Congress just passed the CARES Act in response to the COVID-19 pandemic.
In it, there are a lot of juicy tax benefits for you and your business. We’ll tell you about a collection of important ones you need to know.
The Check Will Be in the Mail
As you read this, the U.S. Treasury Department could be in the process of writing you a check, and it’s possible you could have that check in your hands within three weeks, according to the Treasury secretary.
The check you receive this year is going to be your minimum amount. You don’t have to repay it or pay taxes on it.
And next year, when you file your 2020 tax return—say, on April 15, 2021—you could receive more cash if the 2020 return shows a bigger credit than you receive this year.
Technically, the cash you’re about to receive is an advance payment of a new refundable tax credit for your 2020 Form 1040 tax return. (This is the return you will file in 2021.)
The advance tax credit (think cash) coming in the mail or electronically in the next three weeks or so is based on your 2018 or 2019 (if you filed it already) tax return. If your income qualifies for the full credit, you will receive
Your tax credit (the check in the mail) goes down by 5 percent of the amount by which your adjusted gross income (AGI) exceeds
The advance credit amount is based on
You’ll “true up” your advance tax credit on your 2020 Form 1040 (which you will file in 2021):
Your current tax debts will not interfere with the cash amount you are about to receive. There are no offsets for outstanding tax debts.
But there is an offset for past-due child support that is reported to the IRS by a state. In this case, the IRS will take the child support money from the advance tax credit before remitting any money to the taxpayer.
Planning tip. If you didn’t file your 2019 tax return yet, calculate if your advance credit is higher with your 2018 AGI. If it is, wait to file your 2019 return until after you get the advance credit paid to you.
Example. You filed a 2018 Form 1040 with AGI of $70,000 and no dependents. Your 2019 Form 1040, which you did not file yet, has an AGI of $105,000 and no dependents.
If you file your 2019 return now, you will get no cash from the advance credit because your AGI would have phased out your entire credit.
But if you don’t file your 2019 return now, you receive $1,200.
Fast-forward to your 2020 tax return—say your 2020 Form 1040 has AGI of $110,000. It’s over the threshold. No problem. Under the rules, you keep the $1,200.
For tax year 2020 only, the CARES Act increases the limits on charitable contributions as follows:
If you are a non-itemizer, you may now deduct up to $300 of cash charitable contributions above the line. This above-the-line deduction is a permanent change starting with tax year 2020.
Net Operating Losses
The CARES Act temporarily suspends some of the Tax Cuts and Jobs Act (TCJA) limitations on net operating losses (NOLs):
These new, temporary changes allow you to fully utilize your NOLs and potentially amend prior-year tax returns to get refunds.
The TCJA created a new loss limitation rule (a ceiling) that limited your ability to use business losses.
The CARES Act retroactively eliminates the Section 461(l) limitation rule for tax years 2018, 2019, and 2020 and moves the start to tax year 2021.
Once again, this change allows you to possibly amend prior-year tax returns to get refunds now.
Qualified Improvement Property
Finally! Congress fixed the TCJA error.
Qualified improvement property (QIP) is now 15-year property, and not 39-year property, for depreciation purposes.
This means QIP is now eligible for bonus depreciation, where previously you could use only Section 179 expensing.
This change is retroactive as if Congress originally included it in the TCJA, so you can amend prior year returns to fully expense the property and potentially secure refunds.
Mark S. Fineberg, CPA