Please note: This blog is current to the date of its publication, Friday, April 17. For additional updates or assistance navigating these uncertain times, please contact us or visit our SST COVID-19 resource page.
From postponing tax deadlines to implementing a payroll tax deferral, the financial impact of COVID-19 reaches individuals, businesses, institutions, nonprofit organizations and more. Below, SST experts provide a summary of the most important tax effects and what these updates mean for our clients across industries.
Charitable Contributions for 2020
- Corporations may deduct up to 25% of taxable income, up from the previous limit of 10%.
- The 25% deduction is eligible for gifts that go to a public charity and certain foundations, compared to the previous 10% deduction rules which now only applies to gifts to private foundations and Donor Advised Funds.
- A new deduction of up to $300 per taxpayer ($600 for a married couple) is available, in annual charitable contributions.
- This is available only to people who take the standard deduction. It is an “above the line” adjustment to income that will reduce a donor’s adjusted gross income (AGl), thereby reducing taxable income.
- A contribution to a donor advised fund (DAF) does not qualify for this new deduction.
Payroll Tax Deferral for Employers & Self-Employed Individuals
- Employers can defer payment of their 6.2% share of Social Security tax on wages paid from March 27 through Dec. 31, 2020. The first 50% of the deferred amount is due Dec. 31, 2021, and the remaining 50% is due Dec. 31, 2022.
- This does not apply to the employee’s share of Social Security tax, the employee or employer’s share of Medicare tax or to the Additional Medicare tax imposed on employees with Medicare wages in excess of $200K.
- An employer is ineligible to defer paying its portion of Social Security tax if they acquire a loan through the Paycheck Protection Program (PPP).
- The deferral can be used in conjunction with the Employee Retention Credit (see below) when the Credit does not result in a refund.
CARES Act Employee Retention Credit
- This is limited to wages paid between March 12, 2020, and Dec. 31, 2020.
- The wages are capped at $10,000 per employee for all quarters.
- The Credit does not apply if an employer acquires a PPP loan, as the business must retain and continue to compensate workers to claim this tax break.
- An employer is eligible for a retention credit if their gross receipts for a calendar quarter are less than 50% of gross receipts for the same calendar quarter in the prior year until the calendar quarter in which gross receipts are greater than 80% of the same calendar quarter in the prior year.
- Employers with cash flow problems can get this credit quickly by reducing employment tax deposits.
Net Operating Losses (NOL)
- NOLs arising 2018 to 2020 can now be carried back up to five years, although the carryforward rule was not changed. Such NOL carrybacks allow you to claim refunds for taxes paid in the carryback years because tax rates were higher before 2018.
- The 80% taxable income limit for utilizing NOLs is halted for 2018 through 2020.
- The cap on the deduction for business losses on individual returns is halted.
- Amending a 2018 or 2019 return to reflect the suspension of the excess business loss disallowance rule could result in a 2018 or 2019 NOL that could then be carried back to a prior tax year to recover taxes paid during that period.
Depreciation for Real Estate Qualified Improvement Property
- The CARES Act includes a retroactive correction to the 2017 Tax Cuts and Jobs Act (TCJA) that allows much faster depreciation for real estate qualified improvement property (QIP) that was placed in service after 2017.
- The retroactive correction allows you to claim 100% first-year bonus depreciation for QIP placed in service between 2018 and 2022.
2019 Contribution Deadlines to IRAs and HSAs Postponed
- The normal April 15, 2020, deadline for IRA and health saving account (HSA) contributions for the 2019 tax year is postponed to July 15, 2020, and Oct. 15, 2020, for extended returns.
Required Minimum Distributions (RMD)
- The CARES Act suspends all required minimum distributions (RMDs) from retirement accounts for 2020.
- These accounts include 401(k) accounts, inherited retirement accounts, 403(b) accounts and 457(b) accounts.
Borrowing from IRA
- IRA owners can borrow up to $100,000 from their IRA accounts and recontribute the amount any time within a three-year period of the withdrawal date. They can also treat the withdrawal and later recontribution as a tax-free rollover with no federal income tax consequences.
- There are no limitations on the use of these funds during the three-year period.
SST is committed to equipping our clients with the most up-to-date information concerning COVID-19. We’re closely monitoring developments and encourage you to contact us with any questions or explore our COVID-19 resource page for additional information.
Special thanks to SST team member Velma Garcia for providing the content for this post.