CARES Act Provides More Tax Relief

Update: The House passed the CARES Act on March 27, and President Trump quickly signed it into law.

Just before midnight on March 25, the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The legislation, which would provide $2.2 trillion in economic relief to businesses and individuals affected by the COVID-19 pandemic, is now headed to the House for a vote.

The Act’s provisions are wide-ranging, providing direct payments to individuals and families, small business assistance, tax breaks, expanded unemployment benefits, hospital funding, aid to state and local governments, and more.

The loan provisions in the Act have significant implications for both employers and employees. The CARES Act creates additional loan programs and dedicates nearly $350 billion to loan guarantees and subsidies to prevent layoffs and business closures while workers have to stay home during the coronavirus outbreak. In addition, it expands access to economic relief currently available through the U.S. Small Business Administration’s Economic Injury Disaster Loans program. The details of the Act’s newly created loan programs – and the implications for your business – will be explained in depth in a future article.

Tax Provisions

The Act contains tax provisions to help both businesses and individuals. Below is a summary of the key tax provisions in the proposed legislation:

Businesses

• Employee Retention Credit for Employers Subject to Closure Due to COVID-19: Eligible employers may be able to claim a refundable payroll tax credit for 50% of qualified wages paid to employees during the COVID-19 crisis. This credit is available to those whose business operations were fully or partially suspended due to a COVID-19-related shutdown order or whose gross receipts declined by more than 50% as compared to prior year metrics.

• Delay of Payment of Employer Payroll Taxes: Certain employers will be eligible to defer the payment of the employer portion of Social Security taxes (6.2%). The deferred taxes will be paid in two equal installments on Dec. 31, 2021, and Dec. 31, 2022.

• Exception From Excise Tax for Alcohol Used to Produce Hand Sanitizer: This provision waives the federal excise tax on any distilled spirits used for, or contained in, hand sanitizer.

Individuals

• 2020 Recovery Rebates for Individuals: The Act provides rebate checks for individuals up to certain income thresholds: Single-filers with an adjusted gross income (AGI) up to $75,000 will receive $1,200, and those who are married filing jointly with an AGI up to $150,000 will receive $2,400. Each qualifying child under age 17 will add on an additional $500 to the rebate check. Eligibility will be determined based on 2019 tax returns. If the 2019 tax return has not been filed, eligibility will be determined based on 2018 tax returns or Social Security records. There is no action required by individuals to receive these payments; they will be issued automatically. The rebate payment will be directly deposited into individuals’ accounts if direct deposit information was provided to the IRS on a 2018 or 2019 tax return. However, it is unclear at this time when individuals will start to receive the rebate payments.

• Special Rules for Use of Retirement Funds: The Act eliminates the 10% early withdrawal penalty for qualified retirement account distributions up to $100,000 for coronavirus-related purposes if they are made on or after Jan. 1, 2020, and before Dec. 31, 2020. The income attributable to such distributions is included in income and subject to income tax over three years. Additionally, taxpayers may recontribute the funds within three years without regard to annual contribution caps. The Act also provides increased flexibility for loans from certain retirement plans for coronavirus-related relief.

• Waiver of Required Minimum Distributions (RMD) for Certain Retirement Plans and Accounts: There will be no RMD requirement for 2020 for IRAs and certain defined contribution plans.

Potential Impacts

The Act made several retroactive changes that could affect your 2019 tax return or even your 2018 tax returns. Here’s a look at which provisions could impact 2019 and 2018 tax returns as well as several provisions that will impact 2020 tax returns and beyond.

2018 and 2019 Tax Returns

• Limitation on Business Interest Expense – Section 163(j): The Act increases the adjusted taxable income limitation from 30% to 50% for tax years beginning in 2019 and 2020. Notably, this does not apply to partnerships. The 30% limitation still applies to partnerships for 2019, but partners will be allowed a greater deduction of excess business interest expense on their 2020 tax returns.

• Qualified Improvement Property (QIP): The Act fixes a technical error in the Tax Cuts and Jobs Act of 2017 (TCJA) that required QIP to be 39-year property that was not eligible for bonus depreciation. The Act fixes this retroactively back to Jan. 1, 2018. Therefore, QIP placed in service after Dec. 31, 2017, is 15-year property and eligible for 100% bonus depreciation. This could impact both 2018 and 2019 tax returns.

• Modifications to Net Operating Losses (NOLs): There are two changes to the NOL rules:

1. NOLs arising in tax years 2018, 2019, or 2020 can be carried back five years.
2. There is no 80% limitation on the use of an NOL until taxable years beginning after 2020.

Thus, NOLs can fully offset taxable income on 2019 and 2020 tax returns. Note: There are special rules for the application of the NOL changes to real estate investment trusts (REITs), life insurance companies, and years in which a Section 965 inclusion is included in the carryback period.

• Repeal of the Overall Loss Limitation – Section 461(l): Retroactive to 2018 and through 2020, business losses can offset non-business income without limitation. Previously, this limitation prohibited business losses from offsetting non-business income in excess of $500,000 ($250,000 on single returns).

• Corporate Alternative Minimum Tax (AMT) Credits: C corporations with remaining AMT credits were allowed to claim these credits over several years, ending in 2021. Under the Act, C corporations can claim a refund of their remaining AMT credits now. Guidance is needed regarding how to submit a tentative refund claim, but such a claim must be submitted by Dec. 31, 2020.

2020 and 2021 Tax Returns

• 2020 Recovery Rebates for Individuals: The 2020 Recovery Rebates discussed above (i.e., the $1,200 and $2,400 payments) are actually advance payments of a 2020 tax credit. Thus, on 2020 tax returns, taxpayers will compute the amount of payment allowed based on 2020 data (instead of 2019, 2018, or social security records, as applicable). If the actual payment received is less than what is computed, there would be an additional credit allowed on the 2020 tax return. Currently, there is no requirement for taxpayers to repay a rebate they received if it is determined that they are not entitled to it once the 2020 calculations are conducted.

• Business Interest Expense Limitation – Section 163(j): Taxpayers may elect to determine their 2020 business interest expense limitation based on their 2019 adjusted taxable income. Only for 2020, partners with excess business interest expense (EBIE) allocated from partnerships in 2019 would have the ability to treat 50% of such EBIE as paid or accrued at the partner level (potentially deductible). This complexity is intended to partially mitigate the fact that the 30% limitation on earnings before interest, taxes, depreciation, and amortization (EBITDA) was not increased to 50% for partnerships.

• Partial Above-the-Line Deduction for Charitable Contributions of Cash: Individuals who claim the standard deduction in computing their taxable income can take an above-the-line deduction for charitable contributions of cash made in 2020 up to $300. Contributions to supporting organizations or donor-advised funds would not be eligible for the above the line deduction.

• Charitable Contribution AGI Limitations for Cash Contributions: For individuals, the 60% AGI limitation is suspended for 2020, but the limitations on non-cash charitable contributions remain unchanged. For corporations, the 10% limitation is increased to 25% of taxable income. Contributions to supporting organizations or donor-advised funds will still be subject to the pre-existing AGI limitations.

• Exclusion for Certain Employer Payments of Student Loans: Under the Act, employers can contribute up to $5,250 annually toward an employee’s student loans, and such payment will be excluded from the employee’s income. This applies to payments made by an employer from the date of enactment to Jan. 1, 2021. This is incorporated within Internal Revenue Code Section 127, Educational Assistance Programs. Thus, employers that already have a Section 127 program in place must consider all payments pursuant to such program.

• Overall Loss Limitation – Section 461(l): This limitation comes back in 2021, and the Act clarifies that wages will not be considered business income.

Currently, the Act is still proposed legislation. We will keep you informed as news breaks on this legislation, and we are ready to help you navigate how these provisions apply to your situation.

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