Speaker 1: This lesson is called recent developments in the tax law and what it will focus on are changes to the tax all made by the CARES act. All right, CARES act stands for the Coronavirus Aid Relief and Economic Security act that was passed by Congress and signed by president Trump back toward the end of March of 2020 and you’ve heard it … it’s called the CARES act. You’ve heard a lot of things about the CARES act in the press over the last several months and it was something that was … there’s a lot of provisions in there that were there to try to help the country, help businesses, help individuals be able to survive and maintain cashflow through the pandemic while the country is adjusting to what it needs to do to be able to eventually get back to normal operations with the virus but there’s some tax changes in here but some relate to this type of economic relief that was needed because of the pandemic. There are some other changes that were just some things that were setting to the side in Congress, that the next time they passed a tax bill, they needed to include these and some of those we’ll be covering here also. These are going to be tested on the CPA exam beginning October 1st of 2020, and the AICPA will continue to test the 2020 tax law until July 1st of 2021. Once you get to July 1st of 2021, you’ll be tested on the 2021 law, but from October 1st until … of 2020, until June 30th of 2021, the items that I’m going to be going over in this lesson are testable. Now, I’ll also include the information that you’re going to have in this lesson, in this specific lesson, in the material where this is applicable. The nice thing about having this here is it gives you all the CARES act changes in one location if you want to come back and review those at some point in your study and process.

The first change I want to talk about is in the lesson that deals with the cost recovery depreciation rules for section 1231 assets, and the change that was made by the CARES act relate specifically to qualified improvement property. A qualified improvement property is leasehold improvements that are made to pre-existing buildings. It also includes interior improvements that are made to restaurant properties and also to retail properties. All those fall under the umbrella of what is abbreviated as QIP and QIP, if you go back to before 2018 QIP has some great benefits for taxpayers because even though these are permanent improvements made to a commercial building has to be a non-residential building, which is a commercial building in order to be QIP property, even though it was part of a building and buildings are typically depreciated straight line over 39 years, commercial property, if it was QIP property, you could depreciate it straight line over 15 years, but there was a drafting error that was made and a tax bill that was passed in 2017 and because of that drafting error, it actually changed QIP property from 15-year property to 39-year property. It wasn’t Congress’s intent. It was just a typo, but Congress had not yet corrected it. Well, they finally corrected that typo as part of the CARES act. Now, not just for 2020, they made this retroactive so, for 2018, 2019 and 2020 QIP property is back to being depreciated 15 years straight line has a half year convention and then also that means that QIP property is eligible for bonus depreciation so this is a great change for those who own these types of properties.

The next change relates to the lesson on exclusions of income and in that lesson, I’ll talk about several areas where when debt is forgiven for tax payer, situations where that forgiveness of debt is not included in income. In general debt, forgiveness is taxable, but there are some specific situations where that can be excluded from income and the CARES act added a new provision where forgiveness of debt can be excluded from income. I’m sure you’ve heard about the loans that businesses could qualify for in order to give them cash, to help them through the pandemic and those loans were given by the small business administration and they … if the loan was made by the SBA before February 15th, but or between February 15th, 2020, and June 30th, 2020, and it meets the conditions we’re getting ready to go over, then when that debt is forgiven, it is excluded from income so, what are those conditions? Well, basically the notion here is that the loan proceeds had to be used for obligations that the business had before the COVID pandemic began. They have to verify, they have to document to the SBA that they did use the loan to retain employees or to make interest payments on loans that were in effect at February 15th, 2020 to make payments on lease obligations or rent obligations that were in force as of February 15th, 2020, or to make utility payments on services that had begun before February 15th 2020. As long as they verify that information to the SBA, then they don’t have to pay the loan back and the debt is forgiven and that debt forgiveness will be excluded from income. This change relates to the lesson on taxation of employee benefits and there’s a general rule that’s been in the law for many years that says that employees can exclude from their income, the value of assistance that their employer provides them to pursue undergraduate or graduate education and it applies to tuition fees, books, and supplies that the student pays. In other words, if your employer … if you’re working and going to school and your employer is reimbursing you for some of these expenses up to 5,000, $250 of that reimbursement can be excluded from your income so that law has been around for a long time, and it’s still in effect.

The CARES act added a, a new item to this and notice this only applies for payments that your … that an employer may to an employee from May 28th of 2020 through the end of the tax year, and this same $5,250 now also applies to reimbursements that the employer gives the employee to repay student loans. Now, the $5,250, you don’t get this for the tuition and also, for the student loan, it’s a total maximum of $5,250 in 2020, that can be excluded, but you can now include reimbursement from the employer that the employee then uses to repay a student loan as part of this exclusions. The CARES act also made some changes to the rules for retirement plans and these are in the lesson under the income section called taxation of retirement plans. First, I want to talk about a 10% penalty that applies to any individual who takes a distribution from a qualified retirement plan, but it’s an early distribution. If they take it before retirement and basically early means that you take it before age 59 and a half so, if you take a distribution from a retirement plan early, it is going to be subject to a 10% penalty. Distributions from retirement plans are go into your taxable income. They always do. The only exception to that is if you’re taking a distribution from a Roth IRA or from a Roth 401k in those situations, it does not go into your gross income, but in any other situation goes into your income you got to pay taxes on it but in addition to that, if you take it out before age 59 and a half, you’ve got to pay a 10% penalty, 10% times the amount that that was distributed to you, unless you made an exception and in this lesson, taxation and retirement plans, I go through a long list of exceptions to the 10% penalty that apply for distributions from IRAs, and the CARES act added a new exception. This only applies for 2020, but if a qualified individual takes a distribution from a retirement plan because of the COVID-19 situation, then they can … that still has to go into the income. It’s not being excluded from income, but it’s being exempted from the 10% penalty up to a distribution of $100,000 if you meet one of the rules that that is shown what those rules are, is the individual took the money out either because had been diagnosed with the virus you had had a dependent or spouse who had been diagnosed with a virus, you have experienced adverse financial circumstances because you’ve been laid off, you’ve had your hours reduced at work, you’ve been furloughed. Those types of situations could be that you own your own business and you’ve had to reduce back the number of hours that your business can be open and that’s caused adverse financial circumstances or you may have had to miss work because of a lack of childcare due to the virus. If you’re taking a distribution up to a hundred thousand dollars, for any of these reasons, you’re exempted from the 10% penalty, but you do still have to include the amount that you that you withdrew in your income.

There’s also a change made by the CARES act to the required minimum distribution rules. Once a taxpayer reaches a certain age and in the current law it’s, if you’re over age 72 so, once you’re over age 72, you have to take a distribution from your qualified retirement plan each year. Congress allows the, the amounts in your retirement plan to grow tax-free right throughout your working years, but eventually you hit a certain age and Congress wants you to start taking some distributions out because those will be taxable income. The only exception of that is for Roth IRAs, Roth, IRAs do not … you don’t ever have a rule that says you got to take a required minimum distribution from a Roth IRA, regardless of how old you are. Now, you don’t need to know how to compute the amount of the required minimum distribution that’s a little more complex than what they’re going to be testing on the CPA exam, but here’s what you do need to be aware of is that once you reach the age where you’ve got to take a distribution out, let’s assume that your distribution for the year should be $40,000, your required minimum distribution. If you don’t take that out, there’s a penalty that you have to pay that’s equal to 50% of the distribution you should have taken. If you don’t take the 40,000 out, you’re still going to have to take it out later and put it into income but in addition to that, you’re going on a $20,000 penalty that you have to pay. How do the, how does the CARES act impact this? Well, the CARES act says that just for calendar year 2020, you do not have to make … you do not have to take a required minimum distribution so, you get one year where you don’t have to take anything out. Now, a lot of individuals may need to take the money out anyway, to live on in their retirement but if you don’t need the money and you want to go ahead and let it grow, tax-free for 2020, you ought to take a distribution and you will not be subject to this 50% penalty. Now, I mentioned that when you take distributions out of your retirement plans, if it’s not a Roth IRA or Roth 401k, those are taxable to you. Their CARES act also made an exception to that rule just for distributions that happen in 2020 that are related to the virus. For those distributions you still have to take them into income, but instead of taking the total amount into income in 2020, you can spread it over three years. Let’s say you take $60,000 out of your IRA in 2020, and its coronavirus related. Then what you can do is take a third of that $20,000, put that into income in 2020, put another $20,000 in income in 2021 and then the last $20,000 of that will be taxed in 2022 so, you get to spread the income over three years and remember, it’s all excluded from the 10% penalty up to that, a hundred thousand dollars maximum.

There’s also a change that’s in the lesson on just the general basic principles rules for deductions. In that lesson, I go over the rules that relate to a limitation on the amount that businesses can deduct for interest expense and in that lesson, I get into those rules in quite a bit of detail. I’m not going to repeat the detail in this lesson. You can go to that lesson to get the detail, but in this lesson, I just want to point out to you a very major change that was made to these rules by the CARES act. The amount that you can deduct for business interest expense is limited to the taxpayer’s business interest income, plus 30% of that business’s adjusted taxable income so, any of the interest income they have from business operations, such as charging interest on your customers, who you’re given, 60 days, 90 days to pay you that would be business interest expense, plus 30% of your adjusted taxable income. The CARES act though increases the 30% to 50% of your adjusted taxable income just for 2019 and 2020 so, that’s going to make this limitation larger, which means businesses will be able to deduct more interest expense in 2019 and 2020 than they would’ve been able to, if Congress had not made this change. One change that the CARES act made that impacts the material I cover in deductions for adjusted gross income. In that lesson, I go over health savings accounts. If you’re not familiar with health savings accounts, you can go and refer to that lesson to understand for the big picture for health savings accounts, but health savings accounts have a specific definition of what qualifies as a medical expense for purposes of computing the tax consequences of either you contributing funds to your health savings account or your employer contributing funds and then you as the employee using the amount that’s in that health savings accounts to pay for medical expenses. If it’s a … if you use it for a qualified medical expense, then you’re not going to be taxed on the amount that you take out of your health savings accounts and the CARES act expands the definition of what is a qualified medical expense. It now includes non-prescription drugs, and it also includes feminine hygiene products and this is not a temporary change most of the things I’m going over in this lesson, you’ll notice only apply for 2020 or in some cases they’ve applied for 2018, 2019 and 2020. This begins in 2020, but it doesn’t expire this expanded definition will continue on after 2020.

The CARES act also made some changes to the charitable contribution rules for individuals. This has covered in the itemized deductions dash other lesson and the first change is that the world charitable contributions are an itemized deduction. Remember that the only taxpayers who are going to benefit for tax purposes from their charitable contributions are those who were their total itemized deductions that they report on schedule A exceeds their standard deduction. If your standard deduction is greater than your total itemized deductions, then you’ll just take your standard deduction amount. That’s what you’ll deduct, and you’re not getting any specific benefit for the itemized deductions you incurred during the year, such as charitable contributions or state income taxes, or maybe mortgage interests that you paid but for 2020, if you’re not itemizing and you make charitable contributions, you can deduct up to $300 of charitable contributions as a deduction for adjusted gross income so, this only applies for this one tax year. Another provision that the … for charitable contributions that applies just for 2020 is … has to do with the with the maximum amount that you can deduct for cash contributions. Cash contributions are generally limited to 60% of your adjusted gross income, but just for 2020, you can deduct cash contributions up to 100% of adjusted gross income. Why would Congress make a change like this just for one year? Well, just to provide an incentive for those who have more resources, financial resources, if they want to give those to charitable organizations, they’re trying to help individuals out who need food, clothing, shelter, other types of things during the pandemic ow, they’re able to deduct up to 100% of their income for the year for cash contributions.

In the lesson… there’s also a deduction lesson that covers losses and bad debts and, in this lesson, one of the topics that I cover are net operating losses. Now, the net operating loss rules have changed quite a bit over the last few years and I go through those changes in the lesson. The changes that I go through in that a bit that have been a major part of the law over the last three years were passed by Congress toward the end of 2017 and so, it created two sets of net operating loss rules. There was one set of rules that applies before for net operating losses incurred before 2018 and for those net operating losses, those net operating losses could be carried back two years by taxpayers and they could be carried forward for 20 years. When Congress changed the rule, for 2018 going forward, they said, we’re no longer going to let you… we’re not, we’re no longer going to allow you to, to carry an NOL backwards to a prior year. You’re only going to be able to carry your NOLs forward so if NOL is incurred in 2018, 2019, 2020, you can only carry them forward, but you can carry them forward indefinitely. There’s not going to be this 20-year limitation on it so, that’s the rules that we had, the two sets of rules until the CARES act was passed and the CARE act changed the NOL rules notice not just for 2020, which is what you’re preparing to be tested on but for 2018, 20, 19 and 2020. They said, now, for all three of those years, you can carry back an NOL for the five proceeding tax years so, instead of the new rule we had where you can’t carry back at all, but you can carry it forward indefinitely now, for these three years, you can carry it… you can carry it back for five years. If you’re not able to use all the NOL in those carried back years, then you can continue carrying it forward to allow you to save taxes in future years, where you do have positive income. When you carry an NOL back you may not be familiar with how that process would work, but what you actually would do for that prior tax year is you would actually file an amended return so, you paid some taxes that year, you had positive taxable income now you got a new deduction that you’re bringing backwards from the current year. That’s going to reduce your taxable income for that year, reduce the tax liability for that year, but you paid all your taxes back in that year so, now you’ll be able to get a refund and have some additional cash to help you help your business during the pandemic. For NOL is incurred in those years … NOLs that are carried forward to 2020 from previous tax years, those NOLs can offset100% of the taxable income in 2020. Any NOL that is incurred in 2018, 2019 and 2020 that’s not … if you’re not able to use all of it by carrying it back to the previous five tax years, then that can be carried forward indefinitely.

Another change that I’ll discuss in this losses and bad debts lesson has to do with excess business losses. For the last several years, there’s been a limit on the amount of business losses that an individual can deduct on her 1040 so, that has to be from a business activity. These could be losses that come from a sole proprietorship. It could be losses that flow through from a partnership or an S corporation or limited liability company but those losses, when they all flowed through and were accumulated on the form 1040, there was a maximum that could be deducted and that is shown for you in your study texts, the details on that, but for 2020 and for 2018 and 2019 Congress has repealed this excess business loss limitation. For those three tax years, no matter how much your excess business losses are from those types of activities, I just discussed. You can deduct all of it. Now, once you get to 2021, the excess business loss provision will be back in the law again but for those of you taking the exam for 2020, if you see a question saying how much of the losses can be deducted business losses on a 1040, you do need to be aware that this provision called excess business losses that you probably learned in your tax courses at your university has been repealed. Well, let’s go to the personal tax credits lesson and one only one change to talk about in this lesson. This relates to probably the thing that’s gotten the most press related to the CARES act, which is the checks that individual taxpayers received to help them handle the pandemic and the amount of checks that the amount of the check that someone received was $1,200 if they were single, if they were married, filing jointly, it was $2,400 and then if they had a qualifying child, they got an additional $500 for each qualifying child. Now, the definition of a qualifying child is the same as what the dependency rules are for a qualifying child. As long as they met that dependency rule, you’re going to, you’re going to qualify to get a $500 check from the, from the government, with one exception, that child, in addition to being your dependent, they have to be less than age 17 and remember from the dependency … tax dependency lesson that’s included in the materials that in order a person … a child can qualify as a qualifying child up to age … up until they get to age 24, if they are a full-time student. That means you could have a situation where you have a child who you are claiming as a dependent on your tax return, but they are age 17 or over, and if they’re aged 17 or over, then you’re not going to get the $500 check, right from … the addition to the check from the federal government. If you have a family of … let’s say you have a married couple, and they have two dependent children who are less than age 17 they’ll get $2,400 plus $500 for each child so that the check that they should have gotten from the federal government, if it was the correct amount would have been $3,400.

Now there’s two groups of individuals not eligible to receive this amount of money non-resident aliens are not eligible and then someone who is claimed as a dependent by another taxpayer is not eligible to get the $500. Let’s assume that I’ve got a daughter age 16, she’s a dependent on my tax return, therefore, I qualify to get a $500 credit for her under the CARES act, but she’s also working and she makes enough, she has enough income that she needs to file her own tax return. Even though she’s filing her own tax return since she’s a dependent on my return, she will not … she does not qualify to get her own $500 check as part of the CARES act since I got the $500 for her. Now, not everyone qualifies to receive this money. If your income is too high, the government begins phasing this out and where it begins phasing this out is if you’re married, filing joint $150,000 of adjusted gross income, if you’re single, it’s half of that amount, $75,000 and if you’re head of household, it’s halfway in between these two numbers$112,500. Once your AGI is above these amounts, you begin losing your right to get some of this CARES act funding and the amount of their reduction is 5% times the extent that your adjusted gross income exceeds these thresholds and so higher income individuals say the couple … the family I just talked about married filing joint with two children, $3,400 is what they should have received. Once their adjusted gross income starts increasing above $150,000 then they began losing the amount of the check that they should have gotten from the federal government. Now, you may be wondering why I’ve got this included as a tax credit, because this really doesn’t sound like the types of tax credits that I studied in my, in my tax course at school. This was actually a check that … or it was a check I received in the mail, or if the IRS had my banking information, it was just a direct deposit that came directly into my checking account so, I don’t understand what this really has to do with my form 1040 and the tax law. Well, Congress did authorize the IRS to go ahead and pay these earliest, but this was considered an advanced payment of the credit and you still have to … and when you file your tax return for 2020, it might be that you received more credit than you should have based on your actual tax situation for 2020, where it may be, you didn’t receive enough and when you filed your 2020 tax return, that’ll be reconciled. If you didn’t get enough, you’ll be able to get more by getting an additional credit on your tax return. If for some reason you got more than what you should have gotten under the rules for the CARES act, then you’ll have to either pay that money back when you file your 2020 tax return, or if you’re getting a refund from your federal income taxes, it will reduce the amount of your income but I do want you to realize that this actually does function as a credit on your federal income tax return and the amount that you got that you received will actually be reconciled.

You may wonder why would the federal government send me the wrong amount? Well, because what the government did remember, they were sending the check in 2020, but they were basing it on your most recently filed tax return. Some folks had already filed their 2019 tax return and so that’s the information they were using, but some folks had not even filed their 2019 return yet and so, the most current information the IRS had about this family was 2018 and so that information could be as much as, two years old and that’s why the information they used to determine what they thought you should get in. Your check could have been wrong, and it’ll have to be reconciled on your form 1040. Let’s move to corporation so, everything we’ve talked about so far has been related to individuals and business income that’s reported on an individual tax return. What about some things with the CARES act that relates specifically to corporations? Well, first in the corporate income lesson, I also go through the net operating loss rules for a corporation. The good news for you is those are the same rules as for individuals so, I’ve already talked about those in this lesson so, the same rules are going to apply for corporations just as a review. The NOLs that were incurred in 2018, 2019 or 2020 can be carried back for five years and for NOLs is incurred in those years …NOLs that are carried forward to 2020 from previous tax years. Those NOLs can offset 100% of the taxable income in 2020. Any NOL that is incurred in 2018, 20, 19 and 2020 that’s not … if you’re not able to use all of it by carrying it back to the previous five tax years, then that can be carried forward indefinitely

In the lesson on a special corporate deduction, one of the items that’s talked about related to charitable contributions for corporations is that in some situations, when a corporation gives away inventory, it’s able to deduct more than just the adjusted basis of that property. The general rule for a corporation is you give away inventory to a qualified charitable organization you deduct the adjusted basis, but if you meet certain rules, in addition to the adjusted basis, you can deduct 50% of any appreciation in that property and the appreciation would be the difference in the fair market value of the property, less the basis of the property. That’s how much it’s going up in value, but in no situation, can this deduction for the contribution of this inventory ever exceed twice the adjusted basis and I go over this rule in, in quite a bit of detail in this lesson. One of the types of inventory that some businesses could give away that would qualify for this provision is known as wholesome food inventory and if what you’re giving away is … so it’s a company who manufactures food wholesome basically just means the food has to be of appropriate quality cannot be expired food and for that type of contribution, those contributions can be deducted up to 15% of the taxable income for that business who manufactured the food inventory but the CARES act put a change in just once again for 2020. It says for 2020, you can deduct the amount that you’re deducting for this food inventory can be deducted as long as it does not exceed 25% of your taxable income instead of being limited, just to 15% of your taxable income. This provision is also expanded broader for corporations and the general rule for corporations that deductions are limited to 10% of taxable income. Once again, just for 2020 is increased to 25% of taxable income.

There’s one provision that I want to discuss that that the CARES act included that is talked about in the lesson on business tax credits and what this has to do is with the alternative minimum tax. Now, you may say, well, I don’t remember hearing about the alternative minimum tax as part of my corporate tax class I took at school. Well, you probably didn’t hear about it because in 2017, Congress repealed the alternative minimum tax for corporations. There still is an alternative minimum tax for individuals, but there’s not one for corporations any longer, but for corporations who paid the alternative minimum tax in years before 2018, when they paid that tax, one of the things that they earned, that they could have the right to use in the future was called a minimum tax credit so, for example, if in 2015, I had to pay $12,000 of alternative minimum tax. Well, then I received a $12,000 credit that I could use under certain conditions in future years so, once the AMT was repealed, that credit didn’t disappear. As a corporation, I still have that $12,000 credit and there were certain rules Congress put in effect that allowed corporations to use that credit in future years under certain conditions while the CARES act makes it … may actually has made it much easier for corporations to use that credit more quickly and here’s what the CARES act said. It said you can use 100% of the remaining minimum tax credit in 2018 and 2019. Let’s say I got to 2018 and I had not used any of my $12,000 credit well, the CARES act said, my corporation, could you 6,000 of that credit in 2018 to reduce my taxes, could use the other $6,000 in 2019 and now I’ve used all of my credit, my alternative minimum tax credit that I was carrying forward indefinitely. Here’s what’s important about this that you need to be aware of. That means that as of 2020, which is what you’re being tested on the remaining alternative minimum tax credit for any corporation is zero. It’s all been used in 2018 or 2019, because of this change,

The CARES act also added a refundable payroll tax and this credit is equal to notice 50% of the wages paid by eligible employees during the COVID crisis so, which business is which employers are actually eligible for this this credit that’s based on the amount of payroll tax they paid. This is this something that nonprofits could actually benefit from and even though non-profits generally don’t pay any income taxes, but this is something they could get some benefit from and it’s applicable to any employer whose operations were disrupted as a result of government orders, shutdowns because of the pandemic and also, for any employer who had a greater than 50% reduction in income that was coming into their business so ,you meet those conditions you can get this 50% payroll tax credit once again give more cash to the business as they’re working through the pandemic. Notice this credit is not available to any business who got a loan from the small business administration. We talked earlier in this lesson about the loans that small businesses could get, and they don’t have to be paid back as long as they make the proper condition so, if you’ve got one of those loans, you cannot also take this payroll tax credit, but if you didn’t get a loan, you qualify for this credit. If the employees average number of full-time employees in 2019 was 100 or less, then when you’re computing the amount of the payroll tax credit, it’s based on the wages of all employees but if you have more than 100 full-time employees, the credit is based only on the wages of employees who were furloughed or who had reduced hours so, for larger companies who have more employees, the amount of the credit the way it has to be computed, is usually going to be less than for smaller employees. Also, the amount of wages per employee that you’re including in doing this computation, the amount of those wages is limited to $10,000 per employee … and obviously your employees are going to make a lot more money than that. Even your lower paid employees are probably making, 25, $30,000 a year and notice if you’re providing health benefits, if you’re paying some health insurance benefits for your employees, the amount of that is included in this amount so, even for your lower income employees, once you include health insurance, most are probably making $30,000 or more, of course, you may have some employees making $200,000 or more, but for any employee, the maximum you can use to compute as credit is only $10,000. There’s a very limited time period that this credit applies. It’s for wages paid after March 12th of 2020, and before 2021,

This is the most important things in the CARES act that I feel like are potentially testable on the CPA exam. Once again, beginning October 1st of 2020, going through June the 30th of 2021 and I go back through most of these provisions in the lessons that I referenced in this material; how testable do I think these are? Well, that’s … it’s a little bit of a hard question to answer on the one hand, because a lot of these provisions are only in effect for 2020. You might … could make the argument that maybe the AICPA wouldn’t focus on these too heavily and I really don’t think they will focus on them too heavily. I would be very surprised for example, to see a task-based simulation that included a lot of these provisions in it. On the other hand, though, I do think the AICPA its reasonable for them to say, if somebody is going to pass the CPA exam, pass regulation, I want to make sure they’re keeping up with current changes because that’s something that’s important for you to do as a tax professional or as a CPA so, I don’t think it’s unreasonable at all, that you might see one of these … one or two of these provisions possibly tested in a multiple choice question. When you take regulation.