By Corey J. Smith, Esq.
In the past several weeks, I've heard from my clients a lot of uncertainty about the new laws and assistance programs surrounding COVID-19. While there has been much discussion in the media and elsewhere about the Paycheck Protection Program ("PPP") and the Economic Injury Disaster Loan ("EIDL") program, there are additional important changes impacting tax law and creating additional opportunities for financial relief currently available to businesses and individuals. Let me share with you here a few of the topics I am speaking to my clients about:
Relief for Businesses
Net Operating Losses ("Carry-back")
The tax code imposes rules on how businesses may take Net Operating Loss ("NOL") deductions. The Tax Cuts and Jobs Act (TCJA) of 2017, for example, changed limits related to NOL carrybacks and carryforwards. Under the CARES Act, three changes were made to improve cash flow for struggling businesses:
- The CARES Act allows for NOLs from 2018-2020 to be carried back up to five previous years. This allows businesses another potential avenue to raise additional capital by amending previously filed tax returns.
- The CARES Act suspended the NOL limit of 80 percent of taxable income. This means that businesses may deduct their NOLs to eliminate all of their taxable income in a given year, instead of having to carry forward any NOL beyond 80 percent of taxable income.
- The CARES Act allows pass-through business owners to use NOLs to offset their non-business income above the previous limit of $250,000 (single) or $500,000 (married filing jointly) for 2018, 2019, and 2020.
Business owners should make it a priority to speak to their tax and legal advisors about these law changes and the limited opportunity that currently presents itself for those businesses that need this tax relief.
Relief for Individuals
- The CARES Act removes the penalty for early retirement distribution for 2020 IF the distribution is required due to the coronavirus outbreak. You qualify to use this relief from the normal penalty if you or a household member tested positive for the virus or face a variety of other negative economic consequences based on the pandemic. Employers can allow employees to self-certify that they are qualified.
- If you are over 70½ and are subject to take annual required minimum distributions ("RMDs") from your retirement account, the CARES Act means you will not have to do so in 2020. This can help prevent forcing retired individuals from recognizing large losses from extreme volatility we have had in the markets.
- The CARES Act allows penalty-free withdrawal from your retirement plan. If you are younger than 59½, the 10% early withdrawal penalty is waived on the first $100,000 distributed in 2020.
Retirement account holders should make it a priority to speak to their financial and legal advisors about these law changes and the unique rules that will only apply during this limited widow of time.
Economic Impact Payments
The economic impact payments ("Stimulus Checks") coming to Americans thanks to the CARES Act are technically based on your 2020 adjusted gross income. Although it has been called a stimulus, it is technically a pre-paid credit. Since your 2020 adjusted gross income (AGI) is impossible to know right now, the AGI from your 2018 or 2019 filed tax return will be used. The payments begin to phase out for single individuals with adjusted gross income of $75,000 or more a year and 150,000 for married couples. The additional $500 payment per dependent under the age of 17 is not phased out based on income.
So, is there any strategy concerning the stimulus payment that you should be thinking about and discussing with your tax and legal advisers? If your 2019 adjusted gross income would qualify you for the payment, but your 2018 return would not, you likely want to file your 2019 return as soon as possible. Additionally, if both your 2018 and 2019 income were over the thresholds for the payment you may still receive it when filing your 2020 tax return if your income is within the thresholds at that time.
If your 2018 or 2019 tax return included direct deposit information, your payment will be directly deposited into your bank. If you did not have your refund directly deposited and wish to have this payment directly deposited, in the coming weeks there is a web-based portal on the IRS.gov website allowing you to enter your current information. Otherwise, you will receive a check in the mail.
Discuss these topics and more with a tax or business planning attorney to help you determine your next move. Some law firms, like ours, will even offer free consultations to potential clients concerning business and tax planning. Never hesitate to get specific advice for your specific situation.
This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.