On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, H.R. 748 (the “Act”), which contains a host of tax measures as part of a $2 trillion aid package to provide economic stimulus in the wake of the COVID-19 pandemic. While the focus of the legislation is not tax, a large number of tax provisions are included in the Act, which affect both individuals and businesses.
Important Note: The following is a general summary of the tax provisions of the Act. This analysis does not constitute legal advice and is being provided on an informational basis only. For advice about how you or your business may be affected by the Act, please contact your legal counsel.
I. INDIVIDUAL REBATES AND OTHER INDIVIDUAL PROVISIONS
Recovery rebates: The Act provides for payments to taxpayers that are being treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The credit is phased out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals. The credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.
Retirement plans: The Act contains a provisions that waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.
The Act temporarily suspends the required minimum distribution rules in Sec. 401 for 2020.
The Act delays 2020 minimum required contributions for single-employer plans until 2021.
Charitable deductions: The Act creates an above-the-line charitable deduction for 2020 (not to exceed $300). The Act also modifies the AGI limitations on charitable contributions for 2020 to 100% of AGI for individuals. The Act also increases the food contribution limits to 25%.
Employer payments of student loans: The Act contains a provision that enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. 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 employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
II. BUSINESS PROVISIONS
Employee retention credit: The Act creates an employee retention credit for employers that close due to the coronavirus pandemic. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are employers who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit. The credit is provided for wages paid or incurred from March 13, 2020, through December 31, 2020.
Payroll tax credit refunds: The Act provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Response Act, P.L. 116-127. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using forms and instructions the IRS will provide. The IRS is instructed to waive any penalties for failure to deposit payroll taxes under Sec. 3111(a) or 3221(a) if the failure was due to an anticipated payroll tax credit.
Payroll tax delay: The Act allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.
Net operating losses: The Act temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
Excess loss limitations: The Act repeals the Sec. 461(l) excess loss limitation. Sec. 461(l) was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and it disallows excess business losses of noncorporate taxpayers if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly).
Corporate alternative minimum tax (AMT): The Act modifies the AMT credit for corporations to make it a refundable credit for the 2018 and 2019 tax years.
Charitable deductions. The Act also modifies the AGI limitations on charitable contributions for 2020 to 25% of taxable income for corporations.
Certain excise taxes. The Act suspends various aviation excise taxes until 2021. Additionally, the Act temporarily suspends federal excise tax on any distilled spirits used for or contained in hand sanitizer until 2021.
Cancellation of debt provisions for certain covered loans. The Act provides for business loans that may be forgiven under certain circumstances. To the extent these covered loans are forgiven under the terms of the Act, cancellation of indebtedness income under the general tax code will not apply to such loan forgiveness.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties
