CARES Act: Key Tax Provisions Offering Relief to Businesses and Individuals

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CARES Act: Key Tax Provisions Offering Relief to Businesses and Individuals

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Robert R. Pluth, Jr., Olga Bogush, Evgeny Magidenko

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, estimated to cost more than $2 trillion dollars, contains multiple tax-related provisions intended to offer relief to both businesses and individuals. Here we outline key provisions of which businesses and individuals should be aware.

Businesses: Nine Provisions Offering Relief

1. Employee Retention Credit

An employer is allowed a refundable payroll tax credit for 50 percent of qualified wages paid to employees from March 13 through December 31, 2020, subject to a cap of $10,000 of compensation, including health benefits, per employee. The credit is available to employers who were carrying on a trade or business in 2020 and whose (1) operations were suspended as a result of a COVID-19 shut-down order, or (2) gross receipts declined by more than 50 percent as compared to the same quarter in the prior year.

For employers with more than 100 full-time employees, qualified wages are those paid to employees when they are not providing services due to the COVID-19 crisis (although such qualified wages are limited, based on what the employees were earning before the crisis). For employers with 100 or fewer employees, all employee wages are qualified, regardless of whether the employer is open for business or subject to a shut-down order.

Qualified wages do not include wages for which the employer received credits under the emergency sick leave and family leave provisions of the Families First Coronavirus Response Act. In addition, there are restrictions on the credits’ availability with respect to employees on behalf of which the employer is allowed a work opportunity credit, or for whose wages a credit is allowed for paid family and medical leave under the Tax Cuts and Jobs Act of 2017.

This credit is not available to employers who receive a small business interruption loan under the Paycheck Protection Program from the Small Business Administration, which is another component of the CARES Act.

2. Deferral of Payroll Taxes

Employers can defer paying the employer share of the 6.2 percent Social Security tax for which they are otherwise responsible in 2020. A rule with similar effect applies to payroll taxes paid by self-employed individuals. The deferred tax must be paid over the following two years, with half of the required amount due by December 31, 2021, and the remaining half by December 31, 2022.

This deferral is not available to employers who have had indebtedness forgiven with respect to a loan under the Paycheck Protection Program.

3. Net Operating Loss Modifications

As a result of the Tax Cuts and Jobs Act of 2017, net operating losses currently are subject to a taxable income limitation and cannot be carried back to reduce income in a prior taxable year.

The CARES Act provides that a net operating loss arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. In addition, net operating losses can be used to offset the entire taxable income of a corporation.

4. Non-Corporate Loss Limitation Modification

The operation of the limitation on excess business losses (under Internal Revenue Code Section 461(l)) for pass-through entities and sole proprietors is suspended for the 2018 through 2020 taxable years.

5. Prior-Year Corporate AMT Credit Acceleration

Although the corporate alternative minimum tax was repealed as part of the Tax Cuts and Jobs Act of 2017, corporate AMT credits are allowed as refundable credits through 2021.

The CARES Act accelerates the ability of companies to recover the AMT credits by permitting immediate refund claims.

6. Business Interest Expense Limitation Modification

The amount of interest expense that businesses are allowed to deduct on their tax return is temporarily increased from 30 to 50 percent of taxable income, with certain adjustments, for 2019 and 2020.

7. Technical Correction to Treatment of Qualified Improvement Property

Correcting an error in the Tax Cuts and Jobs Act of 2017, the CARES Act allows businesses to immediately write off costs associated with improving facilities, instead of depreciating those improvements over the 39-year life of the building.

8. Excise Tax Exception for Alcohol Used to Produce Hand Sanitizer

For 2020, the federal excise tax is waived on any distilled spirits used for the production of hand sanitizer that is produced and distributed consistently with guidance from the FDA.

9. Modification of Limitations on Charitable Contributions During 2020

For corporations, the regular 10 percent limitation on charitable contributions is increased to 25 percent of taxable income for cash donations. In addition, the limitation on deductions for contributions of food inventory from trades or businesses is increased from 15 to 25 percent of the taxpayer’s aggregate net income (for non-corporate taxpayers) or taxable income (for C corporations).

This provision does not apply to contributions to donor-advised funds or to certain organizations supporting other non-profits.

Individuals: Six Key Provisions Offering Relief

1. Recovery Rebates

The recovery rebate provision is structured as a refundable credit against an individual’s income tax liability for the 2020 taxable year equal to $1,200 per “eligible individual” (or $2,400 for married eligible individuals filing a joint return), plus $500 per qualifying child (essentially, a dependent child of the eligible individual who lives with the taxpayer and has not attained the age of 17).

An eligible individual is any individual, other than (1) a nonresident alien, (2) a dependent of another taxpayer, or (3) an estate or trust.

The amount of the credit begins to phase out for taxpayers with incomes above $75,000 ($112,500 for heads of household, and $150,000 for taxpayers filing joint returns). The credit fully phases out for those with incomes exceeding $99,000 for individuals, $146,500 for heads of household with one child, and $198,000 for joint filers with no children.

The provision allows for the payment of an advance refund, using information from a taxpayer’s filed 2019 income tax return (or 2018 tax return, if a 2019 return was not filed). The amount of the advance refund, calculated using 2019 (or 2018) tax information, is treated as if it were an overpayment of a taxpayer’s 2019 (or 2018) taxes. This allows the IRS to issue a payment of that amount to the taxpayer, and the Treasury Department, through the IRS, is authorized to deliver these funds as rapidly as possible, including electronically. If a taxpayer has not filed either 2018 or 2019 returns, the IRS may look to certain information returns filed with respect to that taxpayer for the 2019 taxable year.

The IRS will mail a notice to the taxpayer’s last known address informing them of the transmittal of the rebate within 15 days of distributing a payment to an individual.

The amount of credit available for the 2020 taxable year will be reduced (but not below zero) by the amount of the advance refund. This appears to imply that if an individual had an income below the eligibility threshold in 2019 and received a rebate payment, and then had income in 2020 that disqualified him or her from receiving some or all of the credit, the rebate payment would not be clawed back; however, the definitive resolution of the rebate payment’s treatment in this situation may need to wait for IRS guidance.

On the other hand, if an individual had higher income in 2019 that disqualified him or her from receiving a rebate payment, but then had lower income in 2020 that allowed him or her a full or partial credit under this provision, then that taxpayer should be able to take that credit on his or her 2020 income tax return.

2. Special Rules on Using Retirement Funds

The CARES Act also waives the 10 percent early withdrawal penalty for coronavirus-related distributions up to $100,000 in total from all of an individual’s qualified retirement accounts in 2020. A coronavirus-related distribution is one made to an individual (1) who was diagnosed with COVID-19, (2) whose spouse or dependent was diagnosed with COVID-19, or (3) who experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or similar conditions.

Any amount that the taxpayer would otherwise have to include in his or her income in 2020 as a result of the coronavirus-related distribution instead can be included in income ratably over three years, beginning with the 2020 taxable year. Withdrawn amounts may be recontributed to an eligible retirement plan within three years of the distribution, without regard to the limitations on retirement account contributions for those later years.

In addition, the limit on plan loans is increased, and the repayment date of certain outstanding loans is delayed under these provisions.

3. Waiver of Required Minimum Distributions from Certain Retirement Plans

Required minimum distributions are waived for certain defined contribution plans and IRAs for 2020.

This provision applies to all taxpayers who have required minimum distributions, without means testing or a requirement that the taxpayer had to have been affected by COVID-19.

4. Partial Above-the-Line Deduction for Charitable Contributions

Up to $300 of cash contributions to charities and certain other tax-exempt organizations can be deducted from the taxable income of a taxpayer who does not itemize deductions. This deduction is not available for contributions to donor-advised funds or to certain organizations supporting other non-profits.

This above-the-line deduction is available to all eligible taxpayers, without regard to their income.

5. Modification of Limitations on Charitable Contributions During 2020

In the case of cash contributions to non-profits made in 2020, individuals are not subject to the 50 percent AGI limitation.

This provision does not apply to contributions to donor-advised funds or to certain organizations supporting other non-profits.

6. Exclusion from Income of Certain Employer Payments of Student Loans

An employer’s payment of an employee’s student loan principal or interest is added to the definition of “educational assistance” provided by an employer, $5,250 of which may be excluded from the employee’s income in a given year. The $5,250 cap applies to the total of “educational assistance” provided to an employee, which under prior law includes (1) payments incurred by or on behalf of an employee for the employee’s education, and (2) the provision by the employer of courses of instruction for the employee—and now will also include student loan repayment.