Synopsis of Tax Law Updates and Changes to the CPA Exam

As mentioned earlier, because of the recent changes in tax law made by the CARES Act, the CPA exam has been updated and will include testing on these changes effective October 1, 2020. These changes will continue to be tested through June 20, 2021, and after that time, the CPA exam will be updated again to test on 2021 tax law.

A brief overview of the CPA exam changes made in 2020 are listed below. And for a succinct, but more in-depth review of these changes, watch our “Recent Changes in Tax Law” video lesson below.

Recent Changes in Tax Law

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Recent Changes in Tax Law

2020 Tax Law Change Overview

The CARES Act was signed into law with the purpose of helping businesses and individuals maintain cashflow to get through the coronavirus pandemic. Some of these changes were related to economic relief and others were unrelated changes slated to be included with the next tax bill. Below are the areas affected by these new tax laws and the most notable changes.

Section 1231 Assets—Cost Recovery

QIP property can once again be depreciated straight line over 15 years (reduced from 39 years), and this change is retroactive to 2018, 2019, and 2020 QIP property. Because of this, QIP property is eligible for bonus depreciation.

Gross Income—Exclusion

The CARES Act added a new provision where forgiveness of debt can be excluded from income if the debt forgiveness is in relation to loans provided to businesses by the Small Business Administration (SBA) between February 15, 2020 and June 30, 2020 for coronavirus relief purposes. The borrower must also verify they meet certain conditions. Wiley CPA goes over these qualifying conditions in their free lesson on the recent changes in tax law.

Taxation of Employee Benefits

The existing benefit that allows employees to exclude up to $5,250 from gross income for assistance provided by the employer for undergraduate and graduate tuition, fees, books, and supplies, now also extends to include reimbursements employers made to employees for student loans if those payments were made between May 28, 2020 and December 31, 2020.

Taxation of Retirement Plans

The CARES Act added new exceptions that only apply to 2020.

The traditional 10% penalty for early distribution of qualified retirement accounts is waived for distributions up to $100,000 if the distribution was made for a qualifying circumstance relating to coronavirus.
Required minimum distribution rules are waived for the calendar year of 2020 due to coronavirus.
And the income tax incurred from any qualifying coronavirus related distributions made in 2020 can be evenly distributed over 2020, 2021, and 2022.

Deductions—Basic Principles

The amount that taxpayers can deduct for business interest expenses has been increased. The amount they can deduct is still limited to the taxpayer’s business interest income, but the additional percentage they can deduct for that business’s adjusted taxable income has increased from 30% to 50% for 2019 and 2020.

Deductions for AGI

For the purposes of a health savings account, the CARES Act expands the definition of a qualified medical expense to include non-prescription drugs and feminine hygiene products. This change is effective beginning in 2020 and continues on in the future.

Itemized Deductions—Other

Just for 2020, the CARES Act provides for a $300 charitable contribution deduction that qualified individuals can deduct from AGI rather than as an itemized deduction.
Deductions for charitable cash contributions that are generally limited to 60% of AGI have been increased to a limit of up to 100% of AGI for 2020.

Deductions—Losses and Bad Debts

The CARES Act changed Net Operating Loss (NOL) rules for 2018, 2019, and 2020, and taxpayer’s can now carry back an NOL for the preceding 5 years.
In addition, for 2018, 2019, and 2020, Congress has repealed excess business loss limitations.

Personal Tax Credits

For individuals that received a stimulus check, that check acts as a personal tax credit that will be reconciled with the taxpayer’s 2020 tax return. A more in-depth look into how this may affect different taxpayers’ situations is explained in this free lesson on the recent changes in tax law.

Corporate Income

NOLs incurred after 2017 and before 2021 can be carried back to the five preceding tax years.
NOLs carried forward to 2020 from previous years can offset 100% of taxable income in 2020 and NOLs can also be carried forward indefinitely.

Special Corporate Deductions

Just for 2020, the deduction that corporations and other business can take for contributions of “wholesome” food inventory has been increased from up to 15% of taxable income to up to 25%. And cash contributions corporations can deduct increases from 10% to 25% of taxable income.

Business Tax Credits

The CARES Act changes the minimum tax credit rules to provide that 100% of the remaining minimum tax credit can be used in 2018 and 2019. So, as of the beginning of 2020, the remaining tax credit should be zero because it has all been used in 2018 or 2019 due to this change.
The CARES Act also added a refundable payroll tax credit for 50% of wages paid to eligible employees during the pandemic. But note, this credit is not available to employers who received the small business interruption loan

Key Takeaways

Many of the recent changes in tax law that have been added to the CPA exam affect only 2020, so the exam may not focus heavily on these changes. However, while many of these provisions might not be covered, it’s reasonable to expect one or two of the changes to come up as a question on the exam.

For a more in-depth explanation of the recent tax law changes noted above, watch the “Recent Changes in Tax Law” lesson by Wiley CPA and listen to Gregory Carnes Ph.D., CPA, and Dean of the College of Business at the University of North Alabama explain all of the recent changes in tax law in a succinct manner.

And if you plan on taking the CPA exam, choose the best CPA exam review course available and register for a 14-day free trial to Wiley CPA.