23 Apr Legal Alert #6 – CARES Act Tax Benefits
On Friday, March 27, 2020, President Trump signed the massive $2 plus trillion coronavirus Stimulus Bill (the Coronavirus Aid, Relief and Economic Security “CARES” Act) to provide much needed assistance to small business, employees, and taxpayers. The CARES Act provides many benefits to keep America’s economy going as we all work together to preserve through and recover from the economic challenges brought on by the virus.
In this Alert we focus on Individual and Business Tax Benefits
The U.S. Congress has enacted several significant pieces of legislation over the last few weeks. First, the Coronavirus Preparedness and Response Supplemental Appropriations Act was signed into law by President Trump on March 6, 2020. Second, the Families First Coronavirus Act, was signed into law on March 18, 2020 (See our prior Alert on this FFCA).
Most recently, on March 25, 2020, the Senate unanimously passed “phase III” of the relief program, which is known as the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The bill was passed in the House the morning of March 27, 2020 and was quickly signed by President Trump in the afternoon of March 27, 2020. The CARES Act is estimated to cost $2.2 trillion dollars and contains numerous tax provisions aimed to benefit both individuals and businesses.
This update provides a summary of the relevant tax sections contained in the CARES Act.
Business Provisions
Employer Tax Credit Availability – A tax credit against employment taxes is available for certain businesses. An employer is eligible for this credit if:
- the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders of a governmental authority that limited commerce, travel or group meetings.
- in the first calendar quarter in which the employer has a reduction of gross receipts of more than 50% in a calendar quarter as compared to the same calendar quarter in the prior year: eligibility for the credit continues in each calendar quarter as long as the employer has a reduction of gross receipts of more than 80% reduction of gross receipts from the calendar quarter in the prior year.
The amount of the tax credit is 50% of the qualifying wages of the employer. In general terms, qualifying wages for each employee are limited to $10,000 for all quarters and wages paid to certain employees are subject to additional limitation or exclusions.
In addition, the credit is not available if the employer is a borrower under the Payroll Protection Loan Program. Further, the amount of the credit is reduced by any credits allowed under Section 7001 or 7003 of the Families First Coronavirus Relief Act (i.e., the sick leave and family leave credits).
Delay of Payment of Employer Payroll Taxes – Employers are responsible for paying a 6.2% Social Security tax on employee wages. From the time the CARES Act is signed into law through December 31, 2020, many employers will be allowed to defer paying their share of this Social Security tax. Half of this deferred amount would be due on December 31, 2021 and the other half by December 31, 2022. Similar provisions apply to self-employed individuals, however, 50% of the self-employment tax still needs to be remitted on the existing deadlines.
Modification of Net Operating Losses (“NOLs”) – The Tax Cuts and Jobs Act (the “TCJA”), which was enacted in 2017, eliminated net operating loss carrybacks for certain years (which generally included NOLs arising after 2017. Under the TCJA, NOLs arising after 2017 could be carried forward indefinitely, but were limited to 80% of taxable income in the relevant period. These rules were changed by the CARES Act to allow NOLs arising in tax years 2018, 2019 and 2020 to be carried back five years. In addition, the 80% limitation created by the TCJA has been eliminated for tax years beginning before January 1, 2021.
Taxpayers will be able to amend tax returns for the applicable years to claim refunds arising from the use of these NOLs. Amended returns seeking refunds for earlier years must be filed by the due date, including extensions, of the taxpayer’s return for the first taxable year ending after the enactment of the CARES Act. Thus, calendar year taxpayers have until March 15, 2021 (or September 15, 2021 if the return due date is extended) to file refund claims. Note that there are special provisions for REITs (denying carrybacks for any year the REIT was a REIT) and for companies that recognize foreign income under the “Subpart” rules of the Code.
Taxpayers seeking to carry back 2020 losses to earlier years will have to wait until their 2020 returns are filed, which may not be until late January or early February, 2021, to apply for a refund for prior years related to a 2020 NOL. Nonetheless, these NOL carryback rules provide opportunities for businesses to retool and prepare for the recovery. For example, businesses can purchase needed equipment and machinery in 2020 and claim a deduction for the cost of these items under the existing “bonus depreciation” rules.
Modification of Limitation on Losses for Non-Corporate Taxpayers. The TCJA added Section 461(I) to the Code, which limited non-corporate taxpayers (individuals, trusts, estates) ability to deduct excess business losses. Excess business losses are defined basically as the excess of aggregate business gross deductions over aggregate business gross income. Deduction of these excess business losses by non-corporate taxpayers was limited to $250,000 per year ($500,000 for married filing jointly). Unused excess business losses are carried forward as NOLs. These limitations continue through the 2026 tax years. The new provision delays the application of the excess business loss limitation until 2021. Non-corporate taxpayers may be able to deduct all excess business losses created through the end of the 2020 tax year. Taxpayers with losses in 2018 and 2019 that were disallowed by the limitation may file for refunds.
Relaxation of Limitations on Business Interest Expense Deduction. The CARES Act temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the adjusted taxable income limitation from 30% to 50% for 2019 and 2020. The TCJA previously limited the deduction for business interest for taxpayers with average gross receipts of $25,000,000 or more to 30% of the taxpayer’s adjusted taxable income for tax years beginning in 2018. In addition, the CARES Act allows a taxpayer to elect to treat its 2020 adjusted income as if it were the same amount as its 2019 adjusted taxable income for purposes of applying the interest expense limitation. This may be a significant benefit to some taxpayers and may create additional NOL’s in 2020, which could be carried back to previous tax years under the net operating loss modifications addressed above.
Employer Student Loan Payments. Employers are allowed to provide a limited student loan repayment benefit to employees on a tax-free basis. Specifically, employers may contribute up to $5,250 annually to each employee on a tax-free basis. The annual limitation applies to both the new student loan repayment benefit as well as other educational assistance provided by the employer under current law (ex. tuition, fees, books, etc.). The provision applies to student loan payments made after the enactment date and before January 1, 2021.
Individual Provisions
Recovery Rebate Checks – Recovery rebate checks of up to $1,200 ($2,400 for married filing jointly) will be made available to most individuals and families, with an additional $500 for every child under the age of 17. There are no limits on the number of children that qualify. These recovery rebate checks are reduced by $5 for each $100 a taxpayer’s income exceeds $75,000 ($150,000 for taxpayers married filing jointly and $112,500 for head of household). This means that taxpayers making below $99,000 ($198,000 for taxpayers married filing jointly) will generally receive at least some amount of a recovery rebate check.
The complete phase-out of the recovery rebate check is dependent on each taxpayer’s filing status, adjusted gross income in the applicable tax year, and the number of children claimed by the taxpayer. In general, the rebate checks will be based on a taxpayer’s 2020 taxable income. Since nobody knows those amounts yet, these new rules provide that qualifying income levels can be tentatively based on the taxpayer’s most recently filed tax return (either 2019 or 2018). Certain taxpayers that are not required to file a tax return, such as when receiving Social Security benefits, are still eligible for the recovery rebate checks. Instead of using a tax return the government can use information from the Social Security Information.
The refund checks are generally not taxable income and are instead treated as an advance of the refund a taxpayer would normally receive when filing their 2020 tax return. This means that in 2021 the taxpayer will have to recalculate the amount of their credit based on their 2020 information. If there is a change in circumstances for the taxpayer where they are currently phased out based on a 2019 (or 2018) tax return, but would otherwise be entitled to the full credit based on their 2020 tax return, the taxpayer will receive a credit in 2020 for the difference.
An open issue in this piece of legislation is what happens to those taxpayers who receive a rebate check based on 2019 (or 2018) tax information but would have received a lesser amount based on their 2020 income. The CARES Act does not explicitly require income recognition on any excess credit (which was required in the House’s bill). We anticipate that future regulations may address this issue.
Special Rules for Use of Retirement Funds. The CARES Act provides some retirement account relief for coronavirus related distributions. First, the 10% early withdrawal penalty from qualified retirement accounts is waived for distributions of up to $100,000 if a withdrawal from a retirement account is for a coronavirus-related distribution. A “coronavirus-related distribution” is defined as a distribution made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, 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.
In addition, the time period in which to pay the income tax attributable to a coronavirus related distribution is extended to allow for payments of this tax over three years. Taxpayers may re-contribute the funds withdrawn for a coronavirus-related distribution within three years without regard to that year’s cap on contributions. Provisions that provide for increased loans from certain retirement plans are also revised, so there may be some circumstances in which pursuing one of the loan options may provide for a way to minimize the tax costs from what would otherwise be a coronavirus-related distribution.
The Act also waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts.
Treatment of Charitable Deductions. Generally, taxpayers must itemize their deductions to take advantage of charitable deductions. This itemized deduction requirement is eliminated for charitable deductions of up to $300 for most contributions for the 2020 tax year. Note that not all charitable deductions are eligible for this treatment. Specifically, charitable contributions made to a private foundation or donor-advised fund, are not eligible for the above-the-line charitable deduction.
In addition, the limitation that applies to the amount of a charitable deduction that can be claimed by individual taxpayers based on a percentage of the individual taxpayer’s adjusted gross income is also eliminated for 2020.
All of us at Eagle & Fein continue to be available to provide you with guidance and support. We are well connected electronically and are available for VVFMs – Virtual Virus Free Meetings. Please reach out with any follow up questions by e-mail or phone.
The best always to stay safe and healthy.