On March 27, 2020, President Donald Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act or Act), which includes cash payments to taxpayers, expanded unemployment insurance, increased funding for healthcare providers, small business loans, and tax relief to individuals and businesses. The Act is the third bill from Congress in response to the COVID-19 pandemic.
This tax alert addresses the key tax provisions of the Act for both individuals and businesses that aim to increase access to cash for individuals and increase liquidity for businesses. For individuals, the tax provisions include direct cash payments and penalty-free withdrawals from retirement savings accounts. Business tax provisions include an employee retention credit, deferral of payroll tax payments, temporary reinstatement of the net operating loss (NOL) carryback, increased limits for business interest deductions, and a technical correction to the qualified improvement property provision contained in the 2017 Tax Cuts and Jobs Act (TCJA).
Tax Provisions for Individuals
Direct payment as a credit against 2020 income tax
The IRS will make a direct cash payment to “eligible individuals” as a credit against their 2020 income tax liability. The one-time payment amount is equal to the sum of:
- $1,200 for single individuals ($2,400 for married individuals filing jointly); plus
- $500 for each qualifying child of the taxpayer.
The amount of the payment is reduced by 5 percent of the taxpayer’s adjusted gross income (AGI) in excess of:
- $75,000 for single individuals;
- $112,500 for individuals filing as head of household; and
- $150,000 for married individuals that file a joint tax return.
As a result, the payment is completely eliminated for:
- Single individuals with AGI exceeding $99,000;
- Individuals filing as head of household with AGI exceeding approximately $136,500; and
- Married individuals that file a joint tax return with AGI exceeding approximately $198,000.
A taxpayer’s AGI is based on the amount reported on his or her 2019 tax return or, if a 2019 tax return has not yet been filed, the amount reported on the taxpayer’s 2018 tax return.
An “eligible individual” is any individual other than a nonresident alien or an individual for whom a dependency deduction is allowable to another taxpayer for the tax year. However, an eligible individual must have a valid Social Security number to receive a payment. Likewise, if a qualifying child is taken into account in determining the amount of an individual’s payment, the qualifying child must also have a valid Social Security number.
Waiver of 10 percent early-withdrawal penalty
The Act waives the 10 percent early-withdrawal penalty on “coronavirus-related distributions” from eligible retirement plans of up to $100,000. A coronavirus-related distribution is a distribution made to an individual during calendar year 2020 who:
- Is diagnosed with the coronavirus or the COVID-19 disease;
- Has a spouse or dependent who is diagnosed with the coronavirus or the COVID-19 disease; or
- Experiences adverse financial consequences as a result of:
- Being quarantined, furloughed or laid off;
- 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
- Other factors as determined by the Secretary of the Treasury.
An eligible retirement plan is:
- An individual retirement account described in IRC Section 408(a);
- An individual retirement annuity described in IRC Section 408(b) (other than an endowment contract);
- A qualified trust;
- An annuity plan described in IRC Section 403(a);
- An eligible deferred compensation plan described in IRC Section 457(b), which is maintained by an eligible employer described in IRC Section 457(e)(1)(A); and
- An annuity contract described in IRC Section 403(b).
An individual that receives a coronavirus-related distribution can elect to pay the income tax on that distribution ratably over three years. In addition, if the withdrawn amount is recontributed to the eligible retirement plan within three years, it will be treated as a tax-free rollover (and, thus, not subject to income tax).
Finally, the Act also increases the limits for loans from retirement plans for qualified relief from $50,000 to $100,000.
Required minimum distributions not required for 2020
The Act provides that the required minimum distribution rules that require a retirement plan participant or IRA owner to take required minimum distributions annually once the participant or owner reaches age 72 do not apply for calendar year 2020.
Increased deductions for charitable contributions
The Act allows individuals who do not itemize deductions to deduct up to $300 in cash charitable contributions made in 2020. The deduction is not available, however, for contributions to a donor-advised fund or a supporting organization.
In addition, the Act eliminates the percentage of AGI limitations that normally apply to the income tax deduction for charitable contributions in the case of “qualified contributions.” A qualified contribution is a cash contribution:
- That is made in calendar year 2020 to a public charity or private foundation (but not to a donor-advised fund or supporting organization); and
- For which the taxpayer elects to treat as a qualified contribution.
Because of the percentage of AGI limitations being eliminated for qualified contributions, a taxpayer could eliminate his or her 2020 income tax liability by making a sufficient amount of qualified contributions.
Employer payments of student loans
The Act adds student loan payments to the list of eligible educational assistance programs under IRC Section 127(c). As a result, an employer’s payment of an employee’s student loan in an amount up to $5,250 may be excluded from the employee’s gross income provided the employer makes the payment after March 27, 2020, and before January 1, 2021.
Suspension of excess business loss rule
The Act also suspends the $250,000 excess business loss limitation under Section 461(l) through December 31, 2020. This means that affected taxpayers may be able to fully deduct excess business losses arising in 2018, 2019 and 2020.
Tax Provisions Affecting Businesses
Employee retention credit
The CARES Act provides a refundable payroll tax credit equal to 50 percent of certain wages paid by “eligible employers” to certain employees during the COVID-19 crisis. Eligible employers are employers, including non-profits, whose operations have been fully or partially suspended because of a government order limiting commerce, travel or group meetings. Eligible employers also include those who have experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis. Eligible employers do not include, however, employers that receive a Small Business Interruption Loan.
For eligible employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible for the credit, regardless of whether the employee is furloughed. For eligible employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers' closure or reduced gross receipts are eligible for the credit. No credit is available, however, with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee.
The term "wages" includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee after March 12, 2020, and before January 1, 2021. However, wages do not include required paid sick leave or required paid family leave under the Families First Coronavirus Act, nor wages taken into account for the Code Sec. 45S employer credit for paid family and medical leave.
Increased limitation on charitable contribution deduction
The Act increases the 10 percent of taxable income limitation normally applicable to a corporation’s charitable contribution deduction to 25 percent of taxable income in the case of qualified contributions (discussed in detail above).
Payment deferral for employer Social Security payroll taxes
The Act allows employers and self-employed individuals to defer over two years the payment of the employer’s portion of the Social Security payroll tax due on employee wages paid between the March 27, 2020, and December 31, 2020. Self-employed individuals also qualify for the deferral. Taxpayers must pay half of the total amount by December 31, 2021 and the other half by December 31, 2022.
This deferral is not available, however, to any taxpayer that has indebtedness forgiven under the loan forgiveness provision of the Act (related to small business loans).
Temporary reinstatement of net operating loss carryback
The Act amends IRC Section 172(a) to allow businesses to carry back net operating losses (NOLs) incurred in 2018, 2019 and 2020 for up to five years. The NOLs are also not subject to the 80 percent of taxable income limitation, meaning they could fully offset 2020 or prior-year taxable income.
Accelerated AMT credit refunds
The CARES Act allows corporations to accelerate to 2019 claims for fully refundable corporate alternative minimum tax (AMT) credits. It also allows corporations the option to claim the fully refundable AMT credits in 2018. The TCJA repealed the corporate AMT for taxable years after 2017 but allowed corporations to recover AMT credits against regular tax after 2017 and before 2022 with credits fully refundable in 2021. A taxpayer may file an application for a tentative refund of any amount prior to December 31, 2020, to claim the accelerated credit.
Increased business interest deduction limit
The Act increases the limit on the business interest deduction under Section 163(j) by increasing the adjusted taxable income portion of the limit from 30 percent to 50 percent for taxable years 2019 and 2020. However, for partnerships, the increased limitation only applies to 2020.
It also allows businesses to use their taxable income from 2019 (rather than 2020) in tax year 2020 for the purposes of applying the 50 percent limitation.
Technical amendment on qualified improvement property
The Act makes technical amendments to clarify that qualified improvement property is 15-year property under the modified accelerated cost recovery system (MACRS) and eligible for 100 percent bonus depreciation. This allows companies to write off expenses related to physical improvements immediately instead of depreciating them over 39 years. The change takes effect as if it was included in the TCJA, which means it applies to property acquired and placed in service after December 31, 2017.
Small Business Assistance
The CARES Act includes several loans and grants through the Small Business Administration (SBA) designed to help small businesses cover operating costs and retain employees. Two notable provisions are the expanded loans and loan forgiveness.
Expanded SBA loans
The Act increases the government guarantee of emergency loans made under Section 7(a) of the Small Business Act to 100 percent for loans of up to $10 million. It also expands eligible recipients to include any business with not more than 500 employees (or the standard number of employees established by the federal government for the industry), including those with more than one physical location, nonprofit organizations, veterans organizations and tribal businesses. Loans may be used to meet payroll, health benefit costs, employee compensation, mortgage interest, rent, utilities and interest on debt incurred before February 15, 2020.
The Act provides that SBA loan recipients are eligible for loan forgiveness generally for the amount of loan proceeds spent on payroll, interest payments on certain debt obligations, rent and utility payments. The forgiven amount is also excluded from taxable income. The amount forgiven is reduced by the proportionate reduction in employees retained compared to the prior year period and by any pay reduction of more than 25 percent. Other limitations also apply.
During this time of unprecedented changes, Weaver remains vigilant in serving our clients and monitoring tax changes to keep you informed. Our teams are working remotely even during local and national movement restrictions, and we are here to assist with meeting deadlines and needs.
If you have questions or need advice on your specific situation, please contact us. We are here to help.
The CARES Act (the Act) provides numerous favorable tax-related provisions, including Section 2303, which…
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