The Coronavirus Aid, Relief, and Economic Security Act passed by Congress and signed by the President on March 27 (the “CARES Act”) contains a number of tax relief provisions for individuals and businesses intended to ameliorate the economic impact of the Coronavirus pandemic. The provisions summarized below are particularly notable.
Individual Tax Relief Provisions
Individual Income Tax Rebate/Credit. Subject to certain phaseout rules, eligible individuals (nonresident aliens, estates and trusts and dependents are excluded) are allowed an income tax credit for 2020 equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return), plus (2) $500 for each qualifying child (as defined for purposes of the dependent exemption, who hasn't attained age 17). The credit is reduced by 5% of adjusted gross income (“AGI”) in excess of $150,000 (for a joint return), $112,500 (for a head of household), and $75,000 (for all other taxpayers), and thus completely phases out for a single filer with AGI exceeding $99,000 and for joint filers having no children with AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500.
A taxpayer who was an eligible individual for 2019 is treated as having made an income tax payment for 2019 equal to the amount that would have been allowed as a credit for 2019 had the credit provision been in effect for 2019. Thus, even though the credit is technically for 2020, the law treats it as an overpayment for 2019 that the IRS will rebate as soon as possible during 2020. No interest will be paid on this deemed overpayment. If an individual has yet to file a 2019 income tax return, the IRS will determine the amount of the rebate using information from such individual’s 2018 return. The IRS may make the rebate electronically to any account to which an individual authorized, on or after January 1, 2018, the delivery of a refund or payment.
Coronavirus-Related Retirement Plan Distributions. Subject to certain exemptions, individuals who make early withdrawals (i.e., withdrawals before the age of 59½) from qualified retirement plans currently must pay an early withdrawal penalty. The CARES Act waives this penalty for “coronavirus-related distributions” up to $100,000 per person. For this purpose, a “coronavirus-related distribution” from an eligible retirement plan is one made during 2020 to an individual (1) 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 or laid off (including reduced work hours) or is unable to work due to lack of child care because of COVID-19. Such distributions will be subject to income tax ratably over a three-year period, unless the individual recontributes the coronavirus-related distributions to an eligible retirement account within three years, which may be done without regard to applicable contribution limitations in such years.
Waiver of Retirement Plan Minimum Distribution Requirement in 2020. Owners of retirement plan or IRA accounts generally are required to take minimum distributions annually once they reach age 72. The CARES Act provides that the minimum distribution requirements do not apply for calendar year 2020 to most qualified retirement plans and IRAs.
Cash Charitable Contribution Deductions. For 2020, the CARES Act allows individuals who claim the standard deduction (i.e., do not itemize their deductions) to deduct up to $300 of qualified charitable contributions of cash. For this purpose, "qualified charitable contributions" do not include donations to a private foundation or to a donor advised fund. The CARES Act also relaxes the percentage limitations otherwise applicable to individual (as well as corporate) cash charitable contributions in 2020.
Charitable Contributions of Food Inventory. Donations of food inventory to charitable organizations to be used for the care of the ill, the needy or infants generally are subject to a 15% percentage-of-income limitation. The CARES Act increases this limitation to 25% for charitable contributions of food during 2020.
Treatment of Student Loan Repayments by Employer as Tax-Excluded Education Payments. An employee's gross income does not include up to $5,250 of employer payments per year under an educational assistance program for the employee's education. The CARES Act adds "eligible student loan repayments" before January 1, 2021 to the types of educational payments that are excluded from employee gross income, subject to the overall $5,250 limit for all educational payments. Eligible student loan repayments are payments by the employer, whether paid to the employee or lender, of principal or interest on any qualified higher education loan of the employee.
Business Tax Relief Provisions
Employee Retention Payroll Tax Credit. The CARES Act provides a refundable quarterly payroll tax credit with respect to 50% of the wages paid by eligible employers to certain employees after March 12, 2020 and before Jan. 1, 2021. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings or that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. The credit is not available to employers receiving Small Business Interruption Loans under the CARES Act.
For employers that had an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, including wages of employees who are furloughed or face reduced hours as a result of their employers’ closure or economic hardship. For employers that had an average of more than 100 full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers' closure or reduced gross receipts are eligible for the credit. No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit.
For purposes of this credit, the amount of wages which may be taken into account with respect to any employee for all calendar quarters may not exceed $10,000. The term "wages" includes health benefits, but does not include amounts taken into account in determining payroll credits for paid sick leave or paid family leave required by the Families First Coronavirus Response Act or amounts taken into account for purposes of the credit for paid family and medical leave.
Delay of Payroll Tax Payments. The CARES Act allows employers to defer payment of the employer portion of certain payroll taxes through the end of 2020. Of the deferred amounts, 50% must be paid by December 31, 2021 and the remaining 50% is due on December 31, 2022. This deferral is not available to any employer that has certain loans forgiven under the CARES Act.
Tax Treatment of Net Operating Losses (NOLs). The CARES Act modifies a provision of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) that limited the deduction of NOLs arising after 2017 to 80% of taxable income and eliminated the carryback of NOLs to prior tax years. Under the CARES Act, taxpayers will be permitted, in tax years beginning before 2021, to carry back NOLs to the prior five tax years, effectively delaying the 80%-of-taxable-income limitation until 2021 and temporarily extending the carryback period from zero to five years. C corporations may file for an accelerated refund to claim this NOL carryback benefit. The CARES Act also modifies the treatment of NOL carryforwards by allowing NOL deductions equal to 100% of taxable income (rather than 80%) in tax years beginning before 2021. In tax years beginning after 2021, taxpayers will be permitted to deduct 100% of NOLs arising in tax years prior to 2018 and, for NOLs arising in tax years after 2017, up to 80% of modified taxable income.
The CARES Act also temporarily modifies the trade or business loss deduction limitation rules applicable to noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019 and 2020. Previously, noncorporate taxpayers were not allowed to deduct excess business losses incurred in tax years beginning after December 31, 2017 and ending before January 1, 2026. Generally, an "excess business loss" is the excess of the (1) taxpayer's aggregate trade or business deductions, over (2) the sum of the taxpayer's aggregate trade or business gross income or gain plus $250,000 (as adjusted for inflation).
Acceleration of Corporate Minimum Tax Credit. The TCJA repealed the corporate alternative minimum tax (“AMT”) and allowed corporations to claim outstanding AMT credits, subject to certain limits, for tax years prior to 2021, at which time any remaining AMT credit could be claimed as fully-refundable. The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and provides an election to accelerate claims to 2018.
Deductibility of Interest Expense. The TCJA generally limited the deduction of business interest expenses to 30% of adjusted taxable income. The CARES Act temporarily and retroactively increases this limitation from 30% to 50% for tax years beginning in 2019 and 2020 and allows businesses to elect to use their 2019 adjusted taxable income in calculating their 2020 limitation. A special rule applicable to partnerships, however, allows 50% of any excess business interest allocated to a partner in 2019 to be deductible in 2020 without regard to the 50% limitation, with the remaining 50% of such excess business interest from 2019 being subject to the 50% limitation. For partnerships, the business interest limitation remains 30% for 2019, but is 50% for 2020 and partnerships may elect to use their 2019 adjusted taxable income in calculating their 2020 limitation.
Bonus Depreciation for Qualified Improvement Property. The TCJA allowed 100% bonus depreciation for certain investments in depreciable property, but as a result of a drafting glitch, any investment in an improvement to the interior of a nonresidential building meeting the definition of “qualified investment property” was not eligible for bonus depreciation. The CARES Act corrects this glitch and allows 100% bonus depreciation with respect to such improvements, effective retroactively as if originally included in the TCJA, thereby enabling businesses (especially in the hospitality and retail industries) to immediately expense costs associated with improving facilities.
The foregoing is only a summary of the CARES Act’s emergency tax relief provisions. Details regarding the application and implementation of many of these provisions will require explanation and guidance by the IRS.
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