The CARES Act, which is estimated to provide approximately $2 trillion in fiscal stimulus, when finally enacted, will provide tax relief to taxpayers in a number of ways, including:
- Subject to an income-based phase-out, for the first tax year beginning in 2020, the CARES Act provides for a cash payment of $1,200 for individuals ($2,400 for joint taxpayers) plus $500 per qualifying child.
- The CARES Act also provides a refundable payroll tax credit for 50 percent of wages paid by qualifying employers to employees during the COVID-19 crisis.
- The CARES Act defers employers’ obligations to pay the employer portion of employment taxes.
- The CARES Act provides retroactive relief from several limits on tax deductions such as net operating losses that were put in place in 2017 to pay for the Tax Cuts and Jobs Act (TCJA). These changes will allow affected taxpayers to reduce current taxable income and potentially file amended tax returns and claim refunds for prior years.
- The CARES Act makes a technical correction to the TCJA provisions relating to “qualified improvement property” and bonus depreciation under Section 168(k) which should also allow affected taxpayers to reduce current income and potentially file amended tax returns and claim refunds for prior years.
- The CARES Act accelerates the ability of the corporations to recover AMT credits.
- The CARES Act relaxes limitations on the deductibility of charitable contributions to encourage giving.
Many of these provisions provide taxpayers with liquidity benefits by pushing back payment deadlines, providing deductions that will reduce current year tax liabilities (which can be important for estimated tax purposes), providing access to deductions that will retroactively reduce 2019 (and possibly earlier year) tax liabilities, and providing for refundable tax credits. In many cases, however, the provisions will require taxpayers to file amended returns and claims for refunds. In those cases, the liquidity benefits will not be immediate and will depend on the taxpayers’ ability to file amended returns quickly and for the IRS to process those returns. The IRS is encouraging taxpayers that will be entitled to refunds to file returns as soon as possible, to file electronically, and to provide direct deposit information. For information relating to deferred filing and payment dates for returns and taxes otherwise due on April 15, please refer to “COVID-19: IRS and States Extend Tax Deadlines.”
Of note, the CARES Act does not include a proposal in an initial iteration of the CARES Act that would have significantly narrowed the repeal of the prohibition against downward attribution by first generally restoring the prohibition against downward attribution of stock owned by a foreign person to a U.S. person (former Section 958(b)(4)) and then providing an exception to the restoration of Section 958(b)(4) in the case of any “foreign controlled United States shareholder” of a “foreign controlled foreign corporation.”
Employer payroll taxes
- The employer portion of the payroll tax will be not be required to be paid through January 1, 2021. Instead, these taxes will be paid in two equal installments, with the first installment due December 31, 2021, and the second due December 31, 2022.
Refundable employee retention credit
- The CARES Act provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis.
- The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
- The credit is based on qualified wages paid to the employee from March 13, 2020 through December 31, 2020. The credit is provided based on the first $10,000 of compensation, including health benefits, paid to an eligible employee.
Modifications to Net Operating Loss Limitations
- Under current law, (i) a taxpayer can only use net operating loss carryforwards arising in tax years beginning after December 31, 2017, to offset 80% of the taxpayer’s income, and (ii) net operating losses arising in tax years beginning after December 31, 2017, cannot be carried back.
- The CARES Act eliminates the 80% limit on deductions for net operating losses for 2020 and prior tax years (2018 and 2019). As a result, taxpayers that would otherwise have been limited on their 2019 tax returns can now calculate their 2019 and 2020 tax liabilities without regard to the 80% limit, and taxpayers that were limited in their use of net operating losses in 2018 can file amended tax refunds to claim refunds.
- The CARES Act eliminates the limit on net operating loss carrybacks for losses arising in 2018, 2019 and 2020. Net operating losses incurred in these years can be carried back five years. As a result, taxpayers should evaluate whether there is an opportunity to file amended returns to claim refunds as a result of the new carryback opportunity.
- The dollar value of the relaxed net operating loss rules will depend on the facts and circumstances of the particular taxpayer.
Modifications to Limitations of Excess Business Losses of Noncorporate Taxpayers
- The TCJA prevented noncorporate taxpayers from using losses from trades or businesses in which they participate to reduce the taxpayers’ other income. This limitation was originally effective for 2018 and subsequent tax years.
- The CARES Act retroactively postpones the effective date for this limitation to the 2021 tax year. As a result, noncorporate taxpayers can use trade or business losses to offset other income on their 2019 and 2020 returns. Taxpayers should also evaluate whether there is an opportunity to file amended returns to claim the benefit of the offset where it was limited in 2018.
Modification of Limitations on Business Interest
- Under current law, a taxpayer’s ability to deduct business interest is limited to the sum of (i) the taxpayer’s business interest income, and (ii) 30 percent of the adjusted taxable income of the taxpayer.
- The CARES Act increases the amount of business interest that can be deducted in 2019 and 2020 to the sum of (i) the taxpayer’s business interest income, and (ii) 50 percent of the adjusted taxable income of the taxpayer. This should increase the amount of interest that will be currently deductible on 2019 and 2020 tax returns.
- In addition, for the 2020 tax year, taxpayers can elect to use their 2019 adjusted taxable income to calculate the limit. Assuming that most taxpayers’ 2019 income will exceed their 2020 income, this should also allow an increase of permissible interest deductions on 2020 tax returns.
Bonus Depreciation for Qualified Improvement Property
- The CARES Act makes retroactive amendments to the bonus depreciation rules to allow taxpayers to claim 100% bonus depreciation for “qualified improvement property.”
- Taxpayers should consider whether they placed any “qualified improvement property” in place in 2018 and, if so, evaluate whether there is an opportunity to file amended returns to claim the benefits.
Relaxed Limits on Deductibility of Charitable Contributions
- Up to $300 of charitable contributions made during 2020 may be deducted “above the line” to arrive at adjusted gross income (AGI) without regard to whether the taxpayer itemizes deductions.
- For individuals who itemize, the 50% of AGI limitation is suspended for 2020.
- For corporations, the 10% of AGI limitation is increased to 25% and increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Accelerated Corporate AMT Credits
- Although the corporate alternative minimum tax was repealed as part of the TCJA, corporate AMT credits were made available as refundable credits over several years ending in 2021.
- The CARES Act accelerates the ability of corporations to claim a refund to obtain additional cash flow during the COVID-19 emergency.