The CARES Act is 854 pages long and introduces several programs, laws, and tools intended to provide relief to businesses and individuals during the coronavirus pandemic. The Paycheck Protection Program gets most of the attention, but many other laws can bring you cash, if done right. Here are four tax law changes in the CARES Act you shouldn’t overlook.
1. Offset more income with losses
Before the passing of the CARES Act, individuals could claim pass-through losses and offset their income. However, these business losses were limited to $250,000 if that person filed as single or $500,000 if she filed as married filing jointly. This rule, known as the excess business loss limitation, applied to individuals who received income from partnerships, S corporations, or sole proprietorships.
The CARES Act repeals this limitation for tax years 2018, 2019, and 2020, but the limitations are still in place for 2021 – 2026. If this limitation negatively affected you in 2018 or 2019, make sure to amend your return(s)!
Farmers have their own unique version of this law – the excess farm loss rule. They were limited to $300,000 in losses if they received certain government subsidies in that tax year. The CARES Act repeals this limitation for tax years before Jan. 1, 2026.
2. Accelerate your AMT credits
If you operate a C corporation, you’re probably well aware that the Tax Cuts and Jobs Act of 2017 repealed the alternative minimum tax (AMT). When the AMT was in effect, anytime a C corporation paid the AMT, it created an AMT credit that it could carry back or forward to offset its regular income tax. When the TCJA repealed the AMT, any existing credits became refundable over a four-year schedule (2018 – 2021) at varying percentages.
The CARES Act accelerates the refundability of the AMT credits so C corporations can get the cash quicker. All available credits are refundable in 2019 unless the C corporation elects to make them fully refundable in 2018. How you claim your refundable AMT credits depends on your facts and circumstances. Generally, you can claim them by filing an amended return.
In some situations, you may be able to claim them when you file Form 1139 (also used to claim refunds for NOL carrybacks). Read our blog to learn more about how the CARES Act changed net operating loss rules.
3. Save more when you give more
If you don’t itemize your deductions, you can claim a deduction up to $300 for cash donations you make to charitable organizations. This above-the-line deduction is available for tax years that start after Dec. 31, 2019. If you go this route, you can decrease your income by $300 and still claim the standard deduction.
The CARES Act also eliminates the 2020 deduction limitation on cash contributions. Before the Act, individual taxpayers could claim a deduction of up to 50% of their adjusted gross income (AGI). This limitation is gone, encouraging individuals to make more cash contributions to charitable organizations and benefit from full deductibility. You could donate your entire year’s income to charity, claim that amount as a deduction, and owe no taxes in that year. If you can give, many organizations need the money, and you’ll receive a tax benefit.
Beginning in 2020, C corporations are permitted to give up to 25% of their taxable income to charities and receive a deduction. Previously, C corporations were limited to 10% of taxable income. And, the limitation on contributions of food inventory has increased. The limitation on any deductions for donating food increases to 25% of taxable income.
Our blog on the charitable contribution deduction has all the specifics you need to know – just keep the new laws in mind. If you’re a tax-exempt organization, now’s the time to encourage donations!
4. Increase your deduction of business interest expense
The Tax Cuts and Jobs Act limited the amount of business interest expense a company can deduct. The limit was 30% of the company’s adjusted taxable income (ATI). The CARES Act increases the limit for most businesses to 50% of ATI for tax years 2019 and 2020. If it benefits you to keep this limit at 30%, you can elect not to use the increased limitation.
And, the CARES Act allows all businesses to elect to use their 2019 ATI when calculating their 2020 interest expense limitation if the result is beneficial. Many companies were negatively impacted by the COVID-19 pandemic in 2020 and may find they can deduct more interest expense if they use their 2019 ATI.
If your business is a partnership, the increase to 50% of ATI only applies to tax years beginning in 2020. If you choose not to use 50% of ATI in 2019, the election must be made at the partnership level. And, partnerships can use their 2019 ATI in 2020 if it’s more beneficial.
There’s one more special rule for partnerships. Partners can treat the 50% of business interest expense allocated to them in a tax year beginning in 2019 as if it was paid or incurred in their first tax years beginning in 2020. Because partnerships can apply this rule in 2019, it’s rolled into 2020.
These aren’t the only tax law changes in the CARES Act. There are more that affect retirement plans, net operating losses, and qualified improvement property (links to those posts are below).
Our tax professionals can help you understand how the tax changes in the CARES Act and how they affect you. Let’s talk!