April 9, 2020
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law providing tax relief and other economic relief to individuals and businesses affected by the coronavirus (“COVID-19”).
Rebate Payments for Individuals
The CARES Act provides individuals with a rebate payment equal to $1,200 plus $500 for each qualifying child. The rebate payment is increased to $2,400 for joint filers. The amount of the rebate begins to phase out at adjusted gross income (“AGI”) exceeding $75,000 for individual filers ($150,000 for joint filers and $112,500 for those who file as head of household), and the rebate phases out 100% for individuals without any qualifying children if their AGI is above $99,000 ($198,000 for joint filers and $136,500 for those filing as head of household).
A qualifying child is defined as a (i) child, stepchild, eligible foster child, sister, brother, stepsister, stepbrother or descendant of any of them, (ii) under age 17, (iii) who has not provided more than 50% of their own support, and (iv) who has lived with the taxpayer for more than 50% of the year.
Eligible individuals who have not filed a 2018 or 2019 tax return should consider filing such tax returns in order to receive their refund. The refund will be made automatically to individuals who previously filed their tax returns electronically using direct deposit information.
Paycheck Protection Program
The Paycheck Protection Program (“PPP”) under the CARES Act provides small businesses with federally guaranteed loans to cover expenses and retain employees. The loan borrowing base is based on certain payroll costs, including wage compensation, health insurance premiums paid by the business and fringe benefits, amongst other items, and a company’s payroll only includes those employees whose principal place of residence is the United States. The borrowing rate on the loan is 1% and loan maturities are two years. The PPP is first come first served so businesses should consider getting their applications in expeditiously. Loans that are made under the PPP will be forgiven to the extent the debtor has qualifying payroll, rent, mortgage interest or utility expenses. Importantly, under the CARES Act loan amounts under the PPP that are forgiven will not be included in gross income as cancellation of indebtedness income.
The CARES Act provides that individual taxpayers that do not itemize their deductions can still take a charitable contribution deduction up to a maximum of $300 against their AGI in 2020 for cash contributions made to certain publicly supported charities.
In addition for 2020, for taxpayers that do itemize their deductions, the CARES Act temporarily suspends the 60% AGI limitation for cash contributions to publicly supported charities. For 2020 such individual taxpayers will be able to deduct 100% of their cash contributions up to their AGI to the extent that their cash contributions do not exceed the excess of their contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Corporate taxpayers may take a charitable deduction for cash contributions up to 25% of their taxable income for 2020 rather than the general limitation of 10% of their taxable income.
Loss Limitations Provisions
The CARES Act loosens certain limitations on losses that were put in place by the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). Under the 2017 Tax Act net operating loss (“NOL”) carryovers and carrybacks were limited to a deduction of 80% of net income for tax years beginning January 1, 2018. The CARES Act abolishes the 80% limitation for tax years prior to January 1, 2021.
The 2017 Tax Act also provided that NOLs arising in tax years beginning 2018 could not be carried back to prior years but could be carried forward without any limitations. The CARES Act provides for a limited carryback period under which NOLs arising in taxable years beginning in 2018 and before 2021 can be carried back to each of the 5 preceding taxable years.
The 2017 Tax Act also imposed a limitation on excess business losses for noncorporate taxpayers for taxable years beginning after December 31, 2017 and before January 1, 2026 to prevent non-corporate taxpayers from using net business losses for a taxable year to offset other income of more than $250,000 ($500,000 for married taxpayers filing jointly). This applied to net business losses of partners, S corporation shareholders and sole proprietors. Disallowed losses are treated as NOL carryover to the following year. The CARES Act eliminates this limitation for taxable years beginning before January 1, 2021.
The CARES Act provides a technical correction that allows qualified improvement property to be eligible for 100% bonus depreciation. This generally applies to an improvement to the interior portion of a non-residential building made after it has been placed into service. Congress had intended that this type of property be classified as 15 year property eligible for 100% bonus deprecation in the 2017 Tax Act but mistakenly did not designate it as such in the relevant section of the Internal Revenue Code. The CARES Act cures the drafting glitch with an effective date retroactive to the enactment of the 2017 Tax Act. Affected taxpayers may amend prior year’s tax returns if applicable.
Business Interest Deductions
The CARES Act relaxes limits on the deductibility of business interest expense under the 2017 Tax Act. The 2017 Tax Act limited interest deductions for businesses with average annual gross receipts of $25,000,000 or more over a 3 year period to 30% of adjusted taxable income (“ATI”). ATI is generally arrived at by increasing taxable income by NOLs, interest expense and for tax years before 2022, depreciation and amortization deductions. The CARES Act raises the business interest expense limitation to 50% of ATI for tax years beginning in 2019 or 2020 and allows the continued carry forward of disallowed interest deductions as already provided for in the 2017 Tax Act. The CARES Act also allows taxpayers to calculate the limitation for 2020 based on ATI for 2019, which is likely to be a year of higher ATI for many taxpayers.
Corporate AMT Credits
The 2017 Tax Act repealed the corporate alternative minimum tax (“AMT”) for taxable years beginning 2018, and permitted corporations to recover unused AMT credits during tax years 2018 to 2021. Under the CARES Act, corporations may recover the amount of any outstanding AMT credits by the 2019 tax year instead. Certain corporations may also elect to claim their entire AMT credit for the 2018 tax year and apply for a tentative refund if filed prior to December 31, 2020.
Payroll Tax Credits and Deferral of Payroll Taxes
The CARES Act provides a refundable employment tax credit of 50% of qualified wages paid by businesses affected by COVID-19. The Payroll Tax Credit applies to businesses whose operations are fully or partially suspended because of a governmental shutdown order because of COVID-19 or that have a significant decline in gross receipts. For purposes of this provision, a significant decline in gross receipts occurs beginning with the first calendar quarter after December 31, 2019 in which gross receipts are less than 50% of gross receipts for the same quarter in 2019 and ending with the calendar quarter after the first calendar quarter for which gross receipts are greater than 80% of gross receipts for the same quarter in the prior year. The credit only applies to wages that an employer pays to employees who are not working because the company’s business is fully or partially suspended because of a government shutdown order because of COVID-19 or because of a significant decline in the business’ gross receipts for employers that averaged more than 100 full-time employees in 2019. Qualified wages cannot exceed the amount the employee would have received for working an equivalent duration during the 30 days immediately prior to the period in question. The Payroll Tax Credit applies to wages paid after March 12, 2020 and before January 1, 2021. Qualified wages are limited to $10,000 per employee and do not include wages for which an employer is receiving a tax credit for paid sick leave or paid family leave under the Families First Coronavirus Response Act (“FFCRA”). The Payroll Tax Credit is applied against the company’s share of social security taxes (6.2% of the first $137,700 of an employee’s 2020 wages). Payroll Tax Credits under the CARES Act in excess of those social security taxes are refundable and can be claimed on a quarterly basis. However, the Payroll Tax Credit is not available to companies that receive loans under the PPP.
In addition, the CARES Act permits companies to defer paying their share of employee Social Security taxes due for the period beginning March 27, 2020 and ending December 31, 2020. Under the CARES Act the deferral will be interest-free. The CARES Act further provides that 50% of the Social Security taxes due in the above-referenced period will be due December 31, 2021, and the remaining 50% will be due December 31, 2022. Individuals subject to self-employment tax for the same period may also defer 50% of their social security taxes on the same December 31, 2021 and December 31, 2022 schedule. Please note that this program does not apply to employers that have loans forgiven under the PPP because of payroll, rent, mortgage interest or utility expenses.
Refunding of Credits Available under FFCRA
The CARES Act amends the FFCRA to provide for advances of payroll tax credits available under the FFCRA for sick leave and expanded family leave wages provided for under the FFCRA. It also provides for penalty relief for failure to deposit payroll tax amounts in anticipation of those credits. gi
Retirement Planning Changes
The CARES Act has suspended required minimum distributions (RMDs) for 2020, including those for inherited IRAs as well as traditional IRAs. If the effects of COVID-19 have dropped a taxpayer into a lower tax bracket, it might make sense to take the RMD regardless of the relaxation on the RMD. For those who have already taken a 2020 RMD, it will generally have to be included in gross income and subject to tax, but there are some options available, such as returning the RMD to an IRA within 60 days of the distribution. Since the tax return filing deadline for 2019 income tax returns was extended to July 15, the deadline for making a 2019 contribution to an IRA also is extended to July 15, 2020.
In addition, to the relaxation of the RMD rules, CARES Act also waived the 10% penalty for taking early distributions from qualified retirement plans, including IRAs and 401k plans. The waiver applies to distributions taken between January 1, 2020 and December 31, 2020. The maximum early distribution under this provision is $100,000.
The CARES Act also modified retirement plan loan rules. The maximum loan amount is increased for loans that are made between the March 27 and December 31, 2020 to $100,000 or 100% of the vested account balance. Normally the loan maximum is $50,000 or 50% of the vested account balance. The due date for repayment of the loan is delayed one year. To qualify for these IRA and retirement plan changes, a loan or distribution must be COVID-19 related. To be COVID-19 related, the individual, the individual’s spouse or a dependent must have been diagnosed with COVID-19 or the individual must experience adverse financial consequences as a result of being quarantined, furloughed, laid off or having work hours reduced due to COVID-19. Also eligible are individuals who were unable to work due to lack of child care as a result of COVID-19. An individual whose business was closed or had reduced operating hours as a result of COVID-19 also is eligible. A retirement plan administrator can rely on an individual’s certification that he or she meets the requirements.
For more information on how COVID-19 may impact your tax, business or estate planning, contact the author at firstname.lastname@example.org or another Moses & Singer attorney.
 An individual taxpayer’s contribution base is generally equal to their AGI computed without regard to any NOL carrybacks.