Tax Benefits Announced: The Coronavirus Aid, Relief, and Economic Security Act (H.R. 748), What Every Individual and Corporate Taxpayer Needs to Know Now
Unprecedented times call for unprecedented measures. The COVID-19 crisis has prompted the U.S. Congress to craft and pass the largest economic bailout bill in the nation’s history. This $2- trillion rescue plan, The Coronavirus Aid, Relief, and Economic Security Act (H.R. 748, or CARES Act), was signed into law by President Donald Trump on March 27, 2020, and impacts nearly every aspect of the U.S. economy. Much of its more than 800 pages contain many unprecedented tax benefits intended to smooth over—to the extent possible—the historic economic downturn resulting from the COVID-19 pandemic.
We address some of the more important tax provisions affecting individuals and businesses below. (Procopio is also addressing other non-tax areas of the new law in a separate article.)
Tax Return Filing Date and Payment Date Automatically Extended
Prior to addressing the CARES Act’s tax benefits, taxpayers should be comforted to know that on March 21, 2020, the Treasury Department and Internal Revenue Service (IRS) announced it had extended that the federal income tax filing due date 90 days, from April 15, 2020, to July 15, 2020. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax who ordinarily have an April 15 due date. (As of this date, certain information returns have not been extended beyond the due date of April 15, 2020. See Notice 2020-18.)
Additionally, the IRS is allowing taxpayers to defer federal income tax payments (tax and estimated payments) due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. The IRS has issued guidance on this extension of the tax return and payment deadlines in Notice 2020-18. The IRS also issued FAQs to address various questions raised by Notice 2020-18. The State of California is also providing consistent tax return due date and payment relief, as detailed here.
A. CARES ACT – INDIVIDUAL TAXPAYER BENEFITS
How will the CARES Act benefit individual taxpayers?
1. 2020 Recovery Rebates for Individuals (CARES Act Section 6428)
All U.S. residents with adjusted gross income (AGI) up to $75,000 ($150,000 married), if they are not a dependent of another taxpayer and have a work eligible Social Security number, are eligible for a $1,200 ($2,400 married) rebate. The payments are reduced for those with incomes above $75,000, or $150,000 for couples, and would be eliminated for those with incomes of more than $99,000, or $198,000 for couples.
In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits. The credit is not available for nonresident aliens.
Generally, no action is required in order to receive a rebate check, as the IRS will use a taxpayer’s 2019 tax return to determine the credit. If a 2019 tax return has not been filed, the IRS will use the taxpayer’s 2018 return to determine AGI.
2. Special Rules For Use of Retirement Funds (Penalty Relief for Immediate Use of Retirement Funds) (CARES Act Section 2202)
The CARES Act waives the 10% early withdrawal penalty under IRC Section 72(t)–which generally applies to withdrawals made before the age of 59 ½–for distributions made up to $100,000 from qualified retirement accounts (e.g., a 401k) for coronavirus-related purposes made on or after January 1, 2020, and before December 31, 2020. Income attributable to such distributions, however, will be subject to tax, and the tax is to be paid over three years. The taxpayer may also recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.
A coronavirus-related distribution is a one made 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 U.S. Treasury Secretary.
3. Temporary Waiver of Required Minimum Distribution Rules For Certain Retirement Plans and Accounts (CARES Act Section 2203)
The CARES Act also waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
4. Modification of Limitations on Charitable Contributions During 2020 (CARES Act Section 2205)
The CARES Act encourages charitable contributions by increasing 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%.
The new law also encourages taxpayers to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether or not they itemize.
B. CARES ACT – CORPORATE TAXPAYER BENEFITS
How will the CARES Act benefit corporate and other business taxpayers?
1. Employee Retention Credit for Employers Subject to Closure due to COVID-19 (CARES Act Section 2301)
The CARES Act provides an employee retention credit for employers that close due to the coronavirus pandemic. Subject to certain limitations, eligible employers (defined below) are allowed a credit against employment taxes equal to 50% of qualified wages (defined below) for each employee that are paid or incurred from March 13, 2020 through December 31, 2020.
Eligible employers are those who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Even if not suspended, employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year.
For employers with more than 100 employees, wages eligible for the credit are those that the employer pays to employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit. In both cases, qualified wages include any “qualified health plan expenses” allocable to the wages, such as amounts paid to maintain a group health plan. In either case, however, the amount of qualified wages for EACH employee for ALL quarters may not exceed $10,000.
Any wages taken into account in determining the new payroll tax credit for family medical leave or sick leave as part of the CARES Act (as addressed in the section below) may not be taken into account in determining qualified wages for the employee retention credit discussed above.
2. Advance Refunding of Credits (Payroll Tax Credit Refunds) (CARES Act Section 3606)
The CARES Act provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Response Act, P.L. 116-127. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using forms and instructions the IRS will provide. The IRS is instructed to waive any penalties for the failure to deposit payroll taxes under IRC Sections 3111(a) or 3221(a) if the failure was due to an anticipated payroll tax credit.
3. Delay of Payment of Employer Payroll Taxes (CARES Act Section 2302)
The new law allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax (6.2%) they otherwise are responsible for paying to the federal government with respect to their employees. This deferral covers the period beginning on the date of the enactment of the CARES Act and ending before January 1, 2021. Employers generally are responsible for paying a 6.2% Social Security tax on employee wages. The provision requires that the deferred employment tax 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.
4. Modifications for Net Operating Losses (CARES Act Section 2303)
The new law relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that a NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation thereby allowing an NOL to fully offset income. The new provision provides an opportunity for claiming refunds for taxes paid in earlier years.
5. Modifications of Limitation on Business Interest (CARES Act Section 2306)
Currently, a business cannot deduct interest expenses that exceeds 30% of the business’ taxable income. The CARES 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 taxable income (with adjustments) for 2019 and 2020.
6. Technical Amendments Regarding Qualified Improvement Property (CARES Act Section 2307)
This provision corrects an error in the Tax Cuts and Jobs Act (TCJA) of 2017. When Congress passed the TCJA, it intended to expand the availability of the 100% bonus depreciation on certain purchases, including improvements made to commercial property (so that retail establishments, including restaurants and others businesses in the hospitality industry, could benefit). Unfortunately, due to an apparent drafting error, improvements to the interior of a non-residential building (qualified improvement property) were not actually eligible for a 100% bonus deprecation. The CARES Act fixes this technical drafting error effective retroactively to property placed in service in 2018 and beyond. The new provision provides an opportunity for claiming refunds for taxes paid in earlier years.
7. Exclusion for Certain Employer Payments of Student Loans (CARES Act Section 2206)
Employers can provide an employee up to $5,250 during 2020, subject to certain limitations, as a payment toward the employee’s outstanding student loans. Such payment is tax free to the employee.
The IRS, Treasury Department, and other agencies are expected to release further regulations and guidelines regarding the CARES Act, which we will continue to monitor and analyze.
Disclaimer: The foregoing is not intended to be treated as tax advice and cannot be relied upon in any way. Before relying on anything in this article, you should, and are expected to, discuss such tax law changes with your own tax advisor.