Additional Deductions Allowed Under the CARES Act + Is More Stimulus Funding on the Way?

 

When the coronavirus crashed headlong into our world, the only thing certain, was…well…uncertainty. A sentiment you’ve no doubt heard echoed on just about every media update since mid-March.

Yet now, nearly six months later, the prognosis remains…well…uncertain. Some businesses are open, while others remain closed. Some businesses are approaching full operational capacity, while others remain significantly scaled back. The rise in unemployment has slowed, but new jobless claims continue to roll in. And still, no one is certain where things are headed.

In response, the government continues to tinker with the CARES Act. Along with debating the passing of additional stimulus and relief funding. Both to aid individuals and businesses, possibly through another round of PPP loans or a similar lending program.

And to ensure you stay connected with the financial side of these developments, here are some key points to keep in mind:

ADJUSTMENTS TO NET OPERATING LOSS RULES
__________________________________

A Net Operating Loss occurs when your business’s allowable deductions exceed its taxable income. This is a critical breaking point, because if your net operating losses exceed your allowable deductions, your deductions for that fiscal year are effectively capped at that amount. In other words, you can’t claim losses that are higher than the amount of taxable income you earned.

To enable businesses to circumvent these capped deductions, the Carryback clause was introduced. Under this clause, if your business’s allowable deductions exceed your taxable income in a given fiscal year, you can “carryback” those losses and readjust filings for up to two years prior to the current tax year. This would allow you to claim more deductions for the past two fiscal years (assuming you don’t exceed your taxable income).

The Tax Cuts + Jobs Act, however, which took effect 2018, removed the Carryback clause and replaced it with the “carryforward” clause. This clause allows you to spread deductions for Net Operating Losses indefinitely, over future tax years.

Meanwhile, the CARES Act reinstated the Carryback clause for a five year period. Under this new condition, Net Operating Losses from 2018, 2019 + 2020, can be “Carried Back” for the next five years.

This is a HUGE boon to many small businesses destined to see losses over the next several years related to the COVID-19 pandemic, as it enables businesses to spread operating losses out over several fiscal years and take full advantage of all allowable deductions. And such losses are likely to be significant due to expected lower earnings resulting from the pandemic.

ADDITIONAL CHARITABLE DONATION ALLOWED UNDER THE CARES ACT
__________________________________

The CARES Acts offers a number of potentially lucrative deductions for increased charitable donations (to qualified charities). Here are some of the key deductions now available to taxpayers making charitable donations:

Universal Deduction

For those who do not itemize their deductions in the 2020 tax year, you can deduct up to $300 (per individual) off of your gross income. And this is an “Above the line” deduction applied prior to the calculation of your adjusted gross income.

Donations 100% Deductible From Adjusted Gross Income For Individuals

If you’re itemizing your deductions, the CARES Act allows you to deduct 100% of your cash donations from your Adjusted Gross Income (AGI). This is a significant increase from the prior limit of 60% for such donations.

Donation Deductions Also Increased For Corporations

Under the CARES Act, corporate givers can now deduction up 25% from their business’s AGI for charitable donations. This is a 15 point increase from the prior 10% deduction limit.

IRA Qualified Charitable Distributions (QCD) Increased (For Those in the Right Age Bracket)

If you’re over 59 1/2, you can take a cash distribution from your IRA and claim a 100% deduction from your AGI for any portion of the funds used to make a cash charitable donation.

Important Points to Keep in Mind: Qualified Charities + Cash Donations ONLY!

These deductions can only be claimed for donations to QUALIFIED charities. If you have a charity in mind, but are not sure if it meets the correct status, double-check with your CPA or a qualified tax advisor.

Additionally, these deductions are applicable to CASH donations ONLY. Donations of physical property, real estate, securities, or other non-cash held assets do not qualify for any of the deductions noted above.

IS ADDITIONAL STIMULUS + MORE PPP FUNDING ON THE WAY?
__________________________________

Second Round of Stimulus Checks

While the $1,200 stimulus checks were certainly appreciated by the individuals and families who received the funds, most would agree it was a literal “drop in the bucket.” Especially, for those furloughed, laid off, or let go from businesses that outright folded. And that money is likely long gone for those struggling with lost or decreased employment.

Both Democratic and Republican lawmakers support an additional round of stimulus funding. The Senate and the House of Representatives have each drafted competing bills: The HEALS Act + HEROES Act, respectively. And the President himself has expressed not only support for a second round of stimulus funding but has publicly stated he’d like to see a figure that’s “much higher” than the $1,200 granted to qualified individuals in the first round.

Thus, it seems inevitable additional stimulus funding is imminent. It’s now largely a matter of how much and when. But given that Congress adjourned for summer break without passing another bill, it could take several more months for this legislation to see the light of day.

Extended Unemployment Benefits

The extended unemployment benefits — which granted an additional $600 per week to those who lost their job due to the COVID-19 pandemic — expired on July 31st. This is another aspect of economic relief both Democratic and Republic lawmakers agree should be extended. But neither side can agree on the terms.

The inter-party quibble revolves around the dollar amount of the extension and how long the increased benefit should be offered. Suggested plans have ranged from maintaining the current $600 per week figure to as little as $200 per week to a sliding scale that begins at $200 per week and increases up to $500 per week if the unemployed individual is unable to find replacement work.

Here again, additional funding is inevitable. But exactly when it might come and just how much it will be is still up in the air.

Additional PPP Funding

The Payroll Protection Program (PPP) was designed to help smaller businesses impacted by the pandemic avoid making layoffs. The results, however, have been mixed.

Many PPP eligible businesses chose not to take funds and simply made layoffs, ultimately opting for the path of least resistance.

Others took on PPP loans, but used much of the funds to cover rent and other operational expenses (which was technically allowed due to a subsequent program amendment).

And still others took PPP funds, but as soon as the money ran out, laid-off employees anyway (mostly because they couldn’t afford to keep the staff without additional financial aid).

Regardless, PPP loans were WIDELY sought after by a huge number of eligible businesses. And the available monies were quickly depleted, disappearing almost instantly in two rounds of funding. As such, all of the proposed stimulus packages include additional funding for PPP (or PPP like programs).

And just like the rest of the proposed stimulus, it all boils down to when, how much, and in the case of PPP, eligibility factors. This time around PPP will likely zero in on the hardest hit small businesses. Specifically targeting those companies that have lost 50% or more of their revenue due to the pandemic.

Have More Questions About CARES Act Deductions?

This overview really just scratches the surface. As has been the case all along, I could fill volumes with explanations and analysis of how all the quickly churned out legislation impacts you and your finances, both personally and business-wise.

So, if more questions come to mind or you’re seeking additional guidance, please don’t hesitate to get in touch.

I look forward to hearing from you!