Senate Passes CARES Act

SENATE PASSES ‘CARES’ ACT

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The Senate has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the third phase of the government’s response to the impact of the Coronavirus. It is estimated that this package will exceed $2 trillion in cost, the largest relief package yet, dwarfing President Obama’s 2008 financial crisis stimulus package of $800 billion. The House is scheduled to bring the Act to vote on Friday March 27, 2020, and President Trump has indicated his support of the Act.

The Act contains many provisions including small business loans, help for distressed sectors, health provisions, and tax provisions. Below is a summary of the tax related provisions of the CARES Act.

PROVISIONS RELATED TO INDIVIDUALS

RECOVERY REBATES

Generally, subject to limitations, the CARES Act will provide an advanced payment to individuals of not more than $1,200 ($2,400 for joint filers) increased by $500 for each child under the age of 17. The advanced payment will be reduced for individuals with 2018 adjusted gross income (AGI) greater than $75,000 ($150,000 for joint filers, $112,500 for head of household). The reduction will be 5% of the amount that the taxpayer’s AGI exceeds the aforementioned thresholds. Therefore, a single taxpayer with no children would not receive an advanced payment if their AGI exceeded $99,000 (calculated – 1,200-5%*(99,0000-75,000)). Likewise, joint filers with no children would receive no credit if their AGI exceeded $198,000. Amongst other limitations, individuals that are non-resident or are claimed as a dependent will not be eligible for the advance payment. The advance payments will be coordinated with a credit on the individual’s 2020 return for true-up of the actual amount due to the individual based on their 2020 adjusted gross income.

CHARITABLE CONTRIBUTIONS

The Act will increase the ability for many individuals to deduct a portion of their charitable contributions:

  • Beginning in 2020, individuals that do not itemize and instead use the standard deduction, will be allowed to deduct up to $300 of qualified cash charitable contributions.
  • Temporarily suspends the deductibility limitations based on adjusted gross income for qualified cash charitable contributions made during 2020. In essence, if all of an individual’s contributions are qualifying they will be able to deduct the full amount of these contributions up to their adjusted gross income.

RETIREMENT FUNDS

The Act provides relief for individuals that must use funds from their retirement fund; that is a coronavirus related distribution.

  • Exempts coronavirus related distributions of up to $100,000 from the 10% early distribution penalty.
  • The distribution will be taxable, but will be taxable over a 3-year period. In addition, the individual has an opportunity to repay the distributions within a 3-year period, beginning on the day after the distribution, to avoid taxability of the distribution.
  • A coronavirus distribution is a distribution from an eligible retirement plan on or after January 31, 2020 and before December 31, 2020 to an individual:
    o Who has been diagnosed with SARS-CoV-2 or COVID-19
    o Whose spouse or dependent is diagnosed
    o Who experiences adverse financial difficulty as a result of being quarantined, furloughed, laid off or a reduction in hours due to the virus, unable to work due to lack of child care due to the virus, or the closing or reduction of hours of a business owned or operated by the individual due to the virus
  • Increases the amount an individual may borrow from a plan, within 180-days of enactment of the Act, from $50,000 to $100,000
  • Delays the repayment of plan loans due between date of enactment and December 31, 2020 by one year, with a corresponding adjustment to subsequent repayments.
  • Waives the requirement to take a required minimum distribution for 2020

LOSS LIMITATIONS

The Tax Cuts and Jobs Act (TCJA), passed at the end of 2017, limited the amount of net business losses an individual could deduct against other types of income to $250,000 ($500,000 for a joint return) for years 2018 through 2025. CARES modifies the effective date of the loss imitation provisions to 2021 through 2025. This will allow individuals with otherwise allowable business losses to fully deduct the losses against all income for taxable years 2018, 2019 and 2020. This may also create a net operating loss that may be carried back as discussed below in the business provisions.

PROVISIONS RELATED TO BUSINESSES

WORKER RETENTION CREDIT

The Act encourages companies that have been negatively impacted to retain employees by providing a credit for wages paid to employees that have been retained.

  • Applies to companies that, during any calendar quarter,
    o Have fully or partially suspended operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings, or
    o Has gross receipts for the quarter which is less than 50% of the same calendar quarter in the prior year
  • Wages eligible for the credit depend on the size of the company, but eligible wages do not include wages paid under the Emergency Paid Sick Leave Act or Emergency Family Medical Leave Expansion Act.
    o For companies with more than 100 employees during 2019, wages only include wages paid to employees not providing services due to the circumstances above
    o For companies with 100 or less employees during 2019, wages include all wages paid to employees during the above affected periods
  • The amount of credit is equal to 50% of the qualifying wages paid to the employee after March 12, 2020 and before January 31, 2021, not to exceed $10,000
  • The eligible credit is a credit against the payroll taxes to be remitted by the employer. If the credit is larger than the payroll taxes, the excess amount will be refunded.
  • Employers that receive a Small Business Interruption Loan are not eligible for this credit.

DELAY OF EMPLOYER PAYROLL TAXES

The Act also provides a deferral in the timing to deposit the employer portion of payroll taxes, thus providing immediate assistance to cash flow. Businesses would not be required to deposit the employer share of FICA taxes (6.2% portion) from the date of enactment until December 31, 2020. However, 50% of the amount deferred would be required to be deposited on December 31, 2021, with the remaining 50% deposited on December 31, 2022. The business must still deposit the employer’s share of the hospital insurance tax (1.45% portion) as well as all of the employee’s share of the payroll taxes withheld. Any taxpayer that has loans forgiven under the CARES Act is not eligible for this deferral.

CHARITABLE CONTRIBUTIONS

Similar to individuals, the Act also increases the ability for many businesses to deduct a portion of their 2020 qualifying cash charitable contributions. This temporarily increases the threshold for deducting qualified charitable contributions to 25% (from 10%) of taxable income.

MODIFICATION TO NET OPERATING LOSS RULES

The CARES Act relaxes many of the limitations on a business’s or an individual’s ability to utilize net operating losses (NOL) that were in place because of TCJA.

  • Allows a 5-year carryback of NOL generated for taxable years beginning after December 31, 2017 and before January 1, 2021
  • For NOL deducted in years beginning before January 1, 2021, the NOL deduction for the year would be the NOL carryovers or carrybacks to the year. For taxable years beginning after December 31, 2020 the NOL deduction would be the NOL from years beginning prior to January 1, 2018, plus the lesser of 1) the NOL carried over from years beginning after December 31, 2017, or 2) 80% of the taxable income.

PRIOR YEAR MINIMUM TAX

With the TCJA’s repeal of alternative minimum tax (AMT), many businesses had AMT credit carryovers that were being refunded subject to an annual calculation beginning in 2018. CARES has eliminated this calculation beginning for taxable years beginning after December 31, 2017, thus making the amount of AMT carryovers completely refundable on the businesses 2018 or 2019 tax return.

LIMITS ON BUSINESS INTEREST EXPENSE DEDUCTION

TCJA generally placed limitations on the amount of business interest expense that could be deducted on an annual basis. CARES modifies these limitations as follows:

  • Increases the allowable deduction of business interest expenses to 50% (from 30%) of the business’s adjusted taxable income for years beginning in 2019 and 2020, with a special rule applicable to partnerships and partners.
  • For taxable years beginning in 2020 only, a business may use their adjusted taxable income from the year beginning in 2019 for purposes of determining the amount of deductible interest in 2020.

BONUS DEPRECIATION ON QUALIFIED IMPROVEMENT PROPERTY

CARES fixes a drafting error in the TCJA, by allowing a 100% write-off of qualified improvement property by using the bonus depreciation provisions. This amendment is retroactive to property placed in service after December 31, 2017, which could allow businesses to receive refunds by amending their 2017, 2018 or 2019 (if filed) returns to deduct the cost of qualified improvement property.

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