CARES Act: What Individuals and Businesses Need to Know
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, is a $2.2 trillion stimulus package to alleviate the economic devastation of the Coronavirus pandemic. The bill includes several elements aimed at helping keep individuals and businesses engaged in the economy.
Individual Tax Relief
Individual taxpayers will receive $1,200 recovery rebates. The rebate amounts are advance refunds of credits against 2020 taxes, and equal to $1,200 for individuals ($2,400 for joint filers) with a $500 credit for each child. The rebate amount is based upon 2018 adjusted gross income (or 2019 return if it has already been filed). The amount of each rebate is phased out by $5 for every $100 in excess of a threshold amount. The phaseout begins at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. The rebates are phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of household with $136,500, and joint filers with $198,000.
In order to be eligible for a recovery rebate, the individual must not be: (1) a nonresident alien, (2) able to be claimed as a dependent on another taxpayer’s return, (3) an estate or trust, and (4) must have included a Social Security number for both the taxpayer, the taxpayer’s spouse, and eligible children (or an adoption taxpayer identification number, where appropriate). The bill includes additional rules for the application of the credit.
The bill waives the 10% penalty on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions. For purposes of the penalty waiver, a coronavirus-related distribution is one made during the 2020 calendar year, to an individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus. Any income attributable to an early withdrawal is subject to tax over a three-year period. Taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years.
The bill also waives all required minimum distributions for 2020, regardless of whether the taxpayer has been impacted by the pandemic.
The bill enhances tax incentives for making charitable contributions for the 2020 tax year. For individuals, the CARES Act removes the 50% of adjusted gross income limit on charitable deductions for cash contributions in 2020. It also allows individuals who take the standard deduction to receive an above-the-line deduction for charitable contributions up to $300. The charitable deduction limit increases from 10% to 25% of a corporation’s taxable income for cash contributions in 2020.
Student Loans Paid by Employers
The bill provides for an exclusion of up to $5,250 from income for payments of an employee’s education loans. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance, such as tuition, fees, and books, provided by the employee.
In order for the exclusion to apply, the loan must have been incurred by the employee for the education of the employee (so, for example, the loan must not have been incurred to pay for the education of the employee’s child). The payment can be made to the employee or directly to the lender. The exclusion only applies for payments made by an employer after the date of enactment and before January 1, 2021.
Business Tax Relief
Employee Retention Credit
Eligible employers can receive a credit against employment taxes equal to 50% of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business or a significant decline in gross receipts. The credit is available to be claimed on a quarterly basis, but the amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters. The provision contains several requirements defining qualified wages, qualified employees, and qualified employers. The credit applies to wages paid after March 12, 2020, and before January 1, 2021.
To be eligible, an employer’s operations must be fully or partially suspended during the COVID-19 Crisis Period, due to a COVID19-related shut-down order; or gross receipts must have declined by 50% or more when compared to the same quarter in 2019. For employers with more than 100 full-time employees in 2019, “qualified wages” are wages paid to employees that are not providing services due to the COVID-19 crisis. For eligible employers with 100 or fewer full-time employees in 2019, all employee wages are “qualified wages.”
Payroll Tax Deferral
The CARES Act allows employers and self-employed individuals to defer the payment of social security payroll taxes in order to free up employers’ cash flow and retain employees during times of quarantine or shutdown. Social security payroll taxes due from the period beginning on the date the CARES Act is signed into law and ending on December 31, 2020, are deferred. Half of the deferred payroll taxes are due on December 31, 2021, and the remainder is due on December 31, 2022.
Net Operating Losses
The CARES Act allows for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business. Businesses will be able to amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carryback. Under current law, only farming NOLs are allowed to be carried back and limited to two years.
The CARES Act also eliminates loss limitation rules applicable to sole proprietors and passthrough entities to allow them to take advantage of the NOL carryback. Additionally, the bill allows for NOLs arising before January 1, 2021, to fully offset income. Under current law, NOLs are limited to 80% of taxable income.
To qualify for a carryback adjustment, a taxpayer must file the application within 120 days of the enactment of the CARES Act. Businesses with NOL carrybacks will be able to obtain tax refunds for taxes paid within the five-year carryback period. As a result, these changes may provide many business with liquidity from accelerating the use of NOLs to reduce taxes and permitting immediate tax refunds for tax paid in prior years.
Business Interest Expense Deductions
The CARES Act relaxes the limitation on business interest expense deductions from 30% of adjusted taxable income (ATI) to 50% of ATI for tax years beginning in 2019 and 2020, with any excess carried forward to future tax years. ATI is defined generally as earnings before interest, taxes, depreciation, and amortization for tax years beginning before 2022. Taxpayers can elect to use their ATI from their 2019 tax year for purposes of their business interest deductions in their 2020 tax year. This will allow businesses that were more profitable in 2019 than 2020 to have a higher limit on deductible business interest than they otherwise would, which will provide a large benefit to businesses that will be in loss positions for 2020.
For tax partnerships (which include many LLCs), the increased limit from 30% to 50% applies for tax years beginning in 2020 (but not 2019). For excess business interest in tax years beginning in 2019, partners can elect to have 50% of that excess business interest treated as business interest paid in 2020 that is not subject to the business interest deduction limitation. The remaining 50% of that excess business interest subject to the 30% business interest expense limitation can be carried forward.
For tax partnerships, the election to use ATI from the 2019 tax year for purposes of business interest deductions in the 2020 tax year is made by the partnership. The increase in the business interest expense deduction, in addition to the expanded ability to use losses, may permit tax partnerships to reduce their outlays of cash for tax distributions to their partners.
Excess Business Loss Limitations
A taxpayer’s ability to use business losses to offset nonbusiness income is limited to $250,000 for individuals ($500,000 for joint return filers) prior to 2026, and such losses that are disallowed as “excess business losses” are carried forward and treated as NOLs in future tax years. The CARES Act suspends these excess business loss limitations for tax years beginning in 2018, 2019 and 2020. Qualifying taxpayers can take advantage of these additional deductions to reduce taxes for 2019 and 2020, and should consider filing amended returns for excess business losses that arose in 2018.
Qualified Improvement Property
The 2017 Tax Cuts and Jobs Act (TCJA) generally permits taxpayers to take 100% bonus depreciation on property with a recovery period of 20 years or less if that property is placed in service before 2023. In what is commonly called the “retail glitch,” the 2017 TCJA mistakenly excluded from 100% bonus depreciation business expenses for improvements to an interior portion of an existing nonresidential building (“qualified improvement property” or QIP). The CARES Act fixes this error by extending 100% bonus depreciation to QIP and by permitting taxpayers to retroactively claim 100% bonus depreciation on QIP placed in service in 2018 and 2019. Qualifying taxpayers should consider filing amended returns to take advantage of this benefit.
Refunds for Alternative Minimum Tax Credits
Before the TCJA, certain corporations paid a 20% alternative minimum tax (AMT) and that paid AMT generated a tax credit that could be carried forward and used to offset regular income tax paid by those corporations in future tax years. The CARES Act allows a corporation to claim a full refund of these AMT credits in its 2018 and 2019 tax years. To take advantage of this immediate refund, corporations must apply by the end of 2020 and the IRS will process the application within 90 days.
Payment of Credits for Required Paid Sick Leave and Family Leave
The CARES Act authorizes employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.
Pension Funding Delay
Single employer pension plan companies have more time to meet their funding obligations. The due date is delayed for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest. Also, a plan can treat its status for benefit restrictions as of December 31, 2019 as applying throughout 2020.
SBA Loan Debt Forgiveness isn’t Taxable
Amounts of Small Business Administration Section 7(a)(36) guaranteed loans (known as the Paycheck Protection Program) that are forgiven under the CARES Act aren’t taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020.
Excise Tax Relief
The bill provides a temporary exception from alcohol excise taxes for alcohol for use in or contained in hand sanitizer produced or directed by the Food and Drug Administration related to the pandemic. The bill also suspends excise taxes on aviation and kerosene used in aviation fuel. The exception and suspensions are only applicable to 2020.
This advisory is summary of certain changes to the federal tax laws and is not intended to and does not constitute legal or tax advice.
If you need guidance about the CARES Act for you or your business, please contact us to discuss with a member of our team.
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