In-Depth: CARES Act Tax Provisions
Supplement to COVID-19 Tax Developments (Barack Ferrazzano Client Alert, March 2020).
Tax Provisions Relating To Individuals
- Recovery Rebates For Individuals. The CARES Act provides for recovery rebates, in the form of a refundable tax credit, of up to $1,200 for individuals and $2,400 for joint filers, plus $500 per qualifying child. The amount of the rebate begins to phase out for individual taxpayers with adjusted gross incomes (“AGIs”) of $75,000, heads of household with an AGI of $112,500, and joint filers with an AGI of $150,000. The recovery rebates are completely phased out for individual taxpayers with AGIs of $99,000, $146,500 for head of household filers, and $198,000 for joint filers with no children. Although the credit is for the 2020 tax year, the CARES Act treats the taxpayer as if it had an overpayment equal to the credit in 2019 (or 2018, if the taxpayer’s 2019 has not yet been filed), so that the taxpayer is eligible to receive a refund check immediately. There is generally no action required to claim the recovery rebates. The refundable tax credit does not require a taxpayer to have a minimum income or minimum tax liability. Note that the credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts.
- Special Rules For Use Of Retirement Funds. The CARES Act allows taxpayers to withdraw up to $100,000 in “coronavirus-related distributions” from retirement plans and IRAs without being subject to the 10% early withdrawal penalty. A “coronavirus-related distribution” is defined as any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020, to an individual (i) who is diagnosed with SARS-CoV-2 or COVID-19, (ii) whose spouse or dependent has been diagnosed with SARS-CoV-2 or COVID-19, or (iii) who experiences adverse financial consequences as a result of being (a) quarantined, (b) furloughed (c) laid off or subject to reduced work hours due to COVID-19, (d) unable to work due to the lack of child care caused by COVID-19, (e) closing or reducing hours of a business owned or operated by the individual due to COVID-19, or (f) other factors that may be determined by the Service. The taxpayer may also restore the withdrawn funds without regard to the maximum cap on contributions during the three-year period beginning on the day after the distribution was received. Amounts withdrawn subject to this provision, to the extent not repaid, will be taxable to the taxpayer over the following three years beginning with the taxable year in which the coronavirus-distribution was received.
In addition, the CARES Act also increases the amount an individual may borrow from a qualified plan from the existing maximum of $50,000 to $100,000. An individual with less than $100,000 in his or her plan is allowed to borrow up to 100% of the present value of such individual’s nonforfeitable accrued benefit as opposed to 50% of such amount under the previous law. Furthermore, in the event that the due date for loan repayment is between March 27, 2020 and December 31, 2020, the CARES Act allows for the repayment to be delayed for one year from the original due date.
- Temporary Waiver Of Required Minimum Distribution Rules For Certain Retirement Plans & Accounts. The CARES Act temporarily waives the required minimum distribution rules in Section 401 of the Code for the 2020 calendar year.
- Allowance For Partial Above-The-Line Deduction For Charitable Contributions. Individuals who do not elect to itemize deductions (i.e. those who take the standard deduction) may take an above-the-line deduction for up to $300 of cash contributions made to Section 501(c)(3) organizations in 2020.
- Modification Of Charitable Contribution Limitation. The CARES Act also temporarily suspends the 60% limitation on deductions for charitable contributions made by individuals who itemize. As such, for the 2020 tax year, individuals may deduct such contributions up to 100% of their AGI. Furthermore, as with existing law, any excess charitable contributions may be carried forward to the next five taxable years.
- Exclusion For Certain Employer Payments Of Student Loans. The CARES Act also includes a provision that temporarily expands the tax exclusion for employer provided educational assistance to include payments of student loans. Employers may provide up to $5,250 annually to an employee (or directly to a lender on behalf of an employee) for the payment of principal or accrued interest. Such payments will be excluded from the employee’s income. This provision applies to any employer payments made after March 27, 2020 and before January 1, 2021.
Tax Provisions Relating To Businesses
- Increased Possibility Of Amended Returns. During the course of your review of the following Business Provisions, please keep in mind that many of them are retroactive to tax year 2018. On that basis, businesses will necessarily have to be amending their 2018 returns and, possibly, 2019 as well (if already filed) – even going back as far as 2013 for carryback losses (see below) – in order to avail themselves of the income tax benefits afforded by these provisions.
- Paycheck Protection Program. This is the most publicized provision of the CARES Act, with its massive loans being proffered to small businesses for salaries, rent, etc. To view this information in detail, visit: https://www.bfkn.com/caresact_paycheckprotection. The most important information to know from a tax perspective is that the contemplated forgiveness of these loans to taxpayers complying with their requirements will impose no cancellation of indebtedness income – even as to amounts for which taxpayers are reimbursed with respect to items where they derived income tax deductions.
- Employee Retention Credit. Employers whose operations were fully or partially suspended due to a COVID-19-related shut-down order from the government or whose gross receipts declined by more than 50% (as compared to the same quarter in the prior year) may receive a refundable payroll tax credit of 50% of “qualified wages” paid or incurred for each calendar quarter from March 13, 2020 through December 31, 2020. For employers with more than 100 full-time employees, “qualified wages” are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described in the previous sentence. All wages qualify as “qualified wages” for eligible employers with 100 or fewer full-time employees. Only the first $10,000 of compensation, including health benefits, paid to each eligible employee shall be taken into account for purposes of the credit. Note that this credit is not available to employers receiving loans through the Paycheck Protection Program described above.
- Delayed Payroll Tax Payments. Employers and self-employed individuals can delay payment of 100% of their Social Security payroll taxes and 50% of self-employment taxes related to Social Security from March 27, 2020 to January 1, 2021. 50% of this deferred amount is due on December 31, 2021. The remaining 50% is due on December 31, 2022. Note that payroll tax deferral is not available to employers receiving loan forgiveness through the Paycheck Protection Program described above.
- Changes to Net Operating Loss and Excess Business Losses. The CARES Act relaxes the limitations on a company’s use of net operating losses (“NOLs”) from prior years and provides that NOLs from 2018, 2019, or 2020 can be carried back five years. In addition, the CARES Act temporarily suspends existing law’s limitation upon utilization of NOLs against 80% of taxable income instead to allow them to offset 100% of taxable income, thereby allowing NOLs from 2018, 2019 and 2020 to offset that income fully. Special rules apply to real estate investment trusts. It should be noted that income includible under Section 965 of the Code (the deemed repatriation provision enacted in the Tax Cuts and Jobs Act (“TCJA”)) is excepted from this provision. Furthermore, business losses incurred in tax years 2018, 2019 and 2020 derived from pass-throughs may be utilized to offset non-business income in those years.
- Alternative Minimum Tax Credits. The TCJA eliminated the Alternative Minimum Tax (“AMT”), but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The CARES Act accelerates the ability for companies to recover those AMT credits, permitting companies to claim a refund now.
- Limitation On Business Interest. Under the TCJA, the deduction for business interest was generally limited to 30% of the taxpayer's adjusted taxable income for the tax year. The CARES Act temporarily increases the limitation from 30% to 50% for 2019 and 2020.
- Bonus Depreciation. The defined life of “Qualified Improvement Property” has been reduced from 39 to 15 years, thereby enabling businesses immediately to write off 100% of the costs associated with renovating businesses. This provision is retroactive to 2018 and will be especially important as a much-needed cash generator to the hotel and restaurant industries.
- Increase In Charitable Contribution Limitations. The CARES Act increases limitation on a corporation’s charitable deduction from 10% to 25% of taxable income. Further, the limitation on deductions for contributions of food inventory is increased from 15% to 25% of taxable income.