On Friday, March 27, 2020, President Trump signed into law the CARES Act, which contains many provisions designed to mitigate the impact of the Coronavirus pandemic. Liskow & Lewis attorneys John T. Bradford and Jeffrey P. Birdsong wrote about four of those provisions which affected the implementation of the 2017 Tax Cuts and Jobs Act (“TCJA”) here. The following blog post walks through another round of changes to the Internal Revenue Code (“IRC”) contained in the CARES Act.
Enactment of New Employee Retention Credit
In addition to the refundable employment tax credits contained in the Families First Coronavirus Response Act (the Phase II COVID-19 legislative response), the CARES Act implements a refundable employee retention credit. This credit (taken against employment taxes) is worth 50% of up to $10,000 of “qualified wages” (including certain health plan expenses) paid to certain employees between March 13, 2020 and December 31, 2020. An employer is eligible for the credit if their business was fully or partially shut down due to a government order issued in response to COVID-19 or if for any quarter in 2020, gross receipts are down at least 50% from the same quarter in the prior year.
For eligible employers with at least an average of 100 employees during 2019, wages qualify for the credit if paid to employees who cannot provide services due to a government order or drop in gross receipts as described above. For eligible employers with an average of less than 100 employees during 2019, wages qualify for the credit if paid to employees for any period of time where the business is subject to a shutdown order or for any quarter with reduced gross receipts as described above – regardless of whether the employees continue to provide services to the employer. Note that otherwise eligible wages which were used as a basis for a credit in the Families First Coronavirus Response Act and a handful of other credits contained in the IRC will not be considered wages for purposes of this credit. Further, otherwise eligible employers who take advantage of certain small business interruption loans provided in the CARES Act are ineligible for this credit.
Changes to the Charitable Contribution Deduction Regime
The CARES Act created a new opportunity for non-itemizers to claim a charitable contribution deduction starting in 2020. Prior to this legislation, the charitable contribution deduction for individuals was only available for those who itemize their tax returns; however, after the TCJA significantly increased the standard deduction – fewer people elected to itemize their deductions. As part of the CARES Act, Congress responded to that development by creating a charitable contribution deduction for non-itemizers. The new deduction is generally governed by the relevant rules in IRC Section 170 with a few modifications. First, the maximum allowed deduction is $300. Second, the charitable contribution must be in cash (not in-kind donations of property). Third, no deduction is permitted for contributions to supporting organizations (under IRC Section 509(a)(3)) or for the creation or funding of Donor Advised Funds.
The CARES Act also implements some subtle changes to the charitable contribution deduction for corporations and itemizing individuals. Individuals and corporations are only permitted to take a charitable contribution deduction up to a certain percentage of an individual’s adjusted gross income (“AGI”) for the year (60% of AGI for a cash contribution to a public charity/50% of AGI for an in-kind contribution to a public charity) or a corporation’s taxable income (10% of taxable income). The CARES Act adjusts those limitations for the 2020 tax year for cash donations to a public charity (not a private foundation or supporting organization). For individuals, it suspends the limit and for corporations, it raises the limit from 10% to 25%. While these rules are limited to cash donations, corporations can also take advantage of an increased taxable income limit for certain donations of food inventory (15% to 25%). Note that all other substantive and substantiation requirements for claiming a charitable contribution deduction continue to apply.
Extension of Educational Assistance Programs Exclusion to Student Loan Repayment
Before the enactment of the CARES Act, IRC Section 127 provided a $5,250 exclusion from an individual’s income for the benefits, e.g. tuition, books, supplies, etc., provided to an employee through certain “educational assistance programs” established by an individual’s employer. The CARES Act expands the type of eligible benefits provided to employees to include repayment of an employee’s qualified education loan between the effective date of the CARES Act and January 1, 2021. So long as all of the other requirements of IRC Section 127 are satisfied, employer repayment of up to $5,250 of certain employee student loans (whether directly to the lender or through a payment to the individual) will not be included in the individual’s income.
Employer’s Social Security Tax Deferral
One CARES Act provision designed to free up cash for businesses and self-employed individuals affected by COVID-19 is a deferral of the employer’s portion of Social Security Taxes, including the employer portion of self-employment taxes. Employers can elect to defer payment of half of their 6.2% share of Social Security Tax liability due at any point in 2020 until the end of 2021 and the other half until the end of 2022. Self-employed taxpayers are also permitted to defer the employer portion of their self-employment tax (6.2%) that would be due before the end of the year until the end of 2020, with half of that amount (25% of the overall self-employment tax liability) being deferred until the end of 2021 and the other half (25% of the overall self-employment tax liability) being deferred until the end of 2022. Note that otherwise eligible employers who take advantage of certain small business interruption loans provided in the CARES Act are ineligible for this credit.
Qualified Improvement Property Expensing Correction
One of the hallmarks of the TCJA was the implementation of immediate expensing for a variety of expenditures which would have been capitalized but for the TCJA. By all indications, Congress intended to permit the immediate expensing of “qualified improvement property” or amounts spent on improvements to the interior of a nonresidential building after it was placed in service, e.g. interior remodeling of certain commercial outlets like restaurants and retail businesses; however, due to an inadvertent omission, this type of expenditure was not eligible for the immediate depreciation provisions in revised IRC Section 168. The CARES Act fixes this oversight and makes the fix retroactive to the date of implementation of the TCJA.
Suspension of Excise Taxes on Distilled Spirits Used in Manufacture of Hand Sanitizer
The CARES Act extends the distilled spirits excise tax exemption contained in IRC Section 5214 to those spirits intended for use in the production of hand sanitizer which comports with FDA rules implemented after the COVID-19 outbreak. This exemption is limited to distilled spirits so used in 2020.