CARES Act Provides Tax Relief for Individuals and Businesses
By Richard Bloom with Ivins, Phillips & Barker, Chtd.
March 27, 2020
On March 27, the President signed the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”), “Phase III” of the government’s response to the COVID-19 crisis, with an estimated cost in excess of $2 trillion. The bill provides economic stimulus for individuals and businesses adversely impacted by the pandemic and includes measures to support states and the country’s health care system, and authorizes a $500 billion loan program for adversely impacted businesses. Also contained within the CARES Act are a number of tax relief measures for individuals and businesses.
Business Tax Relief
The CARES Act delivers business tax relief by providing certain credits against payroll taxes, deferring payment of payroll taxes, relaxing rules with respect to the utilization of net operating losses, and enhancing the deductibility of certain expenses.
Employee Retention Credit
Employers subject to full or partial closure due to COVID-19, or whose businesses have suffered as a result of the economic downturn (“eligible employers”), are eligible for a refundable payroll tax credit of up to 50% of qualified wages paid. For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services because the business has been partially or fully shut down due to COVID-19, or because gross receipts have declined by more than 50% relative to the same quarter in the prior year. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit.
The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee in the quarter, for wages paid from March 13 through December 31, 2020. It is limited to employment taxes on wages paid, reduced by other payroll credits including those enacted by the Families First Coronavirus Response Act, which passed earlier this month.
Employers that receive certain small business loans as provided for under the CARES Act are not eligible for the employee retention credit.
Deferral of Employer Payroll Taxes
The CARES Act allows for deferral of the employer share of Social Security taxes owed in 2020 (including the share owed by self-employed individuals), with the deferred amount to be paid over the following two years, half by December 31, 2021 and the other half by December 31, 2022. The payroll taxes that could be deferred are those incurred during the period beginning on the CARES Act’s date of enactment and ending before January 1, 2021.
Tax Cuts and Jobs Act of 2017 (“TCJA”) Related Changes
A number of provisions of the CARES Act roll back changes made by the TCJA that made it harder for taxpayers to benefit from current year losses or utilize prior year credits. The CARES Act also corrects a widely recognized error in the TCJA known as the ‘retail glitch.’
Net Operating Loss (“NOL”) Relief
This provision reverses restrictions on businesses’ use of losses enacted as part of the TCJA. Those changes amended section 172 to limit taxpayers’ ability to carry back an NOL and introduced an 80% limitation on an NOL carryforward. The CARES Act allows for a 5-year carryback of NOLs arising in tax years beginning in 2018, 2019, or 2020 and temporarily removes the 80% of taxable income limitation.
The CARES Act also includes a technical correction to the TCJA addressing how NOL carrybacks apply to non-calendar year taxpayers for tax years beginning in 2017.
Proposed regulations interpreting the TCJA changes made to section 172 have been reviewed by the Office of Management and Budget and may have been due for immediate release. However, this could now be on hold due to passage of the CARES Act. Additional guidance will now likely be needed to help taxpayers make sense of the interaction between re-amended section 172 and other changes made by the TCJA and the CARES Act, including the one-time transition tax (section 965) and the BEAT.
This provision can offer additional tax refunds at the previous 34% or 35% tax rates for net operating loss carrybacks (“NOLCB”) into pre-2018 tax years. Financial statements may also reflect a benefit by means of converting deferred tax assets on net operating loss carryforward (“NOLCF”) from a 21% tax benefit to a 34% or 35% current tax benefit. Additionally, companies need to take into account the interplay with foreign tax credits, alternative minimum tax (“AMT”), potential base erosion and anti-abuse tax implications, as well as transfer pricing considerations.
Pass-Through Business Loss Relief
Section 461(l) was enacted by the TCJA, limiting the ability of individuals (and sole proprietors) from claiming excess business losses beginning in 2018. The CARES Act modifies the loss limitation rule, thereby reinstating taxpayers’ ability to deduct excess business losses attributable to pass-through businesses and sole proprietorships for tax years 2018-2020.
The CARES Act includes some technical corrections to section 461(l) that will make it more difficult for some taxpayers to benefit from trade or business losses beginning in 2021, restricting the ability to offset wage income against business losses. There is an additional technical correction that clarifies the interaction of section 461(l) and section 172, retroactive to the effective date of the TCJA.
Acceleration of AMT Credit
The TCJA repealed the corporate AMT but allowed corporate AMT credits to continue to be utilized, spread over several years ending in 2021. The CARES Act allows taxpayers to accelerate their ability to claim AMT credits into 2018 and 2019, or to make an election to claim the entire amount in 2018.
Increase in Taxable Income Threshold for Deducting Interest Expense
The TCJA vastly expanded the restrictions on deductibility of business interest expense, generally limiting it to 30% of taxable income (broadly defined). The CARES Act raises the threshold to 50% for 2019 and 2020 for taxpayers other than partnerships. The change can adversely impact taxpayers that may be subject to other loss limitation provisions, such as BEAT. The CARES Act allows taxpayers to elect out of the increased limitation.
The CARES Act does not adjust the limitation for partnerships, but does increase the limitation at the partner level in a complex manner. 50% of a partner’s suspended excess interest expense allocated to them for 2019 can be fully utilized, while the remaining 50% is subject to TCJA-enacted rules applicable to partner excess interest expense. A partner can choose to elect out of the new rule.
Retail Glitch Fix
A well-known drafting error in the TCJA classified qualified improvement property as 39-year property when it was intended to be treated as 15-year property. The CARES Act corrects this oversight by defining qualified improvement property as 15-year property. This means that qualified improvement property will now be eligible for bonus depreciation and a shorter recovery period. This provision is effective for property acquired and placed in service after September 27, 2017, thus affording taxpayers the ability to amend prior year returns.
Temporary Exception from Excise Tax for Alcohol Used to Produce Hand Sanitizer
For 2020, the CARES Act waives the federal excise tax on alcohol used for, or contained in, hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration.
The CARES Act increases the 10% limitation for corporations to 25% of taxable income.
Individual Tax Relief
The CARES Act provides U.S. individuals not taken as a dependent on another person’s tax return with adjusted gross income of up to $75,000 with a $1,200 rebate, plus $500 for every child claimed as a dependent. (For married couples filing a joint return, the amount is $2,400 for couples with adjusted gross income of up to $150,000). The amount is completely phased-out for single filers with incomes exceeding $99,000; $146,500 for head of household filers with one child; and $198,000 for joint filers with no children.
The rebate, in the form of a credit, is allowable for the first taxable year beginning in year 2020. Certain individuals are eligible for an advance refund amount based on their 2019 adjusted gross income (or their 2018 adjusted gross income if a 2019 income tax return has not been filed).
Retirement Plan Relief
The CARES Act temporarily removes the 10% penalty associated with early withdrawals of up to $100,000 from retirement accounts. This relief is available for individuals diagnosed with COVID-19 or who have a spouse or dependent diagnosed with COVID-19, or who have suffered economic hardship from COVID-19 (e.g., furloughed or laid off). The relief applies for withdrawals made in 2020. Distributions made pursuant to this provision are taxable to an individual ratably over a 3-year period. Individuals would be allowed to recontribute any coronavirus distribution back into the retirement plan within the 3-year period beginning on the day after such distribution was received.
Waiver of Required Minimum Distribution Rules
Required minimum distributions from defined contribution plans and individual retirement accounts are waived for the 2020 tax year.
If a distribution is not needed to fund one’s lifestyle, it may be prudent to avail oneself of this relief. Not taking the required minimum distribution will reduce one’s taxable income and, consequently, one’s tax. In addition, taking the required minimum distribution may require one to liquidate securities in the retirement account at a time when the securities are depressed in value.
One should also consider converting IRAs to Roth IRAs if the value of the IRA has been significantly diminished as a result of the recent market volatility and if one’s taxable income in 2020 is expected to be less than other years.
The CARES Act provides taxpayers who do not itemize with the ability to claim an “above-the-line” deduction of up to $300 for cash charitable contributions made in 2020.
In addition, deductions for cash contributions made during 2020 to certain charitable organizations are not subject to the percentage of adjusted gross income limitation. This relief does not apply to contributions made to private foundations or donor-advised funds.
Employer Payments of Student Loans
Under the CARES Act, employers can provide up to $5,250 to an employee to be used for payment of student loans on a tax-free basis, applicable for payments made before January 1, 2021.
The CARES Act includes a number of provisions inserted at the behest of Democrats, including expanded benefits for lower income individuals and oversight of a $500 billion loan program for businesses. Not included in the CARES Act are other hoped-for technical corrections to the TCJA, such as amendments to address unintended consequences of the repeal of section 958(b)(4). Also not included were proposals to further extend tax filing deadlines and estimated payment deadlines.
The CARES Act is not likely to be the last coronavirus-relief package enacted by Congress. Talk has already begun on “Phase IV.”
Please contact your Mazars USA LLP professional for additional information
This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.