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An Overview of the Tax Effects of the Coronavirus Aid, Relief and Economic Security (CARES) Act on Individuals and Businesses

On Friday, March 27, President Trump signed into legislation the Coronavirus Aid, Relief and Economic Security Act (CARES) Act. The $2.2 trillion legislation represents the largest stimulus package in U.S. history—dwarfing the $800 billion package signed during the 2008 financial crisis—and provides a variety of economic relief measures to mitigate the impact of the coronavirus pandemic on American society.

In addition to direct cash payments and extended lending and emergency financing options, the CARES Act includes tax payment deferrals and tax breaks for individuals and businesses.

The IRS already allowed individual, trust, estate, partnership, and corporate tax filers to defer their federal income tax payments and provided an automatic extension of the federal income tax filing deadlines due on April 15, 2020, to July 15, 2020. This relief applies to federal income tax payments (including self-employment taxes) for the 2019 tax year as well 2020 estimated income tax payments, and federal income tax returns due on April 15, 2020. This extension of payments and the filing deadline to July 15, 2020 excludes the accrual of penalties and interest which do not begin to accrue until July 16, 2020.

Individuals

  • A direct payment of $1,200 will be made to each adult and $500 for each child, with phaseouts for individuals earning more than $75,000 annually and couples making more than $150,000.
  • Individuals making more than $99,000 and couples making more than $198,000 will receive no payments.
  • Individuals without income or who rely on government benefits as their sole source of income are automatically eligible for this benefit.
  • No student loan payments will be required for individuals who hold Department of Education loans through September 30, 2020; no interest will accumulate, and no penalties will be enforced during this time period.
  • Individuals with COVID-19 who choose to withdraw up to $100,000 from an employer-sponsored retirement plan will not have to pay the 10% penalty tax; individuals may also take advantage of this benefit if their spouse is diagnosed with COVID-19. Additionally, although the withdrawal will be taxed, taxes will be spread out over three years unless the individual rolls the funds back into the retirement account during that time period.
  • Minimum distribution requirements have been waived for individual retirement accounts. Individuals may keep their retirement capital invested if that is their preference.
  • Above-the-line charitable deduction of up to $300 for all taxpayers in 2020.
  • Limitations for charitable contributions to public charities have been removed for 2020.

Businesses

  • Businesses will not be required to pay their portion of payroll taxes incurred for the remainder of 2020 until 2021 and 2022.
  • Self-employed individuals receive similar relief under the law.
  • 50% of the deferred payroll taxes are due 12/31/2021 and the remainder are due 12/31/22.
  • Payroll tax credit for 50% of the wages paid by eligible employers to certain employees affected by COVID-19.
  • Retail glitch is fixed. Certain real property improvements with 15-year depreciable lives are once again eligible for accelerated and or bonus depreciation.
  • 5-year carryback is allowed of net operating losses (NOLs) incurred in 2018, 2019 and 2020.
  • Relaxation of the 80% limitation rule for use of net operating losses imposed by the Tax Cuts and Jobs Act; losses incurred before January 1, 2021 can fully offset income going forward.
  • Corporate charitable contribution deduction limitation increased to 25% of AGI for the 2020 tax year.

It is possible that further legislation will be passed as it is already being discussed.

CBM will continue to provide breaking news to clients and friends of the firm as the COVID-19 situation develops, and we encourage you to keep an eye out for future alerts dedicated to the impact of the CARES Act on individual and business taxes.

We hope you all stay safe during this unprecedented time.

Richard E. Morris, CPA, MST
Director, Tax Practice
Councilor, Buchanan & Mitchell, P.C.