On March 27, the President signed the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, a $2 trillion omnibus spending package to provide emergency assistance and healthcare response for individuals, families and businesses affected by the COVID-19 pandemic.
The CARES Act contains a wide range of economic relief to individuals and businesses – including direct payments to individuals, expansion of unemployment benefits, small-business loans, relief funds and a financial injection for the healthcare industry – as well as significant tax law changes. Note that many of these tax changes impact not only the 2020 tax year but also tax returns for earlier tax years, including 2019 returns that may still be in process. The IRS and U.S. Treasury have begun and continue to issue guidance related to the methods and procedures for implementing the various provisions.
The major tax provisions contained in the CARES Act are summarized below, with some preliminary observations. It is important to note that the provisions below are for federal taxes and each state will determine whether or not to follow the federal changes for state income tax purposes.
Employee Retention Credit:
- Eligible employers can receive a refundable tax credit – equal to 50 percent of qualified wages paid to each employee – against their quarterly employer payroll taxes. This refundable credit is available to a business that has either:
- Had its operations fully or partially suspended during 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19; or
- Experienced a significant decline in gross receipts for any calendar quarter in 2020. A significant decline is deemed to occur when gross receipts for a 2020 quarter are less than 50 percent of the same quarter’s 2019 gross receipts. The credit-eligible period continues until the business’s gross receipts exceed 80 percent of the same quarter’s receipts from 2019.
- The amount of wages taken into account in computing this credit cannot exceed $10,000 per employee per calendar year.
- The amount of wages taken into account differ somewhat depending on whether or not the employer averaged more than 100 full-time workers in 2019.
- Wages used in this credit computation cannot also then be used for purposes of the FFCRA credit amount or the credit for paid family and medical leave.
- Tax-exempt organizations are also eligible for this credit.
- A business that receives a Paycheck Protection Program loan is ineligible for this payroll tax credit.
- IRS FAQ
Delay of Payment of Employer Payroll Taxes:
- Employers can delay remitting the employer’s share (6.2 percent of employee wages) of payroll taxes related to wages paid during the period beginning with the date of the enactment of the CARES Act and ending Dec. 31, 2020.
- The deferral allows employers to remit 50 percent of those taxes by Dec. 31, 2021 and the remaining 50 percent by Dec. 31, 2022 without interest or penalties.
- Employers that have a Paycheck Protection Program loan forgiven are ineligible for this payroll-tax payment deferral.
Modifications of Net Operating Losses:
- Taxpayers who incurred Net Operating Losses (NOLs) in 2018, 2019 and 2020 will be able to carry back those losses to five prior tax years with certain exceptions.
- NOLs incurred in those years (2018-2020) that are carried forward into 2019 or 2020 are no longer subject to the 80-percent taxable income limitation and may now be deducted in full against income.
- If the NOLs are carried back to a sec. 965 (Transition Tax) inclusion year, sec. 965(n) election is treated as automatically made by the taxpayer. In other words, the NOLs carryback would be against the general income (non-Transition Tax amount), which should reduce the tax liability of 2017. One of the lingering technical errors from the Tax Cuts and Jobs Act (TCJA) is that the 2017 overpayment should be first applied to the unpaid section 965 Transition Tax liabilities. Thus, the reduced tax liability that results from the five-year NOL carryback may not be refunded immediately for those who still have Transition Tax liability (e.g. liability related to the eight-year installment payment election). The CARES Act also allows taxpayers to elect to not apply NOLs to a section 965 inclusion year.
- When the post-2020 NOLs are carried forward to 2022 or later, the 80-percent limitation is calculated without regard to the sec. 250 deduction for GILTI and FDII.
GHJ Observation: Taxpayers should evaluate the ability to carryback losses that were previously carried forward and now apply for a refund to ease cash-flow burdens. Taxpayers currently preparing or filing 2019 returns will need to factor the potential carryback of 2018 losses into their current returns.
Temporary Removal of Excess Business Loss Rule:
- IRC Section 461(l) currently limits the ability of individuals to deduct certain trade/business losses to $250,000 ($500,000 for joint filers) per year. The CARES Act will remove this limitation through tax year 2020. However, when the limitation returns after 2020, wages will no longer be considered business income, which will likely result in more loss limitations for taxpayers.
- Technical corrections were made to clarify that NOLs and the qualified business income deduction under section 199A are not included in the excess business loss calculation.
GHJ Observation: This removal of the 461(l) limitation is retroactive to tax year 2018. Therefore, taxpayers who were limited in 2018 or 2019 may be able to amend their return to claim a refund or carry back the resulting NOL.
Changes to the Interest Limitation Rules:
- Businesses subject to IRC Section 163(j) are currently limited to deducting interest expense only up to 30 percent of their Adjusted Taxable Income (ATI). The CARES Act will increase the deductibility threshold to 50 percent of ATI for tax years 2019 and 2020, which will result in a larger business interest expense deduction for many taxpayers.
- Businesses may elect to use their 2019 ATI in computing their 2020 interest expense limitation. This is significant because most businesses will have much lower ATI in 2020 than they had in 2019.
- Partnerships will not get the increased 50-percent limit for 2019. Instead, their partners may get to fully deduct 50 percent of their share of 2019 suspended interest on their 2020 individual returns.
Changes to Qualified Improvement Property:
- The long-awaited technical correction to Qualified Improvement Property (QIP) is included in the CARES Act. This changes QIP from 39-year property to 15-yr MACRS property, and thus makes it eligible for 100-percent bonus depreciation.
GHJ Observation: This change is retroactive to tax year 2018. Thus, taxpayers should consider the ability to amend their 2018 and/or 2019 returns to receive this benefit or consider the ability to file a Form 3115 Change in Accounting Method.
Accelerated Cost Recovery of Corporate AMT Credits:
- IRC Section 53(e) will now allow a corporation to use prior-year alternative minimum tax (AMT) credits against regular tax immediately, rather than over a period of years, as initially required.
- A corporation may elect to take the entire refundable credit amount in its 2018 tax year.
Temporary Excise Tax Exemption for Alcohol:
- Certain alcohol used to produce hand sanitizer for the COVID-19 outbreak (that is produced and distributed in a manner consistent with FDA guidelines) will be exempt from excise tax.
- This exemption applies to distilled spirits removed during 2020.
Recovery Rebates for Individuals:
- The IRS will be sending checks or direct deposits to eligible individuals of $1,200 each ($2,400 for joint filers) plus $500 for each qualifying child of the taxpayer. These rebates are advances on credits to be claimed on the taxpayers’ 2020 tax returns that will be filed in 2021. The rebates are limited based on the taxpayer’s adjusted gross income (AGI), and are decreased by $5 for every $100 of AGI in excess of the applicable threshold.
- The IRS will compute the rebate amount using the taxpayer’s 2019 tax return information if it has been filed or 2018 information if 2019 has not been filed yet. Payment will be sent to eligible individuals by Dec. 31, 2020.
- IRS News Release
GHJ Observation: College students under age 24 but older than 17 whose parents provide more than half of their support are considered dependents, and thus they cannot be used to claim the $500 credit for a qualifying child and are not eligible to receive their own rebate payment.
Special Rules for Use of Retirement Funds:
- The 10-percent penalty for early distribution of retirement funds will be waived for any self-certified, coronavirus-related distribution of up to $100,000. Such distributions may also be repaid at any time over a three-year period to avoid income tax on the distributions. Any amount of the distribution that is required to be included in the taxpayer’s income may be recognized ratably over a three-year period instead of all at once.
- Retirement plan loan limit has been increased to $100,000 from $50,000. Loan repayment can be deferred for one year, and the five-year required repayment period is adjusted accordingly.
- Required Minimum Distributions will be waived for calendar year 2020.
- Taxpayers who do not itemize deductions may deduct up to $300 of charitable contributions “above-the-line” on their 2020 tax returns when computing Adjusted Gross Income (AGI). This provision only applies to taxpayers who do not itemize their deductions and will be taken in addition to the taxpayer’s standard deduction.
- For taxpayers who do itemize their deductions, the deduction for cash contributions to qualified organizations will no longer be limited to 60 percent of their AGI. Instead, they can deduct contributions up to 100 percent of their AGI.
- For corporations, the deductible contribution limit is increased from 10 percent of taxable income to 25 percent.
- Qualified contributions of food inventory will also receive more beneficial tax treatment.
Exclusion for Certain Employer Payment of Student Loans:
- Employers may pay up to $5,250 of an employee’s student loan in 2020 that would be tax-free for the employee.
- This dollar limit includes any amount already paid by the employer for the employee’s qualified educational expenses (i.e., graduate programs) so the total tax-free amount is capped at $5,250.
Families First Coronavirus Response Act Amendments:
- Under the Family and Medical Leave Act (FMLA), as modified by the FFCRA, employees are eligible for job-protected, paid sick leave if they have been with their employer for at least 30 days. Eligible employees will now include rehired employees that:
- Were laid off March 1, 2020 or later;
- Worked for the employer for 30 of the prior 60 calendar days prior to the layoff; and
- Have now been rehired by the employer
GHJ Observation: Employers may now rehire employees who were let go due to the COVID-19 crisis and provide immediate FMLA benefits.
If you have any questions regarding the Coronavirus Aid, Relief and Economic Security Act or its impact on your business, please contact the tax advisors at GHJ.