CARES Act Tax Summary for Businesses and Individuals

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was an economic stimulus package enacted on March 27, 2020, in response to the COVID-19 pandemic. The legislation provided financial support through loans, grants, and tax law modifications to offer relief to individuals and liquidity to businesses. This article serves as a historical overview of the key tax-related provisions within the CARES Act, focusing on the mechanics and implications of these now-expired measures for a 2025 audience.

Key Tax Provisions for Individuals

The CARES Act provided direct financial relief to individuals through recovery rebates, which were advance payments of a 2020 tax credit and were not considered taxable income. Individuals received up to $1,200, married couples filing jointly received up to $2,400, and an additional $500 was provided for each qualifying child under 17. The IRS used 2019 or 2018 tax returns to determine eligibility and issue payments automatically.

These rebate amounts were reduced for higher-income earners. The phase-out began for individuals with an adjusted gross income (AGI) over $75,000, heads of household over $112,500, and married couples over $150,000. The payment was reduced by 5% of the income exceeding these thresholds.

The Act also provided relief for retirement savings by waiving the 10% early withdrawal penalty on “coronavirus-related distributions” of up to $100,000 from eligible retirement plans during 2020. A distribution qualified if an individual, spouse, or dependent was diagnosed with the virus, or if the individual faced adverse financial consequences from quarantine, furlough, layoff, or reduced work hours. Taxpayers could include the distribution in their income ratably over three years or repay the amount to a retirement plan within three years to avoid the tax liability.

For 90 days following the Act’s enactment, the maximum loan amount from certain retirement plans increased from $50,000 to $100,000, allowing individuals to borrow up to 100% of their vested account balance. Additionally, for plan loans outstanding on or after March 27, 2020, any repayment due before the end of the year could be delayed for one year.

Charitable giving was encouraged through enhanced deductions for the 2020 tax year. Individuals who did not itemize could take an above-the-line deduction of up to $300 for cash contributions to qualifying charities. For those who did itemize, the Act temporarily suspended the cap on cash contribution deductions, allowing them to deduct up to 100% of their AGI, an increase from the normal 60% limit.

Major Relief Programs for Businesses

A component of the CARES Act’s business relief was the Employee Retention Credit (ERC), a refundable payroll tax credit. For 2020, the credit was 50% of qualified wages paid to an employee, with wages capped at $10,000 per employee for the year, resulting in a maximum credit of $5,000 per employee.

An employer qualified for the ERC in 2020 if its operations were fully or partially suspended by a government order or if it experienced a significant decline in gross receipts. A significant decline was defined as a drop of more than 50% in a calendar quarter compared to the same quarter in 2019. The definition of “qualified wages” depended on the employer’s size, with different rules for businesses with more or fewer than 100 full-time employees.

While subsequent legislation extended the ERC into 2021, the program is now over, and filing deadlines for amended returns have largely passed. The program became a target for fraudulent claims, prompting the IRS to declare a moratorium on processing new claims in September 2023. As of 2025, the IRS is focused on enforcement and auditing questionable claims.

Paycheck Protection Program Tax Implications

The Paycheck Protection Program (PPP) provided forgivable loans to small businesses. A primary benefit was that the forgiven loan amount was excluded from a business’s gross income for federal tax purposes. This was a departure from the standard tax treatment of canceled debt, which is normally taxable.

Initially, the Treasury Department issued guidance stating that business expenses paid with forgiven PPP funds were not deductible. This would have blunted the program’s benefit by creating higher taxable income. In response, Congress passed subsequent legislation to clarify that these ordinary and necessary business expenses were fully deductible. This secured a double benefit for businesses: the forgiven loan income was tax-free, and the expenses paid with that loan could still reduce taxable income.

Business Tax Law Modifications

The CARES Act temporarily modified business tax laws to improve cash flow. One change involved Net Operating Losses (NOLs), which occur when a company’s deductions exceed its revenues. The Act allowed businesses to carry back NOLs from 2018, 2019, and 2020 for five years, a reversal of a rule from the 2017 Tax Cuts and Jobs Act (TCJA). This allowed businesses to apply losses against profits from prior, higher-tax-rate years, often resulting in immediate refunds. The Act also temporarily removed the 80% of taxable income limitation on NOL deductions for years before 2021.

The “excess business loss” limitation for non-corporate taxpayers was also suspended for the 2018, 2019, and 2020 tax years. This rule had limited the amount of net business losses that owners of sole proprietorships, partnerships, and S corporations could deduct against non-business income. The suspension was retroactive, allowing taxpayers to amend prior returns to use the full extent of their business losses to offset other income sources.

The Act also addressed the limit on deducting business interest expense. It temporarily increased the limit from 30% to 50% of adjusted taxable income (ATI) for the 2019 and 2020 tax years. Businesses were also given the option to use their 2019 ATI to calculate their 2020 interest deduction, which was valuable for those whose income declined in 2020.

Other Notable Tax Changes

A technical correction in the CARES Act fixed the “retail glitch” from the TCJA. A drafting error had assigned a 39-year depreciation period to Qualified Improvement Property (QIP), which includes most interior improvements to non-residential buildings. The Act corrected this to a 15-year recovery period, making QIP eligible for 100% bonus depreciation. This change was retroactive to property placed in service after December 31, 2017, allowing businesses to amend prior returns to claim refunds.

The Act allowed employers to defer payment of their 6.2% share of Social Security taxes on employee wages incurred from March 27, 2020, through the end of that year. This was a deferral, not forgiveness, and the deferred amounts were required to be repaid in two equal installments by December 31, 2021, and December 31, 2022.

Finally, the Act allowed employers to make tax-free payments of up to $5,250 per employee toward their student loan principal or interest during 2020. These payments were excluded from the employee’s taxable income and were deductible by the employer. This provision was later extended and is available through the end of 2025.