22 Tax Law Changes for 2020

Wow. Good to know:

  1. Individual recovery rebate/credit
  2. No 10% additional tax for coronavirus-related retirement plan distributions
  3. Limit on plan loans temporarily increased to $100,000; repayments delayed
  4. Required minimum distributions (RMD’s) from retirement plans/accounts are waived for 2020
  5. Tax-excluded education payments by an employer temporarily include student loan repayments
  6. Changes to the definition of qualified medical expenses
  7. High deductible health plan safe harbor for telehealth services
  8. $300 above-the-line charitable deduction
  9. Modification of limitations on individual cash charitable contributions during 2020
  10. Modification of limitations on corporate cash charitable contributions during 2020
  11. Increase in limits on contributions of food inventory
  12. Employee retention credit for employers
  13. Delay of payment of employer payroll taxes
  14. Advance refunding of credits for paid sick leave and paid family leave
  15. Temporary repeal of taxable income limitation for net operating losses (NOLs)
  16. Modification of rules relating to net operating loss (NOL) carrybacks
  17. Modification of limitation on losses for non-corporate taxpayers
  18. Deductibility of interest expense temporarily increased
  19. Forgiveness for Paycheck Protection Program loans
  20. Corporate minimum tax credit (MTC) is accelerated
  21. Suspension of aviation excise taxes
  22. Bonus depreciation technical correction for qualified improvement property

Comments on above tax law changes here…

1.       Individual recovery rebate/credit.

New law—credit allowed for 2020. Under the CARES Act, an eligible individual is allowed an income tax credit for 2020 equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return) plus (2) $500 for each qualifying child of the taxpayer. For purposes of the child tax credit, the term “qualifying child” generally means a dependent child of the taxpayer under age 17. A married couple with two children under 17 and adjusted gross income below the $150,000 phase-out threshold would receive a credit of $3,400. There’s no minimum income requirement. Individuals with no income, as well as those whose income comes entirely from non-taxable benefit programs such as SSI, are eligible for the credit and the advance rebate.

2.       No 10% additional tax for coronavirus-related retirement plan distributions (the 10% additional tax has previously applied to early retirement plan distributions).

New law. The CARES Act provides that the 10% additional tax does not apply to any coronavirus-related distribution, up to $100,000. A coronavirus-related distribution is any distribution (subject to dollar limits discussed below), made on or after Jan. 1, 2020, and before Dec. 31, 2020, from an eligible retirement plan made to a qualified individual.

A qualified individual is an individual (1) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (2) whose spouse or dependent is diagnosed with such virus or disease by such a test, or (3) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

3.       Limit on qualified employer plan loans temporarily increased to $100,000; repayments delayed.

New Law. The CARES Act temporarily increases the amount allowable from a qualified employer plan to a qualified individual made during the 180-day period beginning on Mar. 27, 2020, to the lesser of (A) $100,000 or (B) the present value of employee s non-forfeitable accrued benefit.

A qualified employer plan is (i) qualified plan which included a tax-exempt trust, (ii) a qualified annuity; (iii) a tax-sheltered annuity; and (iv) a governmental plan.

The CARES Act also provides that, for a qualified individual with an outstanding plan loan (on or after Mar. 27, 2020) from a qualified employer plan, if the due date under the five year and level amortization requirements of Code Sec. 72(p)(2) for any repayment for the loan occurs during the period beginning Mar. 27, 2020 and ending on Dec. 31, 2020, the due date is delayed for one year.

4.       Required minimum distributions waived for 2020.

New Law. The IRA trustee, issuer, or custodian must notify an IRA owner that no RMD is due for 2020. This requirement is satisfied if a copy of the Form 5498, IRA contribution information that is filed with the IRS is furnished to the IRA owner. See Notice 2020-51, 2020-29, 06/23/2020, IRC Sec(s). 401

The CARES Act provides that the required minimum distribution (RMD) requirements do not apply for calendar year 2020. The CARES Act suspends the RMD rules for RMDs that you would otherwise be required to take in calendar year 2020. The suspension also applies to your initial RMD if you turned 70½ in 2019, but did not take that initial RMD in 2019. Before the CARES Act, the deadline for taking that initial RMD was 4/1/20 (the initial RMD is actually for calendar year 2019, even though you opted to put it off until 2020). Now, thanks to the CARES Act, you can put off any and all RMDs that you would have otherwise been required to take in 2020, regardless of your age.

For 2021 and beyond, the RMD rules will generally be applied as if 2020 never happened. In other words, RMD deadlines are effectively pushed back by one year, and RMD deadlines that would have otherwise applied for 2020 are effectively ignored.

5.       Tax-excluded education payments by an employer temporarily include student loan repayments.

New Law. The CARES Act adds to the types of educational payments that are excluded from employee gross income “eligible student loan repayments” (below) made before Jan. 1, 2021. The payments are subject to the overall $5,250 per employee limit for all educational payments. Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principle or interest on any qualified higher education loan. To prevent a double benefit, student loan repayments for which the exclusion is allowable can’t be deducted, which allows the deduction of student loan interest subject to a dollar limit and a phase-out above specified taxpayer income levels.

6.       Changes to definition of qualified medical expenses.

New Law. The CARES Act eliminates the requirement that qualified medical expenses include only amounts paid for prescribed medicine or drugs, and provides that qualified medical expenses include amounts paid for “menstrual care products.” The CARES Act defines menstrual care products as a tampon, pad, liner, cup, sponge, or similar product used by individuals with respect to menstruation or other genital-tract secretions. The CARES Act also provides that expenses incurred for menstrual care products are treated as incurred for medical care, and eliminates the requirement that qualified medical expenses include only amounts paid for prescribed medicine or drugs.

Effective dates. The amendments made by Act Sec. 3702(a) and (b) apply to amounts paid from HSAs and Archer MSAs after Dec. 31, 2019. The amendment made by Act Sec. 3702(c) applies to expenses incurred under FSAs and HRAs after Dec. 31, 2019.

7.       High deductible health plan safe harbor for telehealth services.

New Law. Under the CARES Act, in the case of plan years beginning on or before Dec. 31, 2021, a health plan will not fail to be treated as an HDHP by reason of failing to have a deductible for telehealth and other remote care services.

8.       $300 above-the-line charitable deduction.

New Law. The CARES Act adds a deduction to the calculation of gross income, in the case of tax years beginning in 2020, for the amount (not to exceed $300) of qualified charitable contributions (QCCs) made by an eligible individual during the tax year. For this purpose, the term “eligible individual” means any individual who does not elect to itemize deductions.

Effective date. The amendments made by CARES Act Sec. 2204 apply to tax years beginning after Dec. 31, 2019.

9.       Modification of limitations on individual cash charitable contributions during 2020.

Under pre-Act law, individuals were allowed a deduction for cash contributions to certain charitable organizations (such as churches, educational organizations, hospitals, and medical research organizations) up to 60% of their contribution base (generally, adjusted gross income (AGI)). If the aggregate amount of an individual’s cash contributions to these charities for the year exceeded 60% of the individual’s contribution base, then the excess was carried forward and treated as a deductible charitable contribution in each of the five succeeding tax years.

New law. The CARES Act provides that (except as stated below) qualified contributions are disregarded in applying the 60% limit on cash contributions of individuals and the Code Sec. 170(d)(1) rules on carryovers of excess contributions. Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as deductions for the contribution year.

Qualified contributions are charitable contributions if (i) they are paid in cash during calendar year 2020 to a qualified charitable organizations; and (ii) the taxpayer has elected to apply this provision with respect to the contribution.

Effective date: The amendments made by CARES Act Sec. 2205(a) apply to tax years beginning after Dec. 31, 2019.

10.   Modification of limitations on corporate cash charitable contributions during 2020.

Under pre-Act law, a corporation’s charitable deduction could not exceed 10% of its taxable income, as computed with certain modifications. If a corporation’s charitable contributions for a year exceeded the 10% limitation, the excess was carried over and deducted for each of the five succeeding years in order of time, to the extent the sum of carryovers and contributions for each of those years did not exceed 10% of taxable income.

New law. The CARES Act provides that qualified contributions are disregarded in applying the 10% limit on charitable contributions of corporations and the Code Sec. 170(d)(1) rules on carryovers of excess contributions. Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of 25% of the corporation’s taxable income (as computed under Code Sec. 170(b)(2)) over the amount of all other charitable contributions allowed to the corporation as deductions for the contribution year. If the aggregate amount of qualified contributions exceeds the limitation in the previous paragraph, the excess is taken into account under the Code Sec. 170(d)(2) carryover rule, subject to its limitations. Effective date:

The amendments made by CARES Act Sec. 2205(a) apply to tax years beginning after Dec. 31, 2019. (Act Sec. 2205(c))

11.   Increase in limits on contributions of food inventory.

Under pre-Act law, a donation of food inventory to a charitable organization that used it for the care of the ill, the needy, or infants was deductible in an amount up to basis plus half the gain that would be realized on the sale of the food (not to exceed twice the basis). In the case of a C corporation, the deduction could not exceed 15% of the corporation’s income. In the case of a taxpayer other than a C corporation, the deduction could not exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer’s charitable deductions for the year.

New Law. In the case of any charitable contribution of food during 2020, the taxable income limits are 25% rather than 15%.

Effective date: The amendments made by Act Sec. 2205(b) apply to tax years beginning after Dec. 31, 2019. (Act Sec. 2205(c))

12.   Employee retention credit for employers.

New Law. The CARES Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.

Eligible employers. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings.

The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. When the employer’s gross receipts exceed 80% of the comparable quarter in 2019, the employer no longer qualifies for the credit at the end of that quarter.

The credit is not available to employers receiving Paycheck Protection Program (PPP) loans under Sec. 1102 of the Act (Act Sec. 2301(j)) or to self-employed individuals. (Miscellaneous IRS Documents Retention Credit FAQs: Employee Retention Credit under the CARES Act)

No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit (Code Sec. 21) with respect to the employee.

Refunds and Advance Payments. IRS can advance payments to eligible employers if the amount of the credit for any calendar quarter exceeds the applicable payroll taxes, the employer can claim a refund of the excess on its federal employment tax return. In anticipation of receiving the credits, employers can also fund qualified wages by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS (or by requesting an advance of the credit from the IRS on Form 7200 (Advance Payment of Employer Credits Due to COVID-19)). (Miscellaneous IRS Documents Retention Credit.

Waiver of penalties. IRS can waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit.

Effective date. The credit applies to wages paid after Mar. 12, 2020 and before Jan. 1, 2021

13.   Delay of payment of employer payroll taxes.

New Law. The CARES Act allows employers to defer payment of the employer portion of Social Security and RRTA taxes, and allows self-employed individuals to defer payment of certain self-employment taxes through the end of 2020.

14.   Advance refunding of credits for paid sick leave and paid family leave.

New Law. The CARES Act provides for advance refunding of the credits for qualified sick leave wages paid and qualified family leave wages paid. In anticipation of the credits for qualified leave wages, including the refundable portion, the credits may be advanced, according to forms and instructions provided by IRS, up to an amount 100% of qualified leave wages paid by the employer each calendar quarter, subject to the limits calculated through the end of the most recent payroll period in the quarter.

Penalty relief. IRS will waive any penalty under Code Sec. 6656 for any failure to make a deposit of the tax imposed by Code Sec. 3111(a) or Code Sec. 3221(a) if IRS determines that the failure was due to the anticipation of the credits allowed.

Effective date. The credits apply only to qualified sick and family leave wages paid for the period beginning on Apr. 1, 2020 and ending on Dec. 31, 2020.

15.   Temporary repeal of taxable income limitation for net operating losses.

New Law. The CARES Act temporarily removes the taxable income limitation to allow an NOL carryforward to fully offset income. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the 80% limitation in present law). For tax years beginning after 2021, taxpayers will be able to take: (1) a 100% deduction of NOLs arising in tax years prior to 2018, and (2) a deduction limited to 80% of modified taxable income for NOLs arising in tax years after 2017. The provision also includes a technical correction to the 2017 Tax Cuts and Jobs Act (TCJA, P.L. 115-97) relating to the effective date of the NOL carryback repeal.

Effective date. The amendments made by Act Sec. 2303(a) apply to tax years beginning after Dec. 31, 2017, and to tax years beginning on or before Dec. 31, 2017, to which NOLs arising in tax years beginning after Dec. 31, 2017 are carried.

16.   Modification of rules relating to net operating loss (NOL) carrybacks.

New law. The CARES Act provides that NOLs arising in a tax year beginning after Dec. 31, 2017 and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. The provision also temporarily disregards NOL carrybacks for purposes of the Code Sec. 965 transition tax and contains special rules for real estate investment trusts (REITs) and insurance companies.

Effective date. The amendments made by Act Sec. 2303(b) apply to NOLs arising in tax years beginning after Dec. 31, 2017 and to tax years beginning before, on or after such date to which such NOLs are carried.

17.   Modification of limitation on losses for non-corporate taxpayers.

Prior to modification by the CARES Act, Code Sec. 461(l)(1) disallowed the deduction of excess business losses by non-corporate taxpayers for tax years beginning after Dec. 31, 2017 and ending before Jan. 1, 2026. Generally, Code Sec. 461(l)(3)(A) provides that an “excess business loss” is the excess of the (1) taxpayer’s aggregate trade or business deductions for the tax year over (2) the sum of the taxpayer’s aggregate trade or business gross income or gain plus $250,000.

New law. The CARES Act retroactively modifies the loss limitation for non-corporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020 (with losses arising in tax years beginning after Dec. 31, 2020 and before Jan. 1, 2026 continuing to be subject to the limitation). The provision also includes retroactive technical corrections to the TCJA. Thus, the provision clarifies that excess business losses don’t include net operating loss deduction (NOL) or under Code Sec. 199A (qualified business income deduction).

Effective date. The amendments made by Act Sec. 2304(a) apply to tax years beginning after Dec. 31, 2017.

18.   Deductibility of interest expense temporarily increased.

Background. The Tax Cuts and Jobs Act of 2017 (TCJA, P.L. 115-97) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.

New law. The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Sec. 163(j)(1) from 30% to 50% for tax years beginning in 2019 and 2020.

Effective date. The amendments made by Act Sec. 2306 apply to tax years beginning after Dec. 31, 2018.

19.   Taxation of Paycheck Protection Program loan forgiveness.

New law. Section 1102 of the CARES Act created a new lending program (the “Paycheck Protection Program” or “PPP”) under Section 7(a) of the Small Business Act (15 USC 636) to provide low-interest loans to certain small businesses (generally those with 500 or fewer employees) and self-employed individuals for the purpose of covering payroll and other eligible expenses during the covered period (Act Sec. 1102(a)).

An individual or entity that was eligible to receive a covered loan (eligible recipient) can receive forgiveness of the full principal amount of the covered loan up to an amount equal to the following costs incurred and payments made during the covered period: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) any covered rent obligation payment, and (4) any covered utility payment (eligible expenses).

To start the process of loan forgiveness, we advise you to first contact the lender that is servicing your loan. Different financial institutions have different procedures to be followed and while we remain available to assist in the process of the client to receive PPP loan forgiveness, the financial institution granting the PPP loan is the ultimate authority and recognized processor of the PPP loan forgiveness program.

20.   Corporate minimum tax credit (MTC) is accelerated.

Background. Corporations (for which the alternative minimum tax was repealed for tax years after 2017) may claim outstanding MTCs (subject to limits) for tax years before 2021, at which time any remaining MTC may be claimed as fully refundable. Thus, under Code Sec. 53(e), the MTC is refundable for any tax year beginning in 2018, 2019, 2020, or 2021, in an amount equal to 50% (100% for tax years beginning in 2021) of the excess MTC for the tax year, over the amount of the credit allowable for the year against regular tax liability.

New law. The CARES Act changes “2018, 2019, 2020, or 2021” (above) to “2018 or 2019,” and changes “(100% for tax years beginning in 2021)” to “(100% for tax years beginning in 2019).” Allowing corporations to claim 100% of AMT credits in 2019. The CARES Act also provides for an election to take the entire refundable credit amount in 2018.

Under the CARES Act, a claim for credit or refund where a corporation elects to take the entire refundable credit amount in 2018 must be treated as a tentative carryback refund claim.

Effective date. The amendments made by Act Sec. 2305 apply to tax years beginning after Dec. 31, 2017.

21.   Suspension of aviation excise taxes.

Background. Excise taxes are imposed on: (1) the air transportation of persons (i.e., ticket tax), including amounts paid for the right to provide mileage awards; and (2) the air transportation of property (i.e., cargo tax). Excise taxes are imposed on kerosene used in commercial aviation.

New law. The CARES Act suspends the excise taxes imposed on the air transportation of persons (including amounts paid for the right to provide mileage awards), and on the air transportation of property. The suspension applies to amounts paid from Mar. 28, 2020 through Dec. 31, 2020.

The CARES Act also suspends the imposition of tax on kerosene used on commercial aviation. The suspension applies to kerosene used in commercial aviation from March 28, 2020 through Dec. 31, 2020.

Effective date. The suspensions, as well as the changes to the rules apply from Mar. 28, 2020 through Dec. 31, 2020.

22.   Bonus depreciation technical correction for qualified improvement property.

New law. The CARES Act provides a technical correction to the TCJA, and specifically designates QI Property as 15-year property for depreciation purposes. This makes QI Property a category eligible for 100% Bonus Depreciation. QI property also is specifically assigned a 20-year class life for the Alternative Depreciation System (ADS).

Effective date. The amendments made by Act Sec. 2307 are effective for property placed in service after Dec. 31, 2017.