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Late last night the Senate passed the Coronavirus Aid, Relief, and Economic Security Act (CARES). The House of Representatives is scheduled to pass CARES tomorrow and the President has publicly stated he will sign it. CARES will be the second stimulus package from the federal government addressing economic impact wrought by the coronavirus (COVID-19) pandemic.
CARES provides tax relief to all Americans. In addition, it contains provisions to help workers, employers and certain industries suffering as a result of the economic hardship that has resulted from the pandemic. This article will only address the tax provisions of CARES.
CARES contains several provisions benefitting individual taxpayers.
- Economic Assistance
CARES creates Section 6428 of the Internal Revenue Code providing taxpayers with a refundable credit against their 2020 federal income taxes. The amount of the credit is $1,200 for single and head of household filers ($2,400 for joint filers) and increased by $500 for each qualifying dependent child. The credit is not available to nonresident aliens, dependents, estates or trusts.
Eligibility for the credit begins to phase out for single taxpayers having an adjusted gross income of $75,000 ($112,500 for heads of household and $150,000 for joint filers). The credit phases out at rate of $5 per $100 of income, meaning that single taxpayers are completely phased out when their income reaches $99,000 ($146,500 for head of household with one qualifying child and $198,000 for joint filers with no children).
The credit will be provided in the form of a payment from the U.S. Treasury. Payments are expected to begin within three weeks either in the form of an actual check or direct deposit, if the taxpayer provided his or her direct deposit information on the 2018 or 2019 federal income tax returns.
This is a completely new provision to provide relief to taxpayers with no corollary in current law. We anticipate guidance will be issued by the Treasury Department and IRS.
- Charitable Deductions
Taxpayers who utilize the standard deduction may take a charitable deduction (an above the line deduction) of up to $300 for cash contributions made to charities in 2020. Following the Tax Cut and Jobs Act of 2017 (“TCJA”), the charitable deduction has been far less useful, as it was only available for those who itemized their deductions and the increase in the standard deduction under TCJA resulted in far fewer taxpayers itemizing deductions.
For 2020 only, CARES also suspends or modifies some of the limitations on charitable deductions. CARES suspends the 60% limitation on individuals for cash contributions to charities, other than supporting organizations or donor advised funds. This means that individuals may deduct eligible cash contributions against all of their adjusted gross income. In addition, the 10% limitation on corporations for cash contributions is increased to 25% for 2020.
Finally, the 15% limit on charitable contributions of food inventory by businesses is increased to 25% for 2020.
- Retirement Plans
Under CARES, taxpayers may withdraw up to $100,000 from their qualified retirement plans without incurring the 10% early withdrawal penalty for “coronavirus-related distributions”. “Coronavirus-related distributions” are distributions made in 2020 to an individual:
- who is diagnosed with COVID-19,
- whose spouse or dependent is diagnosed with COVID-19, or
- who experiences adverse financial consequences as a result of being
- laid off;
- having work hours reduced;
- being unable to work due to lack of child care due to COVID-19;
- closing or reducing hours of a business owned or operated by the individual due to COVID-19;
- or other factors as determined by the Treasury Secretary.
Taxpayers making coronavirus-related distributions can recognize the income ratably over three years, starting with the 2020 tax year. However, taxpayers may recontribute the withdrawn funds by 2023.
Finally, the required minimum distribution rules for 2020 are waived. Accordingly, taxpayers who are required to take distributions from their retirement plans under the normal rules will not be required to take any distributions in 2020.
- Student Loan Payments by Employers
For 2020 only, CARES expands the definition of educational assistance to include student loan payments. The current annual cap of $5,250 is not increased.
CARES also contains several tax provisions benefitting businesses.
- Net Operating Losses (NOLs)
CARES relaxes the limitations on the deductibility of net operating losses imposed by the TCJA, which provided that in most cases losses could not be carried back. CARES allows businesses to carry back for five years, NOLs incurred in 2018, 2019 and 2020.
In addition, businesses may fully apply their NOLs against all taxable income. Under TCJA, NOLs were limited to 80% of taxable income.
Limitations on excess business losses under TCJA also are deferred until 2021.
- Net Interest Deduction
TCJA limited businesses’ ability to deduct on their tax returns interest paid to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA). CARES increases this limit to 50 percent of EBITDA for 2019 and 2020.
- Carryforwards & AMT
Businesses with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than previously allowed.
- Payroll Taxes
The Social Security Payroll Tax is the tax levied on employers and employees to fund Social Security. Currently, the rate of tax is 12.4%, with half paid by the employee and half paid by the employer. The employee portion is generally withheld from paychecks and submitted by the employer. The employer portion is paid by the employer on a periodic basis during the tax year.
Under CARES, the employer-portion of the Social Security Payroll Tax payments may be delayed until January 1, 2021, with 50 percent owed on Dec. 31, 2021 and the other half owed on Dec. 31, 2022, easing cash flow problems for the employer.
In addition, CARES provides for a fully refundable payroll tax credit for 50 percent of qualified wages, up to $10,000 of wages (including health benefits) per employee, for employers (1) whose operations were fully or partially suspended during a coronavirus shutdown order, or (2) whose gross receipts decreased by more than 50 percent compared to the same quarter from last year. If the employer has more than 100 full time employees, the compensation to which the credit applies includes only wages paid when the business is not providing services due to coronavirus, but for employers with 100 or fewer full-time employees all wages qualify for the credit regardless of whether they are subject to a shutdown order. Section 501(c)(3) organizations are considered to be an operating a trade or business for the purpose of this credit and are eligible to the extent they meet the other requirements.
CARES also provides that the refundable credit against employment taxes for employers required to provide paid leave for certain employees affected by COVID-19 (established by the Families First Coronavirus Response Act) will be an advance credit. Also, no deposit penalties will be imposed if the failure to deposit employment taxes was due to the anticipated refundable credit.
- Retirement Plans
CARES provides relief for the “minimum required contributions” to a defined benefit pension plan that a single employer might have for 2020. The due date for any such minimum required contribution otherwise due during calendar year 2020 is extended to January 1, 2021, but the amount of such minimum required contribution is increased for interest accruing between the original due date (prior to passage of CARES) and the actual payment date. Sponsors of such defined benefit pension plans should contact their plan actuary or third party administrator for additional details.
- Qualified Improvement Property – The Retail Glitch is Fixed
CARES corrects the Retail Glitch, a well-known problem under TCJA. Now “qualified improvement property’ is eligible, retroactively to the enactment of TCJA, for bonus depreciation and otherwise has a 15-year cost recovery period under Section 168. “Qualified improvement property” is any improvement to an interior portion of a nonresidential building other than enlargements of the building, elevators or escalators, or the internal framework of the building. The Retail Glitch disqualified such expenditures from bonus depreciation and required the improvements to be depreciated over 39 years.
- Distilled Spirits Excise Tax
The federal excise tax on distilled spirits is waived when the spirits are used for the production of hand sanitizer.
Guidance from the Treasury Department and IRS is expected as they work through this new legislation. Such guidance will address the interpretation and implementation of CARES.
For reference, we have published other articles on our website explaining the non-tax provisions of CARES.