This alert was updated on April 2 to reflect new guidance from the U.S. Treasury Department.
Last Friday, Congress passed, and the president signed, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the coronavirus pandemic and resulting economic turmoil. The $2 trillion stimulus package, the largest in United States history, contains a number of provisions designed to provide federal tax relief to businesses and individuals and mitigate some of the economic fallout of COVID-19.
Business Tax Relief
- Employee Retention Credit for Employers Subject to Closure Due to COVID-19 – The CARES Act provides eligible employers with a refundable payroll tax credit for 50 percent of wages paid by eligible employers to certain employees after March 12, 2020 and before January 1, 2021. Eligible employers include employers whose operations have been suspended as a result of a governmental order limiting commerce, travel, or group meetings and employers who have experienced a reduction of more than 50 percent in quarterly receipts.
- Delay of Payment of Employer Payroll Taxes – The CARES Act generally permits employers to defer paying the 6.2 percent employer payroll tax for the period beginning on the date of enactment through December 31, 2020. Half of the taxes are deferred until December 31, 2021, and half are deferred until December 31, 2022. The CARES Act provides similar deferral for 50 percent of self-employment taxes.
- Modifications for Net Operating Losses – Under prior law, a taxpayer’s deduction for net operating losses was limited to 80 percent of the taxpayer’s taxable income. The CARES Act repeals the 80 percent limitation for tax years beginning before January 1, 2021. In addition, the CARES Act allows taxpayers to carry back net operating losses up to five years from any tax year beginning after December 31, 2017 and before January 1, 2021.
- Modifications of Limitation on Losses for Taxpayers Other Than Corporations – Under prior law, noncorporate taxpayers were restricted from deducting any “excess business loss,” which is the amount by which the taxpayer’s aggregate trade or business deductions exceed the sum of the taxpayer’s aggregate trade or business gross income plus $250,000 ($500,000 in the case of a joint return), as adjusted for inflation. The law allows noncorporate taxpayers to deduct excess business losses arising in 2018, 2019, and 2020 tax years.
- Modification of Credit for Prior Year Minimum Tax Liability of Corporations – The CARES Act makes corporate alternative minimum tax credits fully refundable for taxpayers beginning in 2019. In addition, the law allows corporations to elect to claim the entire refundable credit amount in 2018.
- Modification of Limitation on Business Interest – Prior law limited a taxpayer’s deduction of business interest to 30 percent of the taxpayer’s adjusted taxable income. The CARES Act increases the limitation to 50 percent for tax years beginning in 2019 and 2020. Special rules apply for partnerships. Taxpayers may elect out of the increase and continue to apply the 30 percent limitation. In addition, taxpayers may elect to calculate the 2020 interest limitation using adjusted taxable income from the 2019 tax year.
- Exclusion From Gross Income for Debt Forgiveness – The CARES Act authorizes federally backed loans to small businesses under the Small Business Administration’s Paycheck Protection Program. Certain items of indebtedness may be forgiven under this program. Amounts of forgiven indebtedness are excluded from the borrower’s gross income and therefore not subject to income tax.
- Charitable Contributions – The law increases the cap on charitable contributions for corporations and provides for the carryover of excess contributions.
- Technical Amendments Regarding Qualified Improvement Property – The CARES Act includes a technical correction to the Tax Cuts and Jobs Act of 2017 to allow certain “qualified improvement property” (formerly qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) to be depreciated over a 15-year recovery period (rather than the 39-year recovery period for nonresidential rental property), which is consistent with legislative intent.
- Temporary Exception From Excise Tax for Alcohol Used to Produce Hand Sanitizer – The law temporarily exempts from the excise tax imposed under Internal Revenue Code Section 5214 distilled spirits for use in or contained in hand sanitizer produced and distributed in a manner consistent with any guidance issued by the Food and Drug Administration that is related to the outbreak of COVID-19.
- Suspension of Certain Aviation Excise Taxes – The CARES Act provides a temporary tax holiday for the excise taxes imposed by Internal Revenue Code Sections 4261 and 4271 on amounts paid for the transportation by air of persons or property. In addition, the law provides a reprieve for the excise tax on the use of kerosene in commercial aviation imposed by Internal Revenue Code Sections 4041 and 4081.
Individual Tax Relief
- Rebates and Credits for Individuals – The CARES Act provides eligible individuals with a refundable income tax credit for tax year 2020. The amount of the credit is $1,200 for single taxpayers and $2,400 for married filing jointly taxpayers, with an additional $500 for each child. The credit is phased out for single taxpayers with adjusted gross income over $75,000 and married taxpayers with adjusted gross income over $150,000 (phasing out entirely at $99,000 for single taxpayers and $198,000 for married taxpayers with no children). The rebate is based on 2019 tax returns and, if the taxpayer has not filed the 2019 return, on the 2018 return. Although the Internal Revenue Service had previously said individuals who typically do not file returns will be required to file a “simple tax return” to be eligible for payment, the Treasury Department reversed that position on April 1. According to Treasury Secretary Mnuchin, the IRS will use Social Security information to generate payments to Social Security recipients who did not file tax returns. The reversal comes after the filing requirement received criticism from lawmakers and others. Although the credit is technically for tax year 2020, it is effectively treated as an overpayment for 2019 that will be refunded to taxpayers. If the taxpayer is eligible for a credit based on the 2019 return, that amount will be refunded to the taxpayer and will not be clawed back if the taxpayer would not be eligible based on the 2020 return. Conversely, if the taxpayer receives a rebate based on the 2019 return and is entitled to a greater credit based on the 2020 return, the taxpayer may claim the balance on the 2020 return. The Treasury Department has announced that distributions will begin in the next three weeks and will be distributed automatically without any required action for most taxpayers.
- Temporary Waiver of Early Withdrawal Penalty – A 10 percent additional tax normally applies to early distributions from a qualified retirement plan unless an exception applies. The CARES Act provides that the 10 percent penalty does not apply to a coronavirus-related distribution, as defined in the law, up to $100,000. The individual may contribute the amount back to the plan over a three-year period without affecting the contribution limitations. If the individual retains the distribution, it is taxable over a three-year period.
- Temporary Waiver of Required Minimum Distribution Rules – The law also waives the required minimum distributions for 2020 for certain retirement plans.
- Charitable Contributions – The law provides individuals who do not itemize with an “above-the-line” charitable contribution deduction of up to $300 for “qualified contributions.” The law also increases the cap on charitable contributions for individuals who itemize their deductions.
- Payments of Student Loans – The law excludes from the taxable income of employees certain payments of qualified student loans by employers.
We expect additional tax measures will continue to evolve at both the federal and state level and will provide updates in this rapidly developing area.