You are a savvy business owner.
So I know that you are aware that Congress passed the CARES Act in response to the COVID-19 pandemic.
In it, there are a lot of juicy tax benefits for you and your business.
In this blog post, I’ll tell you about a collection of important ones you need to know.
The CARES Act provides many tax benefits that can put cash in your pocket immediately!
Here is a list of the CARES Act tax breaks:
Expanded ability to use and get refunds from Net Operating Losses (NOLs)
Suspension of the rules limiting excess business loss
Increase charitable contributions deductions
Fixed QIP depreciation
Advance payments of refundable tax credits (Stimulus checks)
Let me break them down for you one-by-one.
Net Operating Losses (NOLs)
The CARES Act temporarily suspends some of the Tax Cuts and Jobs Act (TCJA) limitations on NOLs:
For NOLs that arise in tax years 2018, 2019, and 2020, you can now carry them back five years to obtain refunds of taxes previously paid.
Under the TCJA, an NOL deduction in a tax year usually cannot exceed 80 percent of taxable income, but the CARES Act suspends that limitation and allows a 100 percent deduction for tax years 2018, 2019, and 2020.
These new, temporary changes allow you to fully utilize your NOLs and potentially amend prior-year tax returns to get refunds.
You have an NOL when certain deductions exceed your gross income.
An NOL generally occurs when you have a net business loss for the tax year.
Example: John has a Schedule C loss of $40,000 and $10,000 in wage income from a part-time job. John’s NOL is $30,000.
Claiming Your Refund:
The best way to claim a refund from an NOL carryback is to use the “tentative refund” procedures by filing either:
Form 1045, Application for Tentative Refund, or
Form 1139, Corporation Application for Tentative Refund.
If you qualify to use these forms to claim your refund, you get two benefits:
You receive your cash refund within 90 days of filing your application.
The IRS makes only a limited examination of the claim for omissions and computational errors.
Normally, to qualify to use this procedure, you’d need to file your application no later than 12 months after the end of the tax year in which your NOL arose.
Therefore, for NOLs on a 2018 Form 1040, you’d normally be out of luck, as the deadline was December 31, 2019.
But the IRS has given you mercy!
You have a six-month extension to file your Form 1045 or Form 1139 if you have an NOL that arose in a tax year starting in 2018 and that ended on or before June 30, 2019.
For example, if your NOL was on your 2018 Form 1040, you now have until June 30, 2020, to file Form 1045.
You’d better hurry!
The TCJA created a new loss limitation rule (a ceiling) that limited your ability to use business losses.
The CARES Act retroactively eliminates the Section 461(l) limitation rule for tax years 2018, 2019, and 2020 and moves the start to tax year 2021.
Once again, this change allows you to possibly amend prior-year tax returns to get refunds now.
For tax year 2020 only, the CARES Act increases the limits on charitable contributions in four ways:
1. For individuals, there is no AGI limit for contributions normally subject to the 50 percent and 60 percent limitations.
2. If you are a non-itemizer, you may now deduct up to $300 of cash charitable contributions above the line. This above-the-line deduction is a permanent change starting with tax year 2020.
3. For corporations, the 10 percent limitation goes up to 25 percent of taxable income.
4. The limitation on deductions for contributions of food inventory goes from 15 percent to 25 percent.
Qualified Improvement Property
Congress fixed the TCJA error.
Qualified improvement property (QIP) is now 15-year property, and not 39-year property, for depreciation purposes.
This means QIP is now eligible for 100% bonus depreciation in 2018 and 2019, where previously you could use only Section 179 expensing.
This change is retroactive as if Congress originally included it in the TCJA, so you can amend prior-year returns to fully expense the property and potentially secure refunds.
Economic Stimulus Check
The stimulus check you receive this year is going to be your minimum amount.
You don’t have to repay it or pay taxes on it.
The stimulus check is an advance payment of a new refundable tax credit for your 2020 Form 1040 tax return. This is the return you will file in 2021. Next year, when you file your 2020 tax return, you could receive more cash if the 2020 return shows a bigger credit than you receive this year.
The advance tax credit is based on your 2018 or 2019 (if you filed it already) tax return. If your income qualifies for the full credit, you will receive
$1,200, or $2,400 if you filed a joint return, plus
$500 for each dependent age 16 or younger on December 31, 2020.
Your tax credit (stimulus check) goes down by 5 percent of the amount by which your adjusted gross income (AGI) exceeds
$150,000 on a joint return,
$112,500 on a head of household return, or
$75,000 for all other filing statuses.
The advance credit amount is based on
2019 AGI; or
2018 AGI, if you have not yet filed your 2019 return; or
2020 Social Security benefits statement, if you did not file a 2018 or 2019 tax return.
You’ll “true-up” your advance tax credit on your 2020 Form 1040 (which you will file in 2021):
If the tax credit amount (stimulus check) is less than the credit you qualify for based on 2020 AGI, then you’ll get the difference as a refundable tax credit in 2021 after you file your 2020 tax return.
If the cash amount you receive this year is greater than the credit you qualify for based on 2020 AGI, you have a windfall.
You don’t have to pay the excess cash back to the IRS.
There you have it!
Five ways for quick cash you can get to put back in your business.
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"CARES Act Cheat Sheet"
that summarizes the five tax breaks that will put cash in your business quickly!!
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