Individual Tax Provisions
Waiver of required distribution rules. Required minimum distributions (“RMDs”) that otherwise would have to be made in 2020 from IRAs and defined contribution plans are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner's having turned age 70½ in 2019.
Waiver of 10% early distribution penalty. The additional 10% tax on early distributions from IRAs and defined contribution plans is waived for distributions made during 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus. Penalty-free distributions are limited to $100,000, and may, subject to specific guidelines, be re-contributed to the IRA or plan at a later date. Income arising from the distributions can be taxed in 2020 or spread out over three years.
Charitable deduction liberalizations for individuals. The CARES Act made significant changes to the rules governing charitable deductions:
- Individuals will be able to claim a $300 above-the-line deduction for cash contributions made to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
- The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (“AGI”) doesn't apply to cash contributions made to public charities in 2020. Instead, an individual's qualifying contributions, reduced by other contributions, can be as much as 100% of AGI. If more than 100% of a taxpayer’s AGI is contributed, excess contributions may be carried forward to future years.
Deferral of loss-limits. The CARES Act retroactively “turns off” the excess active business loss limitation rule of the TCJA by deferring its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the TCJA and were treated as NOL carryforwards in the following tax year.
Recovery Rebate Credit. Individuals who did not receive an Economic Impact Payment (“EIP”), also known as a stimulus check, or whose EIP was limited, may be able to claim the additional amount as the Recovery Rebate Credit when they file their 2020 tax return if their income meets certain requirements.
New form. A provision from the Protecting Americans from Tax Hikes Act of 2015 kicks in this year. Beginning with the 2020 calendar year, amounts paid for nonemployee compensation will be reported on Form 1099-NEC rather than Form 1099-MISC.
Business Tax Provisions
Timing of income and deductions. Typically, we advise taxpayers to defer income and accelerate deductions in order to push their tax liability to the future; however, that is not currently advisable because of the expectation that tax rates will increase under the Biden administration. Accelerating income and deferring deductions results in a greater tax benefit overall even though the tax is being paid earlier. For many small business owners, this would enhance the benefit of the qualified business income (“QBI”) deduction before a potential phaseout is enacted. In addition, the income accelerated would avoid the additional Social Security tax on earnings above $400,000 that is currently being proposed by President-elect Biden.
On the flipside, deferring income and accelerating deductions may make sense for struggling businesses that will have a net operating loss (“NOL”) this year. The CARES Act allows taxpayers to carry back NOLs five years and obtain refunds of taxes previously paid. The top tax rate in 2015 for individuals and corporations was 39.6% and 35%, respectively; therefore, the tax benefit of carrying back a loss would potentially be greater than carrying that loss forward. In addition, you would have the cash in hand at least a year earlier.
Also, businesses should pay particular attention to the timing of equipment purchases. How your business fits into the above two scenarios determines whether or not you should purchase equipment before the end of the year or hold off until the beginning of next year. One thing to keep in mind is that President-elect Biden has not released his position on bonus depreciation. Therefore, it’s possible that an asset purchased in 2020 might generate a greater tax benefit as compared to the same asset purchased in 2021.
Paycheck Protection Program (“PPP”) forgiveness. The Paycheck Protection Program was created by the CARES Act to provide forgivable loans to businesses negatively impacted by the pandemic. Although originally thought to be tax-free, the IRS subsequently stated that the expenses used to obtain loan forgiveness would not be deductible, effectively making PPP loan forgiveness taxable. Please note there is currently legislation stalled in Congress that would allow the expenses to be deducted, which would render PPP loan forgiveness truly tax-free.
Correction of the “retail glitch.” The CARES Act makes a technical correction to the Tax Cuts and Jobs Act (“TCJA”) of 2017 that retroactively treats a wide variety of interior, non-load-bearing building improvements as eligible for bonus deprecation or for treatment as 15-year MACRS property. This correction restores the eligibility for most leasehold, restaurant and retail improvements.
Corporate net operating loss liberalizations. The TCJA limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks, the 80% taxable income limitation and carryback prohibition until 2021.
The CARES Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax years before 2018, and (2) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.
Charitable deduction liberalizations for businesses. The CARES Act made significant changes to the rules governing charitable deductions:
- The limitation on charitable deductions for corporations that is generally 10% of taxable income doesn't apply to contributions made in 2020. Instead, a corporation's qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income.
- For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.