How Did the CARES Act of 2020 Affect Taxes?

In early 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the economic fallout from the COVID-19 pandemic. This law delivered financial assistance to individuals and businesses through direct payments, enhanced benefits, and modifications to the tax code. The act’s provisions aimed to provide immediate liquidity and support across the economy.

Recovery Rebate Credit

The primary relief for individuals was the Recovery Rebate Credit, delivered as Economic Impact Payments, or stimulus checks. The CARES Act authorized the first payment of up to $1,200 for eligible individuals and $2,400 for married couples filing jointly, with an additional $500 for each qualifying child. A second payment was authorized in late 2020, and a third was authorized by the American Rescue Plan Act in 2021.

Eligibility for the full payments was based on a taxpayer’s Adjusted Gross Income (AGI). For the first round, the credit began to phase out for individuals with an AGI over $75,000, married couples over $150,000, and heads of household over $112,500. The payment was reduced by $5 for every $100 of income above these thresholds.

The IRS used recent tax returns to automatically distribute these advance credits. Individuals who did not receive the full amount they were entitled to could claim the difference when filing their federal income tax returns for the corresponding year. While the deadline to claim the first two payments has passed, the deadline to claim the third payment on a 2021 tax return is April 15, 2025.

Retirement Account Rule Changes

For the 2020 calendar year, the CARES Act changed retirement account rules to provide financial flexibility. A primary change allowed eligible individuals to withdraw up to $100,000 from plans like 401(k)s and IRAs during 2020 without the 10% early withdrawal penalty. This provision has since expired.

To qualify, an individual must have been diagnosed with the virus or experienced adverse financial consequences from being furloughed, laid off, or having work hours reduced. The law allowed individuals to include the withdrawn amount in their gross income over a three-year period. Individuals could also repay the distribution to a retirement plan within three years, treating it as a tax-free rollover.

The act also modified rules for loans from workplace retirement plans. For a limited period in 2020, the maximum loan amount for qualifying individuals was increased from $50,000 to $100,000. The act also permitted a one-year delay for certain loan repayments due that year.

A separate provision waived required minimum distributions (RMDs) for 2020 from defined contribution plans and traditional IRAs. This allowed account balances to recover from market downturns. RMDs resumed in 2021, and subsequent legislation has increased the starting age for RMDs.

Key Tax Provisions for Businesses

The CARES Act created tax relief measures to help businesses retain employees and manage cash flow. The Employee Retention Credit (ERC) was a refundable tax credit for employers against qualified wages. For 2020, the credit was 50% of up to $10,000 in wages per employee for the year, which expanded in 2021 to 70% of up to $10,000 in wages per employee per quarter. The deadline to claim the 2020 credit has passed, but the deadline for the 2021 credit is April 15, 2025. Due to fraudulent claims, the IRS placed a moratorium on processing new claims filed after September 14, 2023.

The Paycheck Protection Program (PPP) provided forgivable loans to small businesses. The loan forgiveness was designated as non-taxable income, and businesses could also deduct the ordinary and necessary business expenses paid for with forgiven PPP funds.

The act temporarily modified the rules for net operating losses (NOLs). It allowed businesses to carry back NOLs generated in 2018, 2019, or 2020 for up to five years. The law also temporarily removed the 80% of taxable income limitation, but these rules expired for tax years beginning after 2020.

The legislation also suspended the “excess business loss” limitation for non-corporate taxpayers for tax years 2018 through 2020. This rule, which capped the business losses that pass-through owners and sole proprietors could deduct against non-business income, was reinstated for tax years beginning in 2021.

Enhanced Charitable Contribution Deductions

The CARES Act encouraged charitable giving by temporarily enhancing tax deductions. For 2020, it created an “above-the-line” deduction of up to $300 for cash contributions for individuals taking the standard deduction. This provision was extended for 2021 but has since expired.

For individuals who itemize, the act temporarily lifted the cap on cash contribution deductions for 2020 and 2021. The limit increased from 60% of AGI to 100% of AGI, allowing a taxpayer to potentially eliminate their income tax liability for the year. This enhanced limit is no longer in effect.

Corporations also received a temporary incentive. For 2020 and 2021, the annual limit on charitable deductions for corporations was raised from 10% to 25% of their taxable income. This increased limit has also expired.