Client Alerts

Q&A: Tax Provisions of the CARES Act

By: John C. Goheen and Adam R. Watowicz

About: Tax

April 9, 2020

1. What if you have already laid off employees and they have already claimed unemployment? Can we still apply for the payroll programs?

A. The employee retention tax credit and the payroll tax payment deferral apply to wages paid. So if you rehire the laid off employees and start paying them wages again, you could apply for the programs.

2. What if you are pursuing a paycheck protection loan, but you don’t know if it will be forgiven? If we stop paying the employer 6.2% SS tax now, will there be penalties for late payment later if we do qualify for the paycheck protection loan?

A. IRS officials have said they are aware of this issue and plan to issue guidance but have not yet done so. We hope there will not be a late payment penalty if the PPP loan is forgiven, but at this point there is no clear answer.

3. Is there no wage credit for the employer share of SS tax if there are more than 100 full-time employees still working? Gross receipts of sales? Net sales? Or what else?

A. An “eligible employer” can claim the employee retention payroll tax credit even if there are more than 100 full-time employees still working. But, with more than 100 employees, the credit can be claimed only on wages paid to employees not performing services because of the closure or decline in gross receipts. For purposes of the “significant decline in gross receipts” test, gross receipts are reduced by returns and allowances (e.g., trade allowances).

4. Are religious organizations also able to defer the employer FICA and Medicare payments?

A. The delay in payment of employer payroll taxes applies to “applicable employment taxes,” which are defined as the 6.2% “employer share” SS tax. So if the religious organization is subject to this 6.2% employer share, it is able to defer payment.

5. If there was a large capital gain in 2018, will the new law permit the application of passive loss carry forwards to now be applied to that 2018 capital gain? Are there limits to the passive carry forwards to be applied to the capital gain if they were incurred prior to 2018?

A. The CARES Act turns off the excess business loss rules of Section 461(l) for 2018, 2019, and 2020. But, the Act did not turn off any of the passive loss rules of Section 469. So if you had a problem in applying passive loss carryforwards before the CARES Act, you still do.

6. What do you have to do to be eligible for the deferral of payroll tax?

A. Any employer is eligible if they owe the 6.2% “employer share” SS tax on wages for the deferral period (i.e., no limit on number of employees). The deferral period is March 27, 2020 (date of enactment), through December 31, 2020. But the deferral does not apply if the employer has a Payroll Protection Program loan forgiven.

7. Will Form 941 be amended to include reference to and application of the payroll tax credit?

A. Yes, the Form 941 will be amended – but the IRS has not yet released the revised form.

8. Are all businesses regardless of size eligible for the delay of payment of SS tax?

A. Yes, that’s correct.

9. Do you need to amend 2018 if you had excess business losses?

A. The CARES Act turns off the excess business loss rules of Section 461(l) for 2018, 2019, and 2020. So we believe an amended 2018 return is needed to now claim any excess business losses disallowed under prior law.

10. Can you file a 3115 in order to avoid amending a return for QIP?

A. For a taxpayer that has not yet filed a 2019 return, we believe you can correct the depreciation for QIP placed in service in 2018 by either: (1) amending the 2018 return, or (2) filing a 3115 with the 2019 return. The IRS may issue guidance on this.

11. Are required minimum distributions (RMDs) for 2020 waived for both IRAs and 401(k)s?

A. The CARES Act appears to waive RMDs that otherwise would be required to be made during the 2020 calendar year from both qualified plans (such as 401(k) plans) and IRAs (as well as 403(b) plans and governmental 457(b) plans).

12. Does the required minimum distribution (RMD) waiver for 2020 in the CARES Act apply to inherited IRAs?

A. Nothing in the CARES Act appears to exclude inherited IRAs from the waiver of the 2020 RMDs. However, there are a lot of unanswered questions regarding the waiver, particularly with respect to inherited IRAs. Hopefully, the IRS will issue guidance soon regarding the application of the 2020 RMD waiver to inherited IRAs and related issues.

13. What about head of household?

A. The phase-out amount for head of household begins at AGI of $112,500. A head-of-household filer is eligible for a maximum credit of $1,200 (subject to the phase-out) plus $500 for children under age 17.

14. Will my disqualified son (as a student in 2019 but working full-time in 2020) be able to receive the credit in 2020? I assume since he was my dependent in 2019 he will not get the advance payment, but I will not get any rebate for him, will he get a credit in 2020?

A. Your son will be eligible for the credit in 2020 as long as he cannot qualify as a dependent in 2020. Assuming that is true, your son will claim the credit on his 2020 return. You will not receive an advanced payment of $500 for your son unless he was younger than age 17.

15. Is there a credit for dependent children 18 and above?

A. At this point, there is no coronavirus related tax credit available for dependent children 18 and above.

16. How is the advanced refund credit calculated for MFS?

A. The advanced refund credit amount for MFS is calculated in the same manner as a single filer. So payments are subject to phase out at $75,000 of AGI ($5 for every $100 over the limit).

17. $500 advance payment for dependent under age 17? So, no college students?

A. Correct assuming the college student is not under the age of 17. The credit is only allowed for your children under the age of 17.

18. For individuals, the adjusted gross income limitation is suspended for 2020. Is this for cash charitable contributions only or is it for cash and non-cash charitable contributions?

A. The 60% limit for cash contributions is suspended for 2020. Note that there are two exceptions – a contribution to a supporting organization or to a donor-advised fund.

This Q&A is in response to a webinar that took place on March 30, 2020 entitled, “Understanding the Tax Provisions of the CARES Act.” To view the webinar, click here.

The above-mentioned webinar is a presentation by the law firm Ulmer & Berne LLP. Neither the program nor this Q&A document is intended as a substitute for professional legal advice. The information provided in this Q&A speaks only to the information and guidance we have available as of the date of publication and is subject to change. We will continue to follow further issued guidance and regulations and endeavor to post those updates via our website. Receipt of this Q&A, by itself, does not create an attorney-client relationship. For more information, please contact the speaker or call 216-583-7000 to be connected with an Ulmer attorney.