As COVID-19 continues to upend nearly every aspect of life in the U.S., Congress has been working to relieve suffering Americans. Having passed the Families First Coronavirus Response Act on March 18 in an effort to limit the spread of the pandemic and support relief efforts, Congress turned to stabilizing the economy. After days of furious negotiations between Republicans and Democrats on Capitol Hill and Trump administration officials, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. With a $2.2 trillion price tag, the act is the most expensive piece of legislation ever passed.
The act passed in the Senate by a unanimous vote late on March 25 and was passed in the House of Representatives on March 27. The President signed the bill into law later that day.
The CARES Act looks to make a significant impact on the economy by providing loan forgiveness, supporting small businesses, enhancing unemployment insurance, and providing federal loans to industries severely impacted by the pandemic. In addition, it provides tax relief and tax incentives for individuals and businesses alike. The majority of the tax relief is designed to increase liquidity in the economy, largely through the relaxation of limitations on business deductions and the deferral of taxes, but also with the introduction of recovery rebates for individuals.
In this article, Meyers Brothers Kalicka, P.C., in conjunction with its affiliation with CPAmerica, presents some of the key elements of the CARES Act and how they will impact individuals and businesses.
INDIVIDUAL TAX RELIEF
The most well-publicized provision is the $1,200 recovery rebates for individual taxpayers. The rebate amounts are advance refunds of credits against 2020 taxes, and equal to $1,200 for individuals, or $2,400 for joint filers, with a $500 credit for each child. The amount of each rebate is phased out by $5 for every $100 in excess of a threshold amount. This threshold amount is based upon 2018 adjusted gross income (unless a 2019 return has already been filed), and the phaseout begins at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. Thus, the rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of household with $136,500 (or higher, depending upon whether status is established because of children), and joint filers with $198,000.
In order to be eligible for a recovery rebate, the individual must not be: (1) a non-resident alien, (2) able to be claimed as a dependent on another taxpayer’s return, or (3) an estate or trust, and must have included a Social Security number for both the taxpayer, the taxpayer’s spouse, and eligible children (or an adoption taxpayer identification number, where appropriate). The act includes additional rules for the application of the credit.
The Secretary of the Treasury has been directed to provide the rebate as rapidly as possible.
The CARES Act also waives the 10% penalty on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions. For purposes of the penalty waiver, a coronavirus-related distribution is one made during the 2020 calendar year to an individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus. Any income attributable to an early withdrawal is subject to tax over a three-year period, and taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years.
This relief is commonly granted by Congress in the wake of major disaster declarations, such as those made after a major hurricane.
The act also waives all required minimum distributions for 2020, regardless of whether the taxpayer has been impacted by the pandemic.
The CARES Act enhances tax incentives for making charitable contributions for the 2020 tax year. First, it allows an above-the-line deduction of up to $300 for charitable contributions made by individuals. This allows an individual to claim a deduction for a charitable contribution, even if the individual does not itemize deductions.
Additionally, the percent-of-adjusted-gross-income (AGI) limitations are increased for all taxpayers as well as for specific types of contributions. For the 2020 tax year, individuals can claim an unlimited itemized deduction for a charitable contribution, which is normally limited to 50% of AGI. In the case of corporations, the usual 10%-of-AGI limitation is increased to 25% for the 2020 tax year. Finally, the contribution of food inventory, the deduction for which is normally limited to 15% of AGI, is increased to 25% for the 2020 tax year.
Student Loans Paid by Employers
The act provides for an exclusion of up to $5,250 from income for payments of an employee’s education loans. In order for the exclusion to apply, the loan must have been incurred by the employee for the education of the employee (so, for example, the loan must not have been incurred to pay for the education of the employee’s child). The payment can be made to the employee or directly to the lender. The exclusion only applies for payments made by an employer after the date of enactment and before Jan. 1, 2021.
The $5,250 cap applies to both the new student-loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employee.
BUSINESS TAX RELIEF
Employee Retention Credit
The CARES Act grants eligible employers a credit against employment taxes equal to 50% of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business or a significant decline in gross receipts. The credit is available to be claimed on a quarterly basis, but the amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters. The provision contains several requirements defining qualified wages, qualified employees, and qualified employers. The credit applies to wages paid after March 12, 2020 and before Jan. 1, 2021.
This is very similar to the paid leave credits granted to employers under the Families First Coronavirus Response Act signed into law on March 18, with some changes to the requirements. Most significantly, neither the employee nor the employer have to be directly impacted by infection.
This is also similar to the employee retention credits Congress provides after major disasters, but with different requirements and limitations.
Payroll Tax Deferral
In order to free up employers’ cash flow and retain employees during times of quarantine or shutdown, the CARES Act defers the payment of payroll taxes. Payroll taxes due from the period beginning on the date the CARES Act is signed into law and ending on Dec. 31, 2020, are deferred. The 6.2% OASID portion of payroll taxes incurred by employers, and 50% of the equivalent payroll taxes incurred by self-employed persons, qualify for the deferral. Half of the deferred payroll taxes are due on Dec. 31, 2021, with the remainder due on Dec. 31, 2022.
Net Operating Losses
The act allows for a five-year carry-back of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business. Businesses will be able to amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carry-back. Under current law, only farming NOLs are allowed to be carried back, and the carry-back is limited to two years.
The Tax Cuts and Jobs Act (TCJA) eliminated the carry-back of NOLs for tax years ending after 2017 and allowed for the indefinite carry-forward for NOLs. Prior to the TCJA, an NOL could be carried back two years, with longer carry-back periods for NOLs arising from a casualty or declared disaster or farming losses.
The CARES Act also eliminates loss-limitation rules applicable to sole proprietors and pass-through entities to allow them to take advantage of the NOL carryback. Additionally, the act allows for NOLs arising before Jan. 1, 2021 to fully offset income. Under current law, NOLs are limited to 80% of taxable income.
Minimum Tax Credits
The TCJA eliminated the alternative minimum tax for corporations for tax years after 2017, but allowed corporations to claim a refundable portion of any unused minimum tax credits through 2021. The amount of the refundable credit is limited to 50% of any excess minimum tax in 2018 through 2020, before being fully refundable in 2021. The act accelerates the year for which a fully refundable credit can be claimed to 2019, and allows corporations to elect to claim the fully refundable minimum tax credits in 2018.
Business Interest Expense Limitation
The TCJA limited the amount of allowable deductions for business interest (regardless of the type of entity) for tax years beginning after 2017. The limitation is generally the amount of business interest income for the year plus 30% of the taxpayer’s adjusted taxable income for the year. The limitation does not apply to taxpayers with average annual gross receipts for the prior three year below an inflation-adjusted amount. For 2020, this amount is $26 million or less.
The act increases the limitation amount to 50% of the taxpayer’s adjusted taxable income for 2019 and 2020 (with a special allocation election required for partnerships for 2019). In calculating the limitation for 2020, the taxpayer may elect to use adjusted taxable income for 2019.
The option to use 2019 adjusted taxable income in calculating the limitation is meant to counteract the likelihood that incomes will not be higher in 2020 because of the economic environment, whereas 2019 was generally a very high revenue year for businesses.
Qualified Improvement Property
When Congress drafted the TCJA, it allowed for 100% bonus-depreciation rules to apply to all MACRS property with a recovery period of 20 years or less. Before the TCJA, qualified improvement property was depreciated as 39-year residential real property, unless it separately qualified as 15-year qualified leasehold improvement property, 15-year retail improvement property, or 15-year restaurant property. Congress eliminated the three separate categories of 15-year improvement properties with the intention of making all qualified improvement property 15-year property. However, it failed to do so, and as a result, qualified improvement property is depreciated as 39-year property and not qualified for bonus depreciation.
This is known in tax circles as the ‘retail glitch.’ A technical amendment has long been promised and had been included in early drafts of several pieces of legislation since the TCJA became law in December 2017. However, it never made it into the final version of any piece of significant legislation voted on by either chamber of Congress.
The CARES Act corrects this congressional oversight by defining qualified improvement property as 15-year property, thus allowing 100% of improvements to be deducted in the year incurred. The change is made as if included in the TCJA and, thus, is effective for property acquired and placed in service after Sept. 27, 2017.
The closures and quarantines related to the COVID-19 pandemic have been especially hard on small businesses, which include restaurants and local retail stores. This technical correction allows any expenses incurred by owners to make improvements to the physical premises related to these businesses to be accelerated into the 2017 or 2018 tax year on an amended return, or the 2019 tax year on a return due July 15, 2020.
Excise Tax Relief
The act also provides a temporary exception from alcohol excise taxes for alcohol for use in or contained in hand sanitizer produced or directed by the U.S. Food and Drug Administration related to the pandemic. The act also suspends excise taxes on aviation and kerosene used in aviation fuel. The exception and suspensions are applicable to 2020 only.
The CARES Act is a massive act, the majority of which does not have a tax impact. However, some smaller, but no less significant, provisions impacting federal tax are sprinkled outside of the tax-related division of the act. These provisions include:
• The exclusion from tax of any forgiven small-business loans, mortgage obligations, or other loan obligations forgiven by the lender during the applicable period;
• A safe harbor from the definition of a high-deductible health plan permitting telehealth services to be included, even though such services do not carry a deductible;
• The inclusion of over-the-counter menstrual products as qualified medical expenses for purposes of distributions from health savings accounts and health flexible spending arrangements;
• Pension funding relief for failures to meet contribution requirements to defined benefit plans during 2020; and
• Allowing certain charitable employers whose primary exempt purpose is providing services to mothers and children to use small employer charity pension plan rules.