The Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted to help individuals and businesses through the financial hardships caused by COVID-19. Below is a summary of the most significant tax provisions.

Individual Provisions:

Recovery Rebates

The CARES Act created a tax credit for individual taxpayers against taxes owed in 2020 and authorizes an advance payment (rebate) of the credit to taxpayers immediately. Your 2020 income will determine how much you were supposed to receive, and any excess will be charged against your 2020 tax liability. If the amount you received was greater than your 2020 income indicates you should’ve received, you will not have to repay any amount of your stimulus check. Adults who were dependents in 2019, but are filing individually in 2020, will also be eligible to receive the proper amount of rebate on their 2020 tax return.

Charitable Contributions

You can deduct up to $300 of charitable contributions above the line, even if you’re taking the standard deduction. This means that your AGI can be reduced by $300 for qualified charitable contributions. Also, taxpayers who choose to itemize can take up to 100% of their AGI as a deduction from charitable contributions, rather than the standard 60%. Keep in mind that these new incentives only apply to contributions to public charities and not to supporting organizations or public charities that sponsor donor advised funds.

Penalty-Free Withdrawals from Qualified Retirement Plans

The CARES Act relaxes the rules on withdrawals from qualified retirement plans. Eligible taxpayers may take up to $100,000 of “coronavirus-related distribution” per taxpayer. The bill allows taxpayers to forgo the 10% penalty on early withdrawal from a qualified retirement account. Taxpayers can then elect to either pay taxes over three years, or defer the taxes completely for up to three years.

Waiver of Minimum Distributions from Defined Contribution Plans

Required minimum distributions for defined contribution plans such as 401(k)s and IRAs are waived for 2020, even for those not affected by the coronavirus.

On June 23, 2020 the IRS in Notice 2020-51 announced that any individual that previously took a required minimum distribution (RMD) in 2020 from his or her traditional IRA and/or qualified retirement account now has the opportunity to rollover those funds back into a retirement account. Affected individuals now have until August 31, 2020 to perform a rollover and return any unwanted 2020 RMDs into their traditional IRAs or qualified retirement accounts.

Business Provisions:

Modification of Net Operating Losses (NOLs)

The CARES Act reinstated the Net Operating Loss carryback rule that was eliminated in the Tax Cuts and Jobs Act. Taxpayers may choose to carryback NOLs up to 5 years prior for 2018, 2019, and 2020 taxes. Owners of pass-through entities are no longer subject to excess business losses for 2018, 2019 and 2020.

Business Interest Deduction

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The Tax Cuts and Jobs Act had limited the deductibility of business interest to 30% of taxable income. Under the Cares Act the allowance deduction has been increased to 50%.

Qualified Improvement Property

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A major drafting error of the Tax Cuts and Jobs Act related to Qualified Improvement Property (QIP) was corrected with the passage of the CARES Act. Qualified Improvement Property consists of “any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in services after the date such building was first placed in service.” The TCJA failed to classify QIP as 15-year property under MACRS or 20-year property under ADS and instead was depreciated as 39-year property and 40-year property under MACRS and ADS, respectively. It also prevented QIP from being eligible for 100% bonus depreciation. The correction can be applied retroactively to January 1, 2018.