Save Taxes Under CARES Act!
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, provides timely cash tax savings for businesses and individuals to help them get through the COVID-19 pandemic and position themselves for success as the economy emerges from the pandemic. Amended return opportunities are available for the following changes brought by the CARES Act, among others:
1. For businesses, net operating losses from the 2018, 2019, and 2020 tax years can now be carried back. The excess business loss rules have been suspended temporarily for individuals.
What does that mean for me as a business owner?
Net operating losses equate reduction of taxes, so by shifting these losses to offset profits you get tax you paid back in the form of cold hard cash. Ask your CPA to see if amending the returns makes sense.
2. The limitation on business interest has been modified to allow more business interest to be deducted. The adjusted taxable income limit of 30% for the limitation is raised to 50% for 2019 and 2020.
What does that mean for me as a business owner?
Business interest is a legal and legitimate deduction against your profit, so being able to take it to mean less taxes. So this year you are able to write off more of those business interest and further reduces taxes.
3. Qualified improvement property is now eligible for 100% bonus depreciation, retroactive to property acquired and placed in service after 2017.
What does that mean for me as a business owner?
Similar to point 2 above, you are able to write off more as expenses and reduce taxes. Also similar to point 1, please check with your CPA to see if amending prior year returns make sense.
4. The employer portion of the Social Security tax is deferred. Also, the employee retention credit provided by the CARES Act allows eligible employers a refundable payroll tax credit equal to 50% of qualified wages paid to employees.
What does that mean for me as a business owner?
The deferred tax means cash flow that usually needs to go out are not (for now). Cash is king, any money you don’t have to pay for now is good news.
The refundable payroll tax credit means a reduction of tax expenses, and less money out of your pocket when it comes to tax filing time.
5. In addition, the CARES Act generally removes the 10% penalty on an early withdrawal from retirement accounts if the withdrawal is coronavirus-related, gives employers a temporary incentive to help employees pay down their student loans, and provides certain favorable rules for 2020 cash charitable contributions, among other things.
What does that mean for me as a business owner?
This point is more for individuals or on business owners’ personal tax situation. If you have to withdraw cash from your retirement accounts to tide you over this year, you are not subject to the usual rules or penalties.
If any of your employees need help to pay down student debt, you are encouraged, via tax incentives, to help them. Win-win for all!
For those charitable types that donate a lot to the extent of having to carry over those deductions, you are also rewarded to use those prior good deed to reduce taxes for now.
There are still several areas with unanswered questions. The IRS will inevitably continue to release guidance over the coming weeks and months, along with Congress or state legislatures may modify certain rules in upcoming COVID-19 laws.