As additional details of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) become available, the list of potential tax benefits continues to grow.
Individual taxpayers are affected in a number of ways. Rebate checks, the so-called stimulus checks, are slated to be issued to individual taxpayers subject to income limitations. Between 2019 and 2018, the most recent filing will be used as a starting point for calculating the taxpayer’s benefit.
The IRS has also adjusted the treatment of some charitable donations. For example, $300 of a taxpayer’s charitable contributions can now reduce adjusted gross income instead of being subject to itemized deduction restrictions. Contributions made by individuals are also no longer limited to a percentage of adjusted gross income. For those who have turned to their retirement accounts for reprieve, certain early withdrawal penalties will be waived if funds were withdrawn for a “coronavirus-related distribution”.
Previously, individual taxpayers were not permitted to deduct more than $250,000 in combined business losses and married taxpayers filing jointly were limited to combined losses of $500,000. This limitation has now been delayed to 2021. Taxpayers whose excess business losses were limited in 2018 and 2019 may file for refunds.
Updates to the CARES Act are also impactful for businesses. The 2017 Tax Cuts and Jobs Act imposed limitations on the amount of interest expense a business could deduct. Deductible interest expense was limited to 30% of adjusted gross income. The CARES Act now permits business interest expense deductions of up to 50% of AGI for 2019 and 2020 tax filings. Additionally, taxpayers can treat their 2020 AGI as if it were the same as 2019 for purposes of applying the limitation.
Earlier legislation removed the ability for most businesses to carry back net operating losses to prior years. The CARES Act allows for NOLs arising in 2018, 2019, and 2020 to be carried back five years. The new law also temporarily lifts the requirement that net operating losses not exceed 80% of taxable income.
The original language of the 2017 Tax Cuts and Jobs Act inadvertently increased the life of qualified improvement property from 15 to 39 years, and did not provide a provision for bonus depreciation. The CARES Act corrected this drafting error, allowing QIP to be eligible for bonus depreciation. Taxpayers can proceed as though the current revision has always been the law and correct 2018 and 2019 returns previously filed.
We are still awaiting further guidance from the IRS as to how many of these changes will be implemented. As guidance is issued, we are actively analyzing all 2018 and 2019 filings to ensure that all of our clients are receiving the maximum benefit available under the changing tax laws. As always, please contact your Siegfried Advisory team member with any questions.
– Your Siegfried Advisory Team