April 23, 2020

CARES Act Tax Provisions

March 27, 2020

On Wednesday the Senate and on Friday the House passed the ‘‘Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act.’’, which President Trump then signed into law.  The following summarizes the tax related provisions, many which offer meaningful potential benefits, as well as clarification of prior legislation:

  1. Federal Tax Rebates
  2. Relaxed Retirement Provisions
  3. Charitable Contribution Limitation Increases
  4. Net Operating Loss Expansion
  5. Business Loss Expansion
  6. Business Interest Deductibility Increases
  7. Enhanced Deductibility for Qualified Improvement Property
  8. Clarification from Prior Relief Legislation

Federal Tax Rebates (Act Section 2201)

Individuals will soon begin to receive as much as $1,200 (married couples up to $2,400) and an additional $500 for every child.  The maximum amount will be phased out for individuals with adjusted gross income (AGI) exceeding $75,000 and $150,000 for married couples.  The rebate will be completely phased-out for single taxpayers with AGIs exceeding $99,000 and $198,000 for joint filers.  The IRS will base the rebates on 2019 tax returns if filed, or alternatively 2018 returns.  It is not clear if quickly filing a 2019 tax return with lower income than 2018 will be recognized.    

Retirement Provisions Relaxed (Act Sections 2202 and 2203)

There are two provisions of the Act which are intended to help individuals help overcome short-term financial obstacles.  First, an individuals can take a distribution of up to $100,000 from their qualified retirement accounts in 2020 without being subject to an early withdrawal penalty provided they experience adverse financial consequences because of the virus.  These distributions will be included in gross income ratably in 2020 – 2022 unless repaid first.  Second, individuals who are required to take annual distributions from a retirement account, are allowed to skip one in 2020. 

Charitable Contribution Limitation Increases (Act Sections 2204 and 2205)

There are two provisions allowing increased charitable deductions included in the Act.  Individuals will be permitted to deduct up to $300 ($600 for married couples) of cash contributions in 2020 even if they do not itemize.  The second provision can be much more significant.  In 2020, individuals will be permitted to make cash contributions of up to 100% of their AGI.  The most important restrictive aspect of this provision is that the contributions must be in cash, and until further guidance is received, all contributions in 2020 must be in cash in order to reach the 100% limitation.  Similarly, for 2020, corporations which are normally limited to 10% of their taxable income for contributions will have the limitation increased to 25%.

Net Operating Loss Expansion (Act Section 2303)

The Act changes two limitations on claiming net operating losses (NOL) for individuals that were enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA).  The 2017 law eliminated loss carrybacks – The Act now reinstates them for losses that arise in 2018-2020 which can be carried back up to 5 years.  In addition, the 80% of taxable income limitation is also eliminated for 2018-2020.  The combination of these two provisions could mean meaningful tax refund possibilities for taxpayers in loss situations, including amending 2018 tax returns. 

Business Loss Expansion (Act Section 2304)

Under the 2017 TJCA, business losses were limited to $250,000 ($500,000 for joint filers) and the disallowed loss treated as a NOL carryforward. The Act suspends this limitation until December 31, 2020, allowing the loss in the year incurred.   The implications for real estate owners, as well as operating businesses, should be examined for the potential for amending 2018 tax returns and estimating income tax payments for 2020.  In combination with the elimination of the NOL limitations related to net operating loss expansion (see above), this provision may provide meaningful relief and planning opportunities.

Business Interest Deductibility Increases (Act Section 2306)

Beginning in 2018, TJCA introduced a limitation on business interest deductibility to the extent it did not exceed 30% of “adjusted taxable income,” a formula which will change in 2021.   The CARES Act increased the 30% limitation to 50% for 2019 and 2020 only.  The original TCJA legislation was very complex, and this modification is no different. It includes electing out in some circumstances, so a fuller understanding of a taxpayer’s specific circumstances will be important.

Enhanced Deductibility for Qualified Improvement Property (Act Section 2307)

This provision is actually a technical correction from the TCJA of 2017 which left unanswered whether taxpayers could expense (as opposed to depreciate) certain leasehold improvements.  By allowing full expensing of these assets, also known as bonus depreciation, 2018 tax returns may be amended for immediate refund. Care must be taken however, related to whether or not states will follow this technical correction.   

Geller Insights – Clarification from Prior Relief Legislation

  • Although gift tax relief is not provided and is still due April 15th, gift tax returns where no payment is due will be automatically extended with your valid individual income tax extension request made by July 15th.
  • IRA contributions previously required to be made by April 15th are also extended to July 15th.  Additionally, if the 10% penalty for early withdrawal due when filing your tax return is applicable, this payment is also extended to July 15th. 
  • Similarly, if you contribute to a SEP IRA plan, contributions must be made before you file your tax return. If you timely extend your tax return before July 15th, you can contribute after July 15th prior to timely filing your tax return.

The views expressed in this letter reflect those of Geller Advisors LLC as of the date of this letter.  Any views are subject to change at any time based on market or other conditions, and Geller Advisors disclaims any responsibility to update such views.  The information presented in this letter is for informational purposes only.  This letter is not to be construed as investment advice and does not constitute an offer to sell or the solicitation of an offer to provide investment advisory services or purchase an interest in a fund.  Any such offer or solicitation will be made to qualified investors only under a formal engagement letter and Investment Policy Statement or by means of an offering memorandum and related subscription agreement as applicable.