When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March of 2020, it included some changes to the federal tax code that individuals and businesses should be aware of.
- Social Security Tax Deferral: Employers and self-employed individuals may postpone paying Social Security taxes through the end of 2020, being paid back over the next two tax years.
- Cash Gifts: The CARES act allows individual taxpayers who take the standard deduction to include a deduction up to $300 for charitable cash gifts. These gifts must not be to a donor advised fund or related organization.
- Active Loss Offsetting: The CARES act provides that pass-through business owners may, without limit, offset active losses against other forms of income, including wages. This was limited to $250,000 per year per individual ($500,000 for married couples) by the TCJA. The unlimited offset applies to 2020 and retroactively to 2019 and 2018.
- Charitable Deduction Limit: Taxpayers making cash gifts to charities in 2020 may deduct up to 100% of their adjusted gross income (AGI), up from the usual deduction limit of 60% of AGI for charitable giving.
- Net Operating Loss Carrybacks: Businesses may now carry back losses incurred during 2018-2020 for five years, after the TCJA barred this practice. This means that companies will be allowed to file amended returns for tax years prior to 2018 when the corporate income tax rate was 35%.
- Waiver of Required Minimum Distribution: The Required Minimum Distribution has been waived for IRA owners and owners of qualified retirement plans for 2020. IRA owners and owners of other qualified plans may still use IRA funds to make a Qualified Charitable Distribution (QCD) up to $100k for individuals 70 ½ years old and older.
- Increased EBITDA Interest Deductions: The CARES act raised the limit for interest deductions to 50% of earnings before interest, taxes, depreciation, depletion, and amortization (EBITDA) for 2019-2020 using 2019 EBITDA to calculate the allowance. The TCJA had limited the deduction to 30% of EBITDA.