Year-End 2020 Tax News & Planning Strategies 

Five Key Ways the CARES Act Could Impact 2020 Year-End Tax Planning

by Ron Dean, CPA, Partner, Restivo Monacelli LLP

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided taxpayers with much-needed relief during this pandemic by establishing additional funding sources, such as the Paycheck Protection Program (PPP); by creating new tax credits, such as the Employee Retention Credit; and by significantly changing several existing tax provisions.

 

Below are five key ways the CARES Act could impact your 2020 taxes and provide opportunities for both businesses and individuals:

1. Qualified Improvement Property (QIP)

Generally defined as any non-structural improvement to an interior portion of a non-residential building.

  • Prior to the CARES Act, the tax law required QIP placed in service after December 31, 2017 to use a 39-year tax life, making it ineligible for bonus depreciation.

  • The CARES Act retroactively changed the recovery period for QIP to a 15-year depreciable life effective January 1, 2018, thus making it eligible for bonus depreciation through 2026 (100% through 2022).

  • If you haven't yet taken advantage of the new QIP rules in 2019, there are still opportunities for 2020 by filing a 3115 with your 2020 return (taxpayers may need to file an amended tax return for 2018 or 2019). However, you should consult with your Restivo Monacelli tax advisor as not all improvements automatically qualify.

2. Business Interest Limitation

  • Under the Tax Cuts and Jobs Act (TCJA) some businesses may have been limited on the amount of business interest they were able to deduct. The amount limited was equal to 30% of adjusted taxable income with any excess business interest expense being carried over.

  • The CARES Act replaces 30% with 50% for the 2019 and 2020 tax years.

  • The CARES Act also allows taxpayers to elect to use their 2019 adjusted taxable income in computing the 2020 business interest limitation. This is important as many businesses may not exceed their adjusted taxable income from 2019 in 2020 due to the effects of the coronavirus on their business.

  • Special rules apply to partnership tax returns under which they are not able to utilize the new 50% limitation. Instead, any interest disallowed at the partnership level is passed through to the partners (and potentially suspended at the partner level). For the 2020 tax year, 50% of the disallowed interest will be fully deductible with the remaining 50% carried forward until the respective partner is allocated excess taxable (or interest) income from the partnership.

3. Net Operating Losses (NOLs)

The CARES Act temporarily relaxed many of the NOL limitations that were implemented under the Tax Cuts and Jobs Act (TCJA).

  • If your small business experienced losses in 2018, 2019 and/or 2020, you will be able to carry back 100% of that loss to the prior five tax years.

  • If you had an NOL carried into 2019 and 2020, you can claim a deduction equal to 100% (vs. the 80% under the TCJA) of your 2020 taxable income.

4. Charitable Contributions

  • Taxpayers who itemized their deductions already receive a benefit for their charitable contributions but The CARES Act increases the maximum deduction available for cash contributions to 100% of Adjusted Gross Income (AGI) for individuals and 25% of taxable income for C corporations. Previously, an individual taxpayer’s charitable contributions were generally limited to 60% of their AGI.

  • The CARES Act offers an “above-the-line” deduction for charitable contributions up to a maximum of $300. Therefore, taxpayers do not need to itemize their deductions to qualify.  The charitable contribution needs to be paid in cash and only to eligible charitable organizations.

  • The increased thresholds are for 2020 only, so consider making additional donations this year.

5. Retirement Plans

​Typically, if a taxpayer receives a distribution from a qualified retirement plan before age 59 ½, there is a 10% penalty imposed. There are several exceptions under which the 10% penalty can be nullified and the CARES Act added one more. A taxpayer may take up to a $100,000 distribution in 2020 without incurring the 10% penalty if the distribution is coronavirus-related. The criteria for deeming a distribution to be related to the coronavirus is:

  • A taxpayer, spouse or dependent was diagnosed with SARS-COV-2 or COVID-19 by a test approved by the CDC.

  • A taxpayer experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced working hours, or being unable to work due to lack of child care.

  • If the distribution meets any of the above qualifications it is not subject to the 10% penalty but would still be subject to income tax consequences. However, the CARES Act allows a taxpayer to spread the taxable distribution over a three-year period beginning in 2020 and also provides the ability to avoid income tax consequences if the distribution is repaid to the retirement plan within three years of receipt.

  • In addition, the CARES Act waives the requirement to take a required minimum distribution (RMD) for the 2020 year only.

Next Steps

There are many nuances and opportunities contained within The CARES Act. Our team has been analyzing the provision in the CARES Act since it was enacted in March of 2020. If you have any questions or would like to discuss how this impacts you or your business, we encourage you to reach out to one of our tax specialists at Restivo Monacelli LLP.