you have a donor-advised fund (DAF), you can make multiple contributions to it in a single year, accelerating the deduction. You then decide when the funds are distributed to the charity. If, for instance, your objective is to give annually in equal increments, doing so will allow your chosen charities to receive a reliable stream of yearly donations (something that’s critical to their financial stability), and you can deduct the total amount in a single tax year.

If you donate appreciated assets that you’ve held for more than one year to a DAF or a nonprofit, you’ll avoid long-term capital gains taxes that you’d have to pay if you sold the property and (subject to certain restrictions) also obtain a deduction for the assets’ fair market value. This tactic pays off even more if you’re subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2019).

What if you’re looking to divest yourself of assets on which you have a loss? Rather than donate the asset, the better move from a tax perspective is more likely going to be to sell it to take advantage of the loss and then donate the proceeds.

Timing also comes into play with medical expenses. The TCJA lowered the threshold for deducting unreimbursed medical expenses to 7.5% of adjusted gross income (AGI) for 2017 and 2018, but it bounces back to 10% of AGI for 2019. Bunching qualified medical expenses into one year could make you eligible for the deduction.

You also could bunch property tax payments (assuming local law permits you to pay in advance). This approach might, however, bring your total state and local tax deduction over the $10,000 limit, which means that you’d effectively forfeit the deduction on the excess.

As with income deferral and expense acceleration, you need to consider your tax bracket status when timing deductions. Itemized deductions are worth more when you’re in a higher tax bracket. If you expect to land in a higher bracket in 2020, you’ll save more by timing your deductions for that year.

Loss harvesting against capital gains

2019 has been a turbulent year for some investments. Thus, your portfolio may be ripe for loss harvesting — that is, selling underperforming investments before year end to realize losses you can use to offset taxable gains you also realized this year, on a dollar-for-dollar basis. If your losses exceed your gains, you generally can apply up to $3,000 of the excess to offset ordinary income. Any unused losses, however, may be carried forward indefinitely throughout your lifetime, providing the opportunity for you to use the losses in a subsequent year.

Maximizing your retirement contributions

As always, individual taxpayers should consider making their maximum allowable contributions for the year to their IRAs, 401(k) plans, deferred annuities and other tax-advantaged retirement accounts. For 2019, you can contribute up to $19,000 to 401(k)s and $6,000 for IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and, so long as the plan allows, $6,000 for 401(k)s and other employer-sponsored plans.

Accounting for 2019 TCJA changes

Most — but not all — provisions of the TCJA took effect in 2018. The repeal of the individual mandate penalty for those without qualified health insurance, for example, isn’t effective until this year. In addition, the TCJA eliminates the deduction for alimony payments for couples divorced in 2019 or later, and alimony recipients are no longer required to include the payments in their taxable income.

Act now

The future of tax planning is uncertain — even without dramatic change in Washington, D.C., many of the most significant TCJA provisions are set to expire within six years. Contact us for help with your year-end tax planning.

© 2019