Accounting on Us
The CARES Act included many other items that we can get excited about, especially as it relates to your taxes.
Tax consequences of the CARES Act
There's a lot more to the CARES Act than stimulus payments and PPP
Donna H. Laubscher, CPA
Much of the attention on the Coronavirus Aid, Relief and Economic Security (CARES) Act has been focused on the stimulus payments and the Paycheck Protection Program (PPP), but with the CARES Act coming in at a whopping 880 pages (okay, the font is large, but still that is lot of reading), there are many other items that we can get excited about, especially as it relates to taxes. Specifically, as it relates to taxes for 2020.
For years, the time to take required minimum distributions (RMD) from your IRA was the year after you attained the age of 70 ½. Then the SECURE Act came along last December (which seems like a decade ago, by the way) and changed that age to 72 (generally, there are some qualifications related to that). Your RMD is based upon a factor of your age and the fair market value of your IRA on the prior December 31. As we were just getting used to this new change, the stock market became a bit unpredictable and The CARES Act was passed. This act removed all requirements for any RMD whatsoever in the calendar year 2020.
For those taxpayers that do not need to take any distribution for living expenses, this is a fabulous opportunity to reduce taxable income in 2020. However, remember if you had voluntary withholding from your distributions, you may need to look at either making estimated tax payments or increasing your estimated tax payments to avoid an underpayment penalty.
If you had already taken your RMD, or a portion of your RMD, before passage of the CARES Act, are you stuck with that taxable income? Not necessarily. The IRS has come out with Notice 2020-23, which says that for RMD taken after February 1, you have until July 15th to roll it back. As with most things in tax, there are some quirks to this, so make sure your financial adviser is up to speed on the requirements.
There are two kinds of deductions on an individual tax return – above-the-line and then everything else. Above-the-line deductions are generally the niftiest because they can reduce your total income in arriving at adjusted gross income. And adjusted gross income is used throughout your tax return in limiting other potential tax benefits.
As part of the CARES Act, an above-the-line deduction is allowed for up to $300 of cash contributions made by individuals. So please note – even if you take the standard deduction on your 2020 income tax return, you can have a deduction for up to $300 on top of that, helping not only a charity, but also helping to reduce your taxable income. Please note – this is only cash contributions, so not noncash donations of household items or appreciated assets.
But wait – there is more! The percentage of adjusted gross income that could be used as a cash contribution was increased from 60% to 100% in 2020. Again, this percentage does not apply to noncash items. Please consult your specific tax adviser, but there may be an opportunity to sell appreciated stock using up existing capital losses and then donate cash to your favorite charity. Again, please do not try this at home, without consulting your tax adviser.
Net Operating Losses
The prior two items were mainly for individuals (though charitable contribution percentages for corporations were increased from 10% of taxable income to 25% of taxable income for 2020 under the CARES Act, as well).
But net operating losses can occur in both individuals and corporations. The ability to carryback net operating losses (except for farming losses) disappeared under TCJA. Additionally, they could only be carried forward, and on top of that, could only be used to offset income up to 80%. Under the provisions of the CARES Act, net operating losses can now be carried back five years. And can be used to offset 100% of taxable income if carried forward, for NOLs arising before January 1, 2021. And this does not just apply to NOLs in 2020 – it also applies to NOLs from 2018 and 2019.
Generally, the most beneficial method of carrying back an NOL is on Form 1045 (individuals) or Form 1139 (corporations). However, to use these forms, they must be prepared within one year of the loss. But for those 2018 losses, we are beyond one year. This would generally mean filing the form on paper but with most of the IRS also working at home, the paper filings are piling up. The ability to use the quicker refund methods was approved for NOLs that otherwise would not be eligible to be filed on these forms. And again, there is more good news. The IRS has established a separate fax line to receive these forms – one for Form 1139 and one for Form 1045.
One final piece of good news on NOLs. There was a technical correction regarding fiscal year corporations. For fiscal year corporations beginning before December 31, 2017 which were subject to a hybrid of the two rules pre-TCJA and post-TCJA. (That is a convoluted enough sentence, so not going to go into any more detail on why a technical correction was necessary – but it was!) This fiscal year corporations can now carryback losses under the pre-TCJA rules for two years. And, again, this can be done on Form 1139, and using the special fax line set up. This applies to fiscal years ending before January 1, 2019.
Qualified Improvement Property
One more technical correction from TCJA made it into the CARES Act. This is what we fondly called the “retail glitch”. And by fondly, I mean that is what we called it, and we were not the least bit fond of it! Before TCJA, qualified improvement property (QIP) was depreciated as 39 year property unless it qualified as 15 year qualified leasehold improvement property or 15 year retail improvement property or 15 year restaurant property. TCJA allowed for all property with a recovery period of 20 years or less to use 100% bonus depreciation. The retail glitch was that Congress left the 15 year property categories – all three of them – out of the final draft of TCJA, subjecting all of this property to not only a 39 year recovery period, but ineligible for bonus depreciation.
This can be corrected by preparing a Form 3115, which is a change in accounting method. Because this change is generally in favor of the taxpayer, the entire benefit can be taken on the return when the Form 3115 is filed. Again, please consult with your Henry+Horne tax adviser on the best way to accomplish this.
Look at that – all the way to end with nary another word on either stimulus payments or PPP loans. Hopefully, we have given you some additional items to think about from the recently enacted CARES Act. And to always try and keep taxes uppermost in your mind! And if your tax professional reaches out to you about amending previously filed tax returns, you may now know part of the reason for that – most likely a tax savings could be in your future.
Donna H. Laubscher, CPA, Partner, specializes in tax planning and consulting for individuals. She can be reached at DonnaL@hhcpa.com or (480) 483-1170.