To Amend or Not To Amend, That Is the Question: How the Cares Act Changes the Tax Cuts and Jobs Act

Thomas R. Tartaglia, CPA (Jun, 2020)

The IRS has recently enacted the Coronavirus Aid, Relief and Economic Security (CARES) Act as a tax relief and assistance package for individuals as well as businesses.  Some of the provisions extend back to tax year 2018 and prior.

 

The CARES Act provides several new and modified tax provisions:

  • Individual recovery rebate/credit (¶ 102)
  • No 10% additional tax for coronavirus-related retirement plan distributions (¶ 201)
  • Limit on plan loans temporarily increased to $100,000; repayments delayed (¶ 202)
  • Required minimum distributions waived for 2020 (¶ 203)
  • Tax-excluded education payments by an employer temporarily include student loan repayments (¶ 301)
  • Changes to the definition of qualified medical expenses (¶ 401)
  • High deductible health plan safe harbor for telehealth services (¶ 402)
  • $300 above-the-line charitable deduction (¶ 501)
  • Modification of limitations on individual cash charitable contributions during 2020 (¶ 502)
  • Modification of limitations on corporate cash charitable contributions during 2020 (¶ 503)
  • Increase in limits on contributions of food inventory (¶ 504)
  • Employee retention credit for employers (¶ 601)
  • Delay of payment of employer payroll taxes (¶ 602)
  • Advance refunding of credits for paid sick leave and paid family leave (¶ 603)
  • Temporary repeal of taxable income limitation for net operating losses (NOLs)         (¶ 701)
  • Modification of rules relating to net operating loss (NOL) carrybacks (¶ 702)
  • Modification of limitation on losses for noncorporate taxpayers (¶ 703)
  • Deductibility of interest expense temporarily increased (¶ 801)
  • Forgiveness for Paycheck Protection Program loans (¶ 802)
  • Corporate minimum tax credit (MTC) is accelerated (¶ 901)
  • Suspension of aviation excise taxes (¶ 1001)
  • Bonus depreciation technical correction for qualified improvement property           (¶ 1002)

The following is a more detailed explanation of some of the more popular provisions:

For individual taxpayers, changes include:

  • Elimination of the 10% early withdrawal penalty on retirement plan distributions. The 10% additional tax does not apply to any coronavirus-related distribution, up to $100,000 during 2020.
  • The required minimum distributions from a retirement plan are suspended for 2020. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner having turned age 70 1/2 in 2019. 
  • The addition of an "above the line" $300 charitable deduction. For tax year 2020, the CARES Act adds a deduction from gross income of up to $300 of qualified charitable contributions made by an individual that does not itemize their deductions.
  • Prior to the CARES act, an individual (noncorporate) taxpayer could only deduct up to $250,000 of "excess business losses." The new law eliminates this limitation for tax years 2018 through 2020.

For businesses and employers, changes include:

  • Delaying employer payroll taxes. The act allows employers, and self-employed individuals to defer social security tax payments that would normally be due and payable during the time-period beginning March 27, 2020 through December 31, 2020. There are no special elections required to defer these tax payments. The deferred tax amounts are to be repaid equally over a 2-year period with payments due by December 31, 2021 (50% of the deferred tax) and the remaining (50%) will be due by December 31, 2022.
  • Temporary removal of the taxable income limitation allowing a net operating loss (NOL) to offset 100% of income (prior law limited this deduction to 80%). Applies to tax years 2018 thru 2020. Modification of the NOL carryback rules. Along with the temporary removal of the taxable income limitation, the CARES Act provides that NOLs arising in tax years 2018 through 2020 can be carried back 5 years. In New York State, losses cannot be carried back to a tax year beginning before 01/01/2015. New York does not follow the 5-year carryback provision in the CARES Act 
  • The Tax Cuts and Jobs Act of 2017 (TCJA) had limited the amount of business interest deduction to 30% of adjusted taxable income. The CARES Act temporarily and retroactively increases the threshold to 50% for tax years 2019 and 2020. Note that New York State conforms to the business interest expense deduction limitation under IRC § 163(j). However, in the recently enacted Budget Bill S7508, New York has decoupled from the temporary increase to the limitation on business interest expense as enacted by the CARES Act.
  • Bonus depreciation technical correction. You may recall that the TCJA of 2017 allowed 100% additional first year depreciation "qualified property." The TCJA eliminated some pre-existing language that eliminated the favorable depreciation method for qualified improvement property. Therefore, instead of the intended 15-year recovery life, it falls into the 39-year category for nonresidential real property and makes it ineligible for 100% Bonus depreciation. The CARES Act provides the technical correction to put qualified improvement property back into its intended 15-year property category and therefore eligible for 100% bonus depreciation. This correction is effective for property placed in service after December 31, 2017. 

Outlined above are only a few of the provisions contained within the CARES Act. If you would like a more detailed analysis, the tax professionals at Dermody, Burke and Brown CPAs are here to assist you in navigating through the rules that are available.

 

The information reflected in this article was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.

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