CARES Act Tax Updates and Planning Opportunities

On Thursday, May 28^th, HBK and Gannon University SBDC presented the second installment of their “From Survive to Thrive” webinar series. In this session, Amy Dalen, JD, Chair of the HBK Tax Advisory Group, and Ben DiGirolamo, CPA, JD, provided a tax update for individuals and businesses. Below are some of the highlights from this session. Economic Impact Payments Amy provided an update on the Coronavirus Aid, Relief, and Economic Security (CARES) Act economic impact payments, indicating that a number of payments have been paid incorrectly to deceased individuals and individuals who have been incarcerated. The Internal Revenue Service (IRS) recently released Frequently Asked Questions (FAQs) providing information on how these payments can be repaid. While FAQs can provide us with valuable insight into the positions that the IRS is likely to take, if they are not otherwise published they should not be relied upon as authoritative. Amy pointed out that some of the FAQs provided by the IRS are more restrictive than the statutory language of the CARES Act. Retirement Planning Amy went through a summary of the CARES Act benefits provided for retirement plans, including a waiver of the 10% penalty for early withdrawals up to $100,000 for qualified individuals, and the increase to permissible loan amounts from $50,000 to $100,000. A qualified individual has either been diagnosed with coronavirus, had a spouse or dependent diagnosed with coronavirus, or been financially impacted by coronavirus. Qualified distributions can be recognized as income over a three year period, and can also be repaid to the plan during that time. The IRS is expected to issue additional guidance, and has indicated that the guidance provided will be similar to the guidance issued for distributions allowed in the wake of Hurricane Katrina. In the mean time, the IRS has provided FAQs. Charitable Contributions Amy pointed out that charities have been suffering from a decrease to charitable contributions in the wake of the Tax Cuts and Jobs Act (TCJA) of 2017, which increased the standard deduction and eliminated the charitable deduction benefit for many taxpayers. The CARES Act attempts to address this by making a permanent $300 charitable deduction for individuals that use the standard deduction, which will be an above-the-line deduction. Contributions must be in cash in order to qualify for this deduction. In addition, the CARES Act increased the adjusted gross income (AGI) limitation for cash contributions to certain 501(c)(3) organizations from 60% to 100% for tax year 2020, and increased the corporate charitable deduction limitation to 25%. Contributions in excess of these limits can be carried forward for up to five years. Excess Business Loss Limitation Amy explained that the TCJA created a new limitation for non-corporate taxpayers on business losses that exceed $250,000 for single filers and $500,000 for married filers that file a joint return. The CARES Act eliminates this limitation completely for farm losses, and suspends the limitation for non-corporate taxpayers for tax years 2018 through 2021. This provides an opportunity for taxpayers to amend their 2018 returns and use business losses that were limited. In addition, the CARES Act provided some technical corrections, clarifying that W-2 wages are not considered business income for purposes of the excess business loss calculation, and that capital gains included in the calculation are limited to a taxpayer’s net capital gain. Individual Planning Opportunities Amy pointed out that low interest rates and low market values are providing significant opportunities for taxpayers. Some of these opportunities include Roth IRA conversions, the use of Grantor Retained Annuity Trusts (GRATs) and other estate “freeze” techniques, and the use of related party loans. For any related party loans currently in existence, taxpayers should consider revising them to take advantage of the low AFR rates. Deductibility of PPP Loan Expenses Ben began his presentation covering one negative provision that came out of the CARES Act: the inability of businesses to deduct expenses that are paid for by PPP loan proceeds that are later forgiven. The CARES Act provides that the loan forgiveness is not taxable income, and the IRS is taking the position that any expenses related to that loan forgiveness are not deductible. This leaves businesses in the same boat as if the forgiven amount were taxable and the expenses were deductible. Ben pointed out that Congress may change this position to make the expenses deductible even though the loan is forgiven. Employee Retention Tax Credit Ben covered the new employee retention credit that was put in place by the CARES Act, indicating that it may be taken if a business was fully or partially suspended during a quarter in 2020 due to a government order, or if gross receipts were less than half of those from the same quarter in 2019. Ben pointed out that businesses that have received a PPP loan are not entitled to the credit. The credit is against the employer’s 6.2% share of Social Security payroll taxes, and is equal to fifty (50) percent of a) wages up to $10,000 per employee paid to the employees unable to work because of COVID-19 if the business had more than 100 employees in 2019, and b) all wages up to $10,000 per employee for businesses with less than 100 employees. The employer is allowed to reduce their otherwise required payroll tax deposits by the credit amount, and can file and get a cash refund if the credit exceeds the deposit. Employer Payroll Tax Deferral Ben went over the payroll tax deferral, which allows employers to delay payment of their side of the Social Security tax for deposits made from March 27^th through the end of the 2020 calendar year. Fifty (50) percent of the deferred amount will be due at the end of 2021, and the other half will be due by December 31, 2022. Employers are allowed to delay payments until they receive notice from the SBA that any portion of their PPP loan is forgiven. This deferral also applies to fifty (50) percent of self-employment taxes. Net Operating Losses Ben explained that the net operating loss carryback period was extended, which makes a change to the prior elimination of the two-year carryback period by the TCJA. Taxpayers are now allowed a five-year carryback period for 2018, 2019, and 2020 tax years, and the 80 percent limitation that was imposed by the TCJA has also been eliminated for carryforwards. Business Interest Expense Limitations Ben explained that the TCJA provided for a thirty (30) percent adjusted taxable income limitation on the deductibility of interest expense for businesses with $26 million or more in average annual gross receipts. The CARES Act increased this limit to fifty (50) percent for tax years 2019 and 2020, though partnerships are only allowed the increase in 2020. Qualified Improvement Property Ben provided a quick overview of a technical error found in the TCJA which required qualified improvement property (QIP) to have a 39-year life and not qualify for bonus depreciation, which was not the intention of Congress. The CARES Act reduced the life to 15 years and provided that it is eligible for 100 percent bonus depreciation. QIP applies to anything internal, non-structural, and after initial construction. The technical correction is retroactive to 2018 and can be applied using amended returns or by filing an accounting method change. Accelerating Disaster Losses Ben provided an overview of a potential benefit to businesses. When there is a federally declared disaster, businesses may be able to deduct certain financial losses as casualty losses, and may be able to accelerate those losses to the tax year preceding the year of the loss. Since the current situation related to COVID-19 is a federally declared disaster, businesses may be able to accelerate deductions for abandoned leaseholds, capitalized costs from abandoned business deals, contract termination payments, and unrefunded prepaid expenses in to the 2019 tax year. Qualified Disaster Relief Payments Finally, Ben pointed out that employers are able to make tax-free payments to employees during a federally declared disaster in order to reimburse them for certain expenses. These payments are still deductible by the employer. Expenses that employers may be able to reimburse include medical expenses not covered by insurance, medicine and sanitizers, costs to work from home, and childcare. The exclusion does not apply for ordinary wage payments.