March 26, 2020 – On March 25, 2020, the U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The U.S. House of Representatives is expected to pass and President Trump is expected to sign the bill on Friday, March 27, 2020.
Ulmer will be conducting a webinar to discuss the tax provisions of the CARES Act in detail on Monday, March 30, from 2:00 – 2:30 p.m. The date of this webinar is subject to change based on the final passage of the bill. Click here to register.
A key economic stimulus provision of the Act provides for cash payments of up to $1,200 to individuals or $2,400 for couples who file joint tax returns, with additional $500 payments per qualifying child. The payments begin phasing out when a single taxpayer’s adjusted gross income exceeds $75,000 (or $150,000 for joint filers), and completely phase out for single taxpayers with adjusted gross income greater than $99,000 or joint incomes greater than $198,000 (the complete phase outs are increased by $10,000 per qualifying child).
Key economic stabilization provisions of the Act authorize funding for: emergency loans and assistance to distressed businesses (including small businesses and passenger and cargo air carriers); expanded unemployment benefits; hospitals and health care providers; and state and local governments.
The Act also contains several tax relief provisions for businesses and individuals. This client alert provides a summary of the most significant of these new tax provisions.
Business Tax Provisions
New employee retention payroll tax credit for employers subject to closure. The Act provides a new refundable payroll tax credit (against the 6.2% “employer share” Social Security tax) for 50% of qualified wages paid by employers whose (1) operations were fully or partially suspended due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year. For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order until the employer has a quarter where its receipts exceed 80% of what they were for the same quarter in the prior year. The credit is limited to the first $10,000 of compensation (including health benefits) paid to an employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Delay of payment of employer payroll taxes. The Act allows employers and self-employed individuals to defer making deposits of the 6.2% “employer share” Social Security tax on wages and self-employment income otherwise due through the end of the year. The deferred employment tax is to 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.
Relaxation of limitations on net operating losses (NOLs). Under current law, NOL carryforwards are subject to a taxable income limitation, and NOLs cannot be carried back to reduce income in a prior tax year. This Act relaxes these limits by providing that a loss from 2018, 2019, or 2020 can be carried back five years. The Act also temporarily removes the taxable income limitation to allow a NOL carryforward to fully offset income.
Relaxation of limitations on excess business losses of noncorporate taxpayers. The Act relaxes the excess business loss limitations applicable to losses from pass-through businesses and sole proprietorships so that their owners can benefit from the NOL carryback rules noted above.
Relaxation of limitation on business interest. The Act temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns by increasing the 30% limitation to 50% of the taxable income for 2019 and 2020. However, entities taxed as partnerships do not use the 50% limit for 2019. Instead, interest disallowed at the partnership level is allocated to the partners and suspended. For 2020, 50% of the partner’s suspended interest becomes deductible and the remaining 50% remains suspended until the partnership allocates excess taxable income or excess interest income to the partner.
Modification of credit for prior year minimum tax liability of corporations. The corporate alternative minimum tax (AMT) was repealed as part of the 2017 Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The Act accelerates the ability of companies to recover those AMT credits.
Immediate expensing of qualified improvement property. The Act enables businesses, especially in the hospitality industry, to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. This provision corrects the “retail glitch” error in the 2017 Tax Cuts and Jobs Act. This change is retroactive to January 1, 2018.
Temporary exception from excise tax for alcohol used to produce hand sanitizer. The Act waives the federal excise tax on distilled spirits for or contained in hand sanitizer effective for calendar year 2020.
Individual Tax Provisions
Relaxed rules for coronavirus-related distributions from retirement funds. The Act waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes. 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 Act provides flexibility for loans from certain retirement plans for coronavirus-related relief.
A coronavirus-related distribution is a distribution made before year-end 2020 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 Secretary of the Treasury.
Waiver of required minimum distribution (RMD) rules. The Act waives the RMD rules for certain defined contribution plans and IRAs for calendar year 2020.
Above-the-line deduction for 2020 charitable contributions. The Act allows an above-the-line charitable contribution deduction of up to $300 for 2020 cash contributions for taxpayers who do not itemize their deductions.
Relaxation of limitations on charitable contributions during 2020. The Act increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50% of adjusted gross income limitation is suspended for 2020. For corporations, the 10% limitation is increased to 25% of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Student loan relief. In order to encourage employers to implement student loan repayment programs, the Act allows an employee to exclude from income up to $5,250 in qualifying student loan repayments paid by an employer on behalf of the employee after the date of enactment and before January 1, 2021.
Ulmer’s Tax Practice Group is available to provide you with strategic advice and counsel as the COVID-19 crisis continues to unfold. If you have any questions about the Coronavirus Aid, Relief, and Economic Security Act, please reach out to one of the authors listed above who can assist you.