The COVID-19 pandemic has triggered a wave of unprecedented challenges, and in response, governments worldwide have introduced a series of legislative measures to provide relief. In the United States, two significant pieces of legislation, namely the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Families First Coronavirus Response Act, have ushered in crucial tax law changes. This article aims to shed light on the key modifications brought about by these legislations, offering a comprehensive summary for taxpayers navigating this complex terrain.
1. Extension of Time to File and Pay
The CARES Act extends relief to individual and gift tax filers by granting an extension until July 15, 2020. This extension encompasses the filing and payment of 2019 tax returns. Additionally, the first quarter estimate and IRA contributions can be made up until the extended due date. It is important to note that the second quarter estimate must be made by June 15, 2020.
2. Paycheck Protection Program
The Paycheck Protection Program, designed for small businesses and non-profits, offers loans that, when forgiven, are tax-free. This initiative aims to provide financial support to entities grappling with the economic repercussions of the pandemic.
3. Health Plans
Amidst the crisis, over-the-counter medication can now be purchased without a prescription using funds from Health Savings Accounts (HSA), Flexible Spending Accounts (FSA), or Health Reimbursement Arrangements (HRA).
4. Recovery Rebate Payments
Individuals with adjusted gross income (AGI) up to $75,000 are eligible for recovery rebate payments of $1,200. Married couples filing jointly with AGI up to $150,000 can receive $2,400. The rebate phases out at 5% for every $100 over these thresholds. A $500 rebate is also provided for each qualifying child under 17. The IRS is disbursing these payments in spring 2020, treating them as an advance against a credit allowed on the 2020 return.
5. Waiver of 10% Early Distribution Penalty
Individual Retirement Accounts (IRAs) and defined contribution plans offer a distribution option of up to $100,000 for those impacted by COVID-19, with income recognition spread over three years unless the taxpayer opts out.
6. Waiver of Required Minimum Distributions (RMDs)
For the tax year 2020, Required Minimum Distributions (RMDs) are waived.
7. Charitable Deductions
In 2020, individuals can claim a $300 above-the-line deduction for cash contributions. The 60% AGI limit for individual donations is lifted, and the 10% limit on corporate donations increases to 25%. The limit on donating food inventory is raised from 15% to 25%.
8. Exclusion for Employer Payment of Student Loans
Employers can offer tax-free benefits to employees by paying up to $5,250 in employer-sponsored education, now including repayments of student loans for the tax year 2020.
9. Employee Retention Credit for Employers
Eligible employers can qualify for a refundable credit to offset the 6.2% employer’s portion of social security tax.
10. Delayed Payment of Employer Payroll Taxes
For 2020, employers can defer payment of the 6.2% employer portion of the social security tax and the employer and employee portion of railroad retirement taxes. Fifty percent of the liability is due on December 31, 2021, and the remaining 50% on December 31, 2022. Self-employed individuals can also defer through reduced estimated payments.
11. Net Operating Losses (NOLs)
The 80% limit on Net Operating Losses (NOLs) for tax years beginning after 2017 has been eliminated. NOLs can now be carried back five years for tax years beginning after December 31, 2017, and before January 1, 2021. The excess business loss limitation for noncorporate taxpayers of $250,000/$500,000 is lifted for 2018, 2019, and 2020.
12. Corporate Minimum Tax Credit (MTC) Acceleration
For tax years beginning in 2019, the Corporate Minimum Tax Credit (MTC) is 100% refundable, and taxpayers can elect to have the entire credit refunded in 2018.
13. Interest Expense Limitation
The 30% limitation on adjusted taxable income for interest expenses has been increased to 50% for tax years beginning in 2019 and 2020. However, this increase does not apply to partnerships in 2019. Taxpayers have the option to elect out, and they can also choose to calculate the interest limitation for 2020 based on their 2019 adjusted taxable income.
14. Technical Correction for Qualified Improvement Property (QIP)
Qualified Improvement Property (QIP) is now assigned a 15-year life for depreciation purposes, making it eligible for bonus depreciation. This applies to property placed in service after 2017.
15. Paid Sick Leave and Family Leave Credits
Employers with fewer than 500 employees may qualify for paid sick leave and family leave credits.
These tax law changes reflect a concerted effort to alleviate the financial burdens imposed by the COVID-19 pandemic. As taxpayers navigate this evolving landscape, it is crucial to stay informed and seek advice from tax professionals to ensure compliance with the latest regulations. It is important to note that the content provided in this article is for informational purposes only and should not be considered as tax advice. Consultation with a tax advisor is recommended to address specific situations and obtain tailored guidance.