The Coronavirus Aid, Relief, and Economic Security Act (the “Act”), signed into law on March 27, 2020, provides substantive assistance to taxpayers affected by the coronavirus. This assistance is in the form of new and modified tax provisions as well as other loan programs. Below is a brief discussion of these items.
Download the PDF version: CARES Act Tax Provisions.pdf
Tax Rebate Checks
U.S. residents who are not dependents of another taxpayer will soon be sent tax rebate payments equal to $1,200 per person, plus $500 for each qualifying child under the age of 17.
A rebate phaseout will begin once adjusted gross income (AGI) exceeds $75,000 for single filers, $112,500 for head of household and $150,000 for married filing jointly, with rebates decreased by $5 for every $100 of excess AGI. Therefore, when AGI exceeds $99,000 for a single filer, $136,500 for a head of household and $198,000 for married filing jointly, no rebate check will be issued. And, the complete phaseouts could increase slightly based on the number of qualifying children in the household.
Checks are anticipated to be sent out within the next few weeks and are based on an individual’s 2019 tax return. Those who have not yet filed a 2019 return will have rebate amounts computed based on their 2018 tax return, or the most recent Social Security Benefit Statement as provided on Forms SSA-1099 and RRB-1099.
The rebate check works as an advance credit from the government. Because it is based on either a 2018 or 2019 tax return for the initial payout, the rebate will need to be recomputed on an individual’s 2020 tax return, using 2020 information. Therefore, when the 2020 tax return is filed, the information for 2020 will be used to determine the amount of the rebate that should have been received. If in 2020, the amount of rebate owed is more than what the taxpayer received based on 2019’s activity, the excess will be treated as a credit against any 2020 tax liability. On the other hand, if the advance rebate was too large, there does not, at this time, appear to be a repayment requirement.
Withdrawals and/or Loans from Qualified Retirement Accounts
The Act waives the normal 10 percent penalty for eligible taxpayers withdrawing money from a qualified retirement account for distributions up to $100,000 made during 2020 to offset financial damage to the plan owner or spouse as related to the coronavirus. Trustee to trustee distributions are not covered. Additionally, the associated income tax anticipated with the coronavirus distribution can be eliminated by repaying the distribution though contributions returned to the plan in not less than equal payments over three years, starting with 2020. Taxpayers can recontribute funds into a qualified retirement account within those three years without regard to any annual limitation. Taxpayers can also borrow up to $100,000, increased from $50,000, from a qualified retirement account. The test for the upper limit for a loan is also increased to now be based on 100% of the present non-forfeitable value. Plus, on existing loans a one-year extension on any associated due dates is made available.
Eligible taxpayers include: 1) a taxpayer diagnosed with the virus; 2) taxpayers whose spouse or dependent is diagnosed with the virus; or 3) a taxpayer “who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease or such other factors as determined by the Secretary of the Treasury….”
Required Minimum Distribution Rules
The minimum distribution rules for withdrawals from a qualified retirement account (including IRAs) are waived for the 2020 tax year.
The Act makes several temporary changes to the charitable contribution rules. For the 2020 tax year, taxpayers are eligible to deduct up to $300 of cash contributions as an “above the line” deduction (meaning even non-itemizing taxpayers can claim this deduction). Additionally, for individuals who itemize, the 50 percent adjusted gross income limitation is waived for certain contributions. Also, this deduction is not allowed if made to a private foundation or to a donor advised fund. For corporations in 2020, once again excluding donations to a private foundation or donor advised fund, at the election of the corporation, the 10 percent taxable income limitation is increased to 25 percent for cash contributions. The Act also increases the limitation on deductions for contributions of food inventory from 15 to 25 percent of taxable income. Based on the legislation, the percentage change for food inventory applies to taxable years ending after December 31, 2019, which suggests it extends beyond 2020.
Employee Retention Credit
The Act provides a refundable payroll tax credit equal to 50 percent of wages paid by employers during the coronavirus crisis. The credit is provided for the first $10,000 of compensation (including health benefits) paid to an employee starting March 13, 2020 through December 31, 2020.
Generally, employers qualifying for this credit include those whose: 1) operations were fully or partially suspended due to a Coronavirus shut-down order; or 2) gross receipts declined by more than 50 percent as compared to the same prior year quarter. And, it can apply to exempt organizations.
The credit is based upon qualified employee wages. Qualified wages for employers with more than 100 full-time employees are wages paid to employees when they are not providing services due to Coronavirus related circumstances. Qualified wages for employees with 100 or fewer full-time employees include all employee wages, even if the employer is closed due to a shut-down order. Employers can elect not to take advantage of this credit. Employers may also be limited in their ability to take advantage of this credit where the employee wages are used to compute a different credit, such as for hiring veterans, the small business R&D, plus the new sick and required leave programs or if the employer accepts a covered loan under the Small Business Act.
Deferral of Employer’s Share of Payroll Taxes
Employers and self-employed individuals can defer payment of the employer’s share of the Social Security tax they are otherwise responsible for paying (generally a 6.2 percent tax on wages or earned income) for the 2020 tax year. The deferred employment tax can be paid over the two following tax years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
A large part of the Act’s financial aid is administered through Small Business Administration (“SBA”) Loans. Many businesses and non-profits with not more than 500 employees (subject to ertain limitations) can qualify for these loans. The loans, which are issued by participating banks and other qualified lenders and guaranteed by the SBA, can equal the lesser of $10 million or 2.5 times an employer’s 2019 monthly annual payroll. All or a portion of the loan amounts can be forgiven by the government if the employer maintains both the number of employees as well as their salaries. There is a waiver of SBA fees for one year, but interest will be accrued.
Net Operating Losses
The TCJA amended code section 172 by placing several limitations on the use of net operating losses (“NOLs”) for the tax years from 2018 forward. First, NOLs could only be carried forward (previous law had allowed NOLs to be carried back two years). And second, NOLs could be used to offset no more than 80 percent of a taxpayer’s taxable income, with any remainder carried forward for use in a subsequent year.
The Act makes substantive changes to code section 172, but only for the tax years beginning in 2018 through 2020. Under this temporary provision, NOLs can be carried back five years, and NOLs are not subject to any taxable income limitations. Any taxpayers with already filed 2018 or 2019 tax returns reporting NOLs subject to the TCJA rules (either the taxable income limitation or prohibition against carrybacks) may consider amending tax returns to claim additional losses and possibly carry back any unused NOLs. Additionally, any NOLs arising with unfiled 2019 tax returns will benefit from these new temporary rules. Under both situations, NOLs can be carried back to former tax years and applied against income taxed at pre-TCJA rates, potentially resulting in a permanent benefit.
Business Interest Expense Limitations
Section 163(j), as amended by the TCJA, generally limits a taxpayer’s deductible business interest expense to the sum of a taxpayer’s business interest income and 30 percent of a taxpayer’s adjusted taxable income (“ATI”). A detailed discussion of ATI is beyond the scope of this update but, generally, ATI equates to earnings before interest, taxes, depreciation, and amortization.
The Act temporarily increases the amount of deductible business interest expense limitation to 50 percent of a taxpayer’s ATI (plus business interest income) for tax years beginning in 2019 and 2020. For taxpayers other than partnerships, the increased ATI limitation is applicable to 2019 and 2020 tax years. Any 2019 tax returns filed by these taxpayers that have been filed reporting a section 163(j) business interest expense limitation may be amended to reflect the increased interest expense threshold. Partnerships remain subject to the 30 percent of ATI limitation for their 2019 tax returns but are provided with increased flexibility in utilizing excess business interest expense carryforward on their 2020 tax returns. Partnerships are then eligible to use the 50 percent of ATI limitation on their 2020 tax returns.
Excess Business Loss Limitation (Section 461(l))
Section 461(l) was enacted as part of the TCJA for tax years beginning after December 31, 2017, and limits the ability of non-corporate taxpayers to use business losses to offset their nonbusiness income. Specifically, business losses that exceed business income can only be used to offset $250,000 ($500,000 for joint filers) of non-business income. Any losses in excess of the amount allowed are carried forward to subsequent years as a net operating loss. The Act delays the effective date of the business loss limitation rules under Section 461(l) to tax years beginning after December 31, 2020. As a result, for tax years beginning in 2018 through 2020, business losses are fully deductible against business and non-business income. Taxpayers whose losses were limited on their 2018 or 2019 tax returns by this provision may have an opportunity to amend these returns to modify the treatment of those losses.
The Act also makes several technical corrections to the original statutory language that are retroactively effective. These corrections are intended to clarify several aspects of the legislation including the determination of business income and the treatment of disallowed losses that are carried forward. The modifications provide that wages earned as an employee do not constitute business income for purposes of Section 461(l). Additionally, capital losses are not treated as business losses for these purposes, but capital gains are treated as business income up to the lesser of the business capital gain income or total capital gain income. Losses disallowed under these rules are treated as net operating losses arising in the year of disallowance for purposes of applying the NOL rules under Section 172.
Qualified Improvement Property “Fix”
Qualified Improvement Property (“QIP”) generally includes interior, non- structural improvements to nonresidential buildings that are placed-in-service after the buildings were originally placed-in-service. QIP was intended to be classified as 15-year property under the TCJA which would have allowed the property to be eligible for bonus depreciation under Section 168(k). However, due to a drafting error, QIP was not assigned a recovery period of 15- years. As a result, QIP placed-in-service after December 31, 2017, was assigned a recovery period of 39-years and was not eligible for bonus depreciation.
The Act retroactively corrects the statutory drafting error and assigns a 15-year recovery period to QIP. As a result, taxpayers that placed-in-service QIP during 2018 or 2019 may correct the recovery period on the property and claim bonus depreciation if otherwise eligible. Taxpayers may make this correction through filing a Form 3115, Application for Change in Accounting Method, with their 2019 or 2020 tax return. Alternatively, they could amend their 2018 or 2019 return if the amendment is completed prior to the date they file their tax return for the following year. For example, a taxpayer may amend its 2018 tax return if they have not yet filed their 2019 return. If they have filed their 2019 return, they will need to file a Form 3115 with either an amended 2019 return or a timely filed 2020 return to recognize the additional depreciation expense.
Download the PDF version: CARES Act Tax Provisions.pdf