The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) includes several tax provisions in addition to the other voluminous economic stimulus provisions. A summary of key tax provisions in the CARES Act is as follows:
Section 1106: Loan Forgiveness
Taxpayers will not have to recognize discharge of indebtedness income attributable to Payroll Protection Loans that are forgiven under the CARES Act. (Read more here.) As a result, these loans are basically tax-free to qualified employers.
Subtitle B: Rebates and Other Individual Provisions
Section 2201: 2020 Recovery Rebates for Individuals
Individual and joint filers will be eligible for advanced tax credit rebates of $1,200 and $2,400, respectively. These amounts are increased by $500 for each dependent child. The credits begin to phase out at adjusted gross income levels of $75,000 for individuals, $112,500 for heads of household and $150,000 for joint filers. Estates and trusts, nonresident aliens, and individuals that are claimed as a dependent on another person’s tax returns are not eligible for the credit. The credit is completely phased out for taxpayers that file individually, as a head of household, or jointly at adjusted gross income levels of $99,000, $146,500 and $198,000, respectively.
The income eligibility tests will be based on 2019 income tax returns, if already filed. Otherwise, the IRS will use 2018 income tax returns. These rebates are refundable advanced tax credits of a 2020 tax credit. The rebates will be delivered in the form of rebate checks. Taxpayers that receive the rebate checks will ultimately reduce the amount of any credit available on their 2020 tax returns by the amount of the rebate check. Thus, if a taxpayer receives a smaller rebate than he is eligible for based on his adjusted gross income for 2020, he will receive the difference as a credit on his 2020 income tax return. However, it a taxpayer receives an overpayment through the rebate check due to higher income in 2020, the overpayment will not be clawed back.
Section 2202: Special Rules for Use of Retirement Funds
The CARES Act permits distributions of $100,000 or less to be made on or after January 1, 2020 and before December 31, 2020 from certain retirement accounts to the following individuals: (i) individuals (or their spouse or dependent) diagnosed with COVID-19 or (ii) individuals that have experienced negative financial consequences from being quarantined, laid off, furloughed, suffering reduced work hours, or missing work due to otherwise unavailable child care. The ten percent (10%) premature distribution tax is also waived with respect to these distributions.
Amounts distributed pursuant to these conditions may be repaid over a three-year period at any time, beginning with the date of the distribution. If the distributions are not repaid, the recipient will have to recognize the amount of the distribution over the three taxable years beginning with the year in which the distribution occurred.
Section 2203: Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts
The CARES Act also suspends the required minimum distribution rules for (i) distributions required by April 1, 2020 for calendar year 2019 and (ii) defined contribution plans and IRA’s for 2020.
Section 2204: Allowance of Partial above the Line Deduction for Charitable Contributions
Taxpayers will be able to deduct up to $300 of charitable contributions, regardless of whether they itemize their deductions. This deduction will be “above the line.”
Section 2205: Modification of Limitations on Charitable Contributions during 2020
The overall limitations on deductions for charitable contributions for individuals are suspended. Prior to the CARES Act, the amount of charitable contributions deductible by an individual was limited (ranging from thirty percent (30%) to sixty percent (60%) of adjusted gross income, depending on the form of contribution). The CARES Act also increases the limitation on corporate charitable contributions from ten percent (10%) of taxable income to twenty-five percent (25%) of taxable income.
Section 2206: Exclusion for Certain Employer Payments of Student Loans
From the date the CARES Act was enacted (March 27, 2020) until December 31, 2020, an employer may contribute up to $5,250 toward an employee’s student loans on a tax-free basis to the employee. This cap applies to the aggregate of any new student loan repayment plus any educational assistance program already provided by employer.
Subtitle C: Business Provisions
Section 2301: Employee Retention Credit for Employers Subject to Closure due to COVID-19
The CARES Act provides for a refundable payroll tax credit of fifty percent (50%) percent of wages paid to employees during the COVID-19 pandemic. For an employer to qualify for this credit, either (i) operations must have been fully or partially shutdown pursuant to a COVID-19 business shut-down order or (ii) an employer’s gross receipts must be at least fifty percent (50%) less than the same quarter in 2019. For purposes of the “gross receipts” test in clause (ii), gross receipts are aggregated pursuant to Internal Revenue Code Sections 52(a) and (b) and 414(m) and (o), such that persons treated as a “single employer” under these provisions will be included. Accordingly, entities under common control will likely be aggregated for purposes of comparing the decline in gross receipts from the same quarter in 2019.
The credit is computed based on “qualified wages”, the definition of which depends on the employer’s average number of full-time employees in 2019. If the employer averaged more than 100 employees, qualified wages only include wages paid when partially or fully shutdown. If the employer averaged 100 or less employees, qualified wages includes all wages paid whether the business was open or shut-down.
The amount of qualified wages is further capped at $10,000 per employee for wages paid from March 13, 2020 to December 31, 2020. The term “wages” generally includes any wages paid to employees plus the cost of health care plan expenses allocated to wages in a group health care plan. Wages to employees that otherwise are included in a work opportunity tax credit, however, do not qualify as qualified wages. Wages paid under Section 7001 (payroll tax credit for required paid sick leave) and Section 7003 (payroll tax credit for required family leave) of the Families First Coronavirus Act also do not constitute qualified wages for purposes of the employee retention credit. (Read more here.)
This employee retention payroll tax credit is not available to employers that receive Payroll Protection Loans. (Read more here.)
Section 2302: Delay of Payment of Employer Payroll Taxes
The payment of Employer payroll taxes related to Social Security and Railroad Retirement Act attributable to wages paid during 2020 will be postponed. Fifty percent (50%) of the amount deferred will be payable on December 31, 2021 and the remaining fifty percent (50%) will be payable on December 31, 2022. For self-employed individuals, the same deferrals apply for fifty percent (50%) of Social Security and Railroad Retirement Act wages. For purposes of clarity, the payroll tax deferral does not, however, apply to the employee’s portion of social security tax, the Medicare tax, and federal income tax withholding. There is no cap on the amount of payroll taxes that can be postponed.
These deferrals, however, do not apply to taxpayers that have indebtedness forgiven under CARES Act (see above discussion of Section 1106 of the CARES Act).
Section 2303: Modifications for Net Operating Losses
The Tax Cut and Jobs Act (the “TCJA”) limited the use of net operating losses (“NOL’s”) to eighty percent (80%) of taxable income. The TCJA also eliminated the ability to carry back NOL’s. The Cares Act suspends that limitation for 2018-2020, such that NOL’s can offset one hundred percent (100%) of taxable income. Additionally, NOL’s arising in 2018-2020 can be carried back for five years (at a taxpayer’s option), which will allow taxpayers with taxable income in such prior years to file amended returns and immediately qualify for tax refunds. Taxpayers with NOL’s in 2018 and 2019 should review prior tax years to see if filing amended tax returns would be beneficial.
Section 2304: Modification of Limitation on Losses for Taxpayers other than Corporations
For individuals, the TCJA only allowed the use of pass-through losses to offset non-business income up to $250,000 for single taxpayers and $500,000 for those filing jointly. The CARES Act eliminates this restriction for 2018-2020. Accordingly, individuals can use pass through losses to offset all non-business income. Taxpayers should review 2018 tax returns to see if it would be beneficial to file an amended 2018 tax return to take advantage of the increased deductibility of such losses (and should consider same in the preparation or amendment of 2019 tax returns, and ultimately the preparation of 2020 tax returns).
Section 2305: Modification of Credits for Prior Year Minimum Tax Liability of Corporations
The TJCA repealed the corporate alternative minimum tax (“AMT”) and allowed corporations who had paid corporate AMT to claim a refundable tax credit for such corporate AMT payments over several years. The CARES Act accelerates the recovery of refundable corporate AMT credits. Beginning in 2018, corporations may fully take these credits. Corporate taxpayers can file amended income tax returns to claim this credit. Corporate taxpayers should consider whether it would be beneficial to amend their 2018 tax returns (and should consider same in the preparation or amendment of 2019 tax returns).
Section 2306: Modification of Limitation on Business Interest
The TCJA added section 163(j), which limited the deduction of business interest expense to thirty percent (30%) of adjusted taxable income. The CARES Act increases that limitation to fifty percent (50%) of adjusted taxable income for years 2019 and 2020. Taxpayers may also elect to use 2019 adjusted taxable income instead of 2020 adjusted taxable income for purposes of computing the limitation. For partnerships, the election must be made by the partnership. This could be very beneficial if 2020 adjusted taxable income is lower than 2019, which may be likely due to the Coronavirus effects on many businesses. Accordingly, the ability to deduct business interest expense will be increased. Taxpayers should consider the increased deductibility in the preparation or amendment of 2019 tax returns, and ultimately the preparation of 2020 tax returns.
Section 2307: Technical Amendments regarding Qualified Improvement Property
The TCJA categorized “qualified improvement property” as thirty-nine (39) year property for depreciation purposes. The CARES Act corrects this technical error and characterizes this property as fifteen (15) year property, retroactive to 2017, which also means that such property can qualify for one hundred percent (100%) bonus depreciation. As a result, businesses can file amended returns and potentially receive refunds based on increased depreciation due to the shorter life of these assets. Taxpayers should determine whether they owned such property in 2017 or 2018 and should file amended tax returns to take advantage of the increased depreciation (and consider same in the preparation or amendment of 2019 tax returns).
Section 2308: Temporary Exception from Excise Tax for Alcohol Used to Produce Hand Sanitizer
For calendar year 2020, the federal excise tax will not be assessed for alcohol used in hand sanitizer if the FDA guidance is followed in producing this product.