The Coronavirus Aid, Relief and Economic Security (CARES) Act can help high-net-worth clients with their business taxes as the pandemic continues. Their individual taxes are another matter.
“The devil’s in the details on the application of the various provisions of the CARES Act, many of which are retroactive,” said Sarah Allen-Anthony, partner at Crowe LLP in South Bend, Ind. “While we got a lot of relief very quickly in response to the economic impact of the virus, there’s still a lot of guidance needed on how to implement many of the law changes. New guidance has been issued at a high speed, almost daily, but more is needed.”
“While wealthy folks are likely feeling the impact of the virus financially ... they’re deemed to be in better financial condition and more likely to survive the financial impacts better than others,” added Bruce Primeau, a CPA at Summit Wealth Advocates in Prior Lake, Minn. “The benefits [wealthy clients] could potentially receive are somewhat limited.”
Business-owning clients will benefit quickest from federal reaction to Covid-19. “Many aspects of the CARES Act may provide quick access to much-needed capital,” said Bill Smith, Bethesda, Md.-based managing director for CBIZ MHM’s national tax office. Benefits include new carryback provisions for net operating losses (NOLs) and an increased business-interest deduction limitation, he said.
Among other notable business breaks is the loosening of loss restrictions through partnerships or similar structures, allowing greater offset of gains. “This concept has been around but was previously capped at those who make $500,000,” said Steve Wittenberg, director of legacy planning at SEI Private Wealth Management in Oaks, Pa. “Now that cap is gone and will save these wealthy taxpayers millions.”
Another item is the change to qualified improvement property, now deemed 15-year life property, “making it eligible for bonus depreciation retroactive to 2018,” said Shashi Mirpuri, tax partner at Squar Milner in Encino, Calif. “This correction comes as significant relief for taxpayers, particularly those in the real estate, hospitality, retail and restaurant industries.”
CARES and other relief moves do offer plusses and minuses for wealthy clients’ tax strategies. The wealthier the client who owes taxes, for instance, the more benefit they’re likely to see from the filing postponement (until mid-July at least) and the extra time to put cash to work in the market.
Yet the relief picture for many individual taxpayers remains unclear. “There are many misconceptions and still many unanswered questions,” Allen-Anthony said. “One misconception is that the CARES Act is impactful to most wealthy clients. If the client doesn’t own a business, don’t be surprised if there is little or no material change to their tax situation.”
One question for individual taxpayers concerns any real relief for mortgage payments. “There’s been a lot of press about avoiding the need to pay mortgages for 90 days,” Wittenberg said. “Many don’t realize that this is a deferment, not an abatement. After 90 days, you will need to catch up on your loan payments and make four months’ worth of payments at once. Yet to be seen is how mortgage companies will handle this if people are in a similar or worse-off financial situation at that time. In theory, if you’re audited by your lender and found to not have been in financial hardship, you could be committing mortgage fraud.”
CARES can also be confusing regarding similar financial tools. Among provisions regarding retirement plan payouts, for instance, the deferral of required minimum distributions from retirement accounts can benefit wealthy individuals who don’t need distributions right now, Wittenberg said.