In an effort to stabilize the economy, the President signed the most expensive piece of legislation ever passed - the CARES Act. This Act will affect nearly every taxpayer and many businesses. The CARES Act looks to increase liquidity in the economy through relaxed limitations of business deductions and deferral of taxes, as well as cash payments to individuals.
This is complex legislation with many changes to the tax law. We have highlighted a few key items below. Please be on the lookout in the coming days for additional information as we will dig deeper into specific aspects of the legislation and explain how it may affect your tax outlook.
Recovery Rebates for Individuals - Up to $1,200 per individual, $2,400 for joint filers and $500 per child under age 17. Phase-outs begin at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. The thresholds are based on 2018 tax return information unless a 2019 tax return has been filed.The rebate amounts are advance refunds of credits against 2020 taxes, with the amount of credit available on a taxpayer's 2020 tax return being reduced by the rebate amount received.
Employee Retention Credit - The CARES Act grants eligible employers a credit against employment taxes equal to 50 percent of qualified wages paid to employees who are not working due to the employer's full or partial cessation of business or a significant decline in gross receipts. This is similar to the paid leave credits granted to employers under the Families First Coronavirus Response Act, with some changes to the requirements. Most significantly, neither the employee nor the employer have to be directly impacted by infection. The amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters. The provision contains several requirements defining qualified wages, qualified employees, and qualified employers. The credit applies to wages paid after March 12, 2020, and before January 1, 2021.
Payroll Tax Deferral - In order to free up employers' cash flow and retain employees during times of quarantine or shutdown, the CARES Act defers the payment of payroll taxes. Payroll taxes due from the period beginning on the date of the enactment of the Act (signed the evening of March 27, 2020), and ending on December 31, 2020, are deferred. The entirety of payroll taxes incurred by employers, and 50 percent of payroll taxes incurred by self-employed persons qualify for the deferral. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.
Retirement Withdrawal Penalty Waived - Eligible individuals who have been adversely affected by the virus (illness, job loss, reduced hours etc.) can withdraw up to $100,000 from qualified retirement plans without having to pay the 10% penalty. The bill also waives all required minimum distributions for 2020, regardless of whether the taxpayer has been impacted by the pandemic. You should consult your financial adviser before tapping into your retirement savings as there may be other options.
Net Operating Losses - The bill allows for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business. Businesses will be able to amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carryback.
The CARES Act is an extensive bill with many provisions that may affect your tax outlook. We are reviewing each client's tax position with respect to the Act and will be advising you accordingly. Thank you for your patience as we continue to comb through the ACT in order to implement all possible savings strategies. Please feel free to reach out to your tax adviser with any questions, but know that we are working diligently with your financial well-being at the forefront.