How To Reap The Maximum Tax Savings Under The CARES Act
May 2020 ISSUE May 1, 2020Tax General/Other
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Revised April 30, 2020. Originally Published March 30, 2020.
The major CARES Act tax provisions that will affect you and your practice are as follows.
Practice-Related Tax Savings
1. Employee Retention Tax Credit – The new CARES Act creates a refundable payroll tax credit equal to 50% of wages paid by eligible employers. For practices with 100 or fewer full-time employees, qualified wages are 100% of wages paid. Up to $10,000 in qualified wages can be taken into account per employee in determining the credit amount. Health plan expenses are treated as wages in computing this credit.
Eligible practices will include virtually all dental practices, since they were required to fully or partially suspend operations due to COVID-19. Other businesses are eligible if their gross receipts are 50% less for the same quarter this year than for last year.
2. Payment Delay for Employer Payroll Taxes – Practices can defer or postpone payment of the employer share of their Social Security payroll taxes due through the end of 2020. The deferred taxes must be paid in two installments, the first due by December 31, 2021 and the second by December 31, 2022.
3. Carryback of Net Operating Losses (NOLs) – Any net operating losses incurred in 2018, 2019, and 2020 can be carried back up to five years to recoup income taxes previously paid. This includes NOLs from S corporations, LLCs, sole proprietorships, and other pass-through entities.
4. Immediate Expensing for Qualified Improvement Property – The cost of qualified improvements (including leasehold improvements for dental build-out) are now eligible for immediate expensing through bonus depreciation, correcting a technical error in the 2017 tax law change.
Individual Tax Savings Provisions
1. Income Tax Rebates – Tax credits of $1,200 per individual ($2,400 for married doctors) will be rebated directly to you, along with a $500 credit for each child eligible for the child tax credit (under age 17). Unfortunately, the credits are phased out for doctors whose adjusted gross income (AGI) on their most recent federal income tax return exceeds $75,000 (single) and $150,000 (married), and are eliminated completely once AGI reaches $99,000 (single) and $198,000 (married). The income used is based on your 2019 return (if filed), or 2018 return if you have not yet filed in 2019. The rebate will be direct deposited into your checking account if listed on your tax return, or mailed to you otherwise.
2. Student Loan Payments Made by the Practice are Tax-Free – Qualified student loan payments made by the practice directly to the lender, or to an employee (i.e. associate/staffer, etc.) to be used for loan repayment are tax-free, if made during 2020, up to a maximum of $5,250. This provision is temporary and expires on December 31, 2020.
3. Favorable Access to Retirement Plan Funds – Under the new rules, the limit on retirement plan loans has been increased from $50,000 to $100,000 and the repayment deadline delayed for any retirement plan loans that are due in 2020. Furthermore, there will be no 10% early withdrawal penalty on hardship distributions of up to $100,000 from retirement plans. However, these distributions are counted as taxable income unless recontributed to the retirement plan within three years thereafter. These recontributions will not affect your annual contribution limit. Doctors seeking to take advantage of these retirement plan options may encounter 2-4 week delays in receiving funds, since the retirement plan may have to be amended, new interim valuations performed, and applications processed. As a result, we continue to recommend you use these options as a last resort, accessing needed funds in the priority set forth in “Don’t Let Your Emergency Fund Rob Your Retirement Nest Egg.”
4. Temporary Waiver of Required Minimum Distributions (RMDs) for 2020 – While RMDs are required for doctors after reaching age 72 (70½ before 2020), these provisions are waived for this year (2020).
5. Enhanced Charitable Contribution Deductions – Doctors who don’t itemize their deductions can claim an above-the-line deduction for cash contributions made up to $300 in 2020. In addition, for doctors who do itemize, the provision limiting cash contributions to no more than 50% of adjusted AGI (60% through 2025), are waived for the current year so that full contributions are allowed.
The McGill Advisory content is provided for informational purposes only and does not constitute legal, accounting, or other professional advice.
Copyright © 2021 John K. McGill & Company, Inc.