On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law as an economic stimulus in response to the COVID-19 virus pandemic. A copy of the CARES Act can be found here. The CARES Act contains a broad number of provisions aimed at providing relief to individuals, businesses, hospitals and the health care system, and distressed sectors of the economy. The following summary highlights certain tax relief provisions included in the CARES Act.
Individual Tax Relief Provisions
- Individual Recovery Rebates: The CARES Act provides for Individual Recovery Rebates in the form of an income tax credit for 2020 for eligible individuals equal to the sum of: $1,200 ($2,400 for eligible individuals filing a joint return) plus $500 for each qualifying child of the taxpayer. The credit is reduced for individual taxpayers with adjusted gross income in excess of $75,000 ($150,000 for joint filers) and is fully phased out for individual taxpayers with adjusted gross income in excess of $99,000 (for joint filers with no children with adjusted gross income exceeding $198,000). Eligible individuals include any individual other than a nonresident alien or an individual for whom a dependency deduction is allowable to another taxpayer for the tax year and is available to those with no income and those whose income is derived from non-taxable means-tested benefit programs such as SSI. Although the rebate is technically a credit for 2020, it is generally treated as a 2019 overpayment so that eligible individuals should receive rebates automatically without the need for additional action.
- Waiver of Early Distribution Penalty for Certain Coronavirus-Related Distributions from Retirement Plans: The CARES Act makes the 10-percent additional tax on early distributions from qualified retirement plans inapplicable to any coronavirus-related distribution, up to $100,000. Coronavirus-related distributions are those made from an eligible retirement plan during calendar year 2020 to a qualified individual, which is an individual who (or whose spouse or dependent) has been diagnosed with COVID-19 or who has had adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury. Unless elected otherwise, income from such a distribution will be recognized ratably over three years and taxpayers receiving such distributions may contribute such amount back to the retirement plan within the next three years.
- Required Minimum Distribution Waiver for 2020: For calendar year 2020, the CARES Act temporarily waives the required minimum distribution rules for certain defined contribution plans and individual retirement plans, and also provides relief to certain individuals who would otherwise be required to make required distributions during 2020.
- Partial Allowance of Above-the-Line Charitable Contributions: The CARES Act allows individual taxpayers can deduct up to $300 of cash contributions made to a public charity in 2020 as an above the line deduction even if they do not itemize deductions.
- Modification of Charitable Contribution Limitations for 2020: Under the CARES Act, for 2020, the limitations applicable to charitable contributions made by individuals and corporations have been modified. An individual’s qualifying contributions to public charities can be as much as 100% of the contribution base. In addition, the limitation applicable to certain donations of food inventory to charitable organizations has been raised from 15% of aggregate net income of the taxpayer to 25% for qualifying donations made in 2020.
- Income Exclusion for Employer Student Loan Payments: Payments made by an employer after the enactment of the CARES Act and before January 1, 2021, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (up to $5,250 per employee) are excluded from the employee’s gross income.
Business Tax Relief Provisions
- Employee Retention Tax Credit: Under the CARES Act, eligible employers carrying on a trade or business during 2020 can qualify to receive a refundable tax credit against applicable employment taxes for each calendar quarter an amount equal to 50% of the qualified wages (up to $10,000 per employee) with respect to each employee of such employer for wages paid after March 12, 2020, and before January 1, 2021. The credit is available to employers (i) whose operations have been fully or partially suspended during the due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19, or (ii) who have experienced a significant decline in gross receipts (more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding quarter of the prior year). Employers with an average number of full-time employees in 2019 in excess of 100 can take the tax credit for eligible wages of any employee not providing services due to COVID-19. Employers with an average number of full-time employees in 2019 of 100 or less can take the tax credit for all eligible wages of any employee, whether or not such employees have been providing services. Qualifying wages will be reduced for any wages taken into account for determining payroll tax credits received under the Families First Coronavirus Response Act. The credit is not available to employers receiving Small Business Interruption Loans.
- Delay of Payment of Employer Payroll Taxes: The CARES Act allows employers to defer paying the employer portion of certain payroll taxes and allows self-employed taxpayers to defer 50% of the self-employment taxes due for periods from the enactment date for the CARES Act through the end of 2020. Such deferred amounts will be required to be paid in two equal installments, one due at the end of 2021, the other due at the end of 2022. Estimated tax payments owed during this deferral period would also exclude the deferred payroll taxes. This relief is not available to any taxpayer if such taxpayer has had indebtedness forgiven under the CARES Act for certain loans under Small Business Act (as modified by the CARES Act).
- NOL Modifications: The CARES Act modifies limitations on the ability to utilize net operating losses that were included as part of the legislation enacted in 2017 originally introduced and referred to as the 2017 Tax Cuts and Jobs Act. These limitations prohibited net operating losses from being carried back to prior years and limited deductions for such losses arising after 2017 to 80% of taxable income. Under the CARES Act, taxpayers can carryback 100% of net operating losses incurred after 2017 and prior to 2021 to the prior five tax years. Additionally, can deduct net operating losses equal to 100% of taxable income for taxable years prior to 2021 (although the 80% limitation is reinstated in 2021 for any such losses arising after 2017).
- Modification of Loss Limitations for Non-Corporate Taxpayers: The CARES Act temporarily modifies another part of the legislation enacted in the 2017 Tax Cuts and Jobs Act, the excess business loss limitation for noncorporate taxpayers (that limits active net business losses in excess of $250,000 ($500,000 for joint filers) and treats such amounts as carryforwards in the following tax year). The CARES Act waives the application of this limitation until 2021 so that such taxpayers can deduct excess business losses arising in 2018, 2019, and 2020.
- Modification of Credit for Prior Year Corporate Minimum Tax Liability: Under the 2017 Tax Cuts and Jobs Act, corporations were allowed to use outstanding corporate alternative minimum tax credits (the corporate alternative minimum tax was repealed by the 2017 Tax Cuts and Jobs Act) subject to certain limitations on usage for tax years before 2021, at which time any remaining credit could be claimed as fully-refundable. The CARES Act allows corporations to accelerate 100% of outstanding corporate alternative minimum tax credits as fully-refundable in 2019 and allows for an election to be made to further accelerate such credits as fully-refundable for 2018.
- Business Interest Limitation Modifications: The CARES Act modifies the limitation on business interest deduction enacted in the 2017 Tax Cuts and Jobs Act (which generally limited such deduction to 30% of adjusted taxable income) and generally allows businesses (other than partnerships) to increase the interest limitation to 50% of adjusted taxable income for 2019 and 2020. Partnerships only receive the increase in the limitation to 50% for 2020 (however, absent an election otherwise, partners of a partnership can deduct 50% of the 2019 excess business interest expense in 2020). Businesses may elect to use 2019 adjusted taxable income in calculating their 2020 limitation. In addition, businesses may elect to opt out of the increased limitation percentage.
- Qualified Improvement Property Technical Amendments: The CARES Act makes a technical correction to the 2017 Tax Cuts and Jobs Act that retroactively treats certain qualified building improvements as eligible for first year bonus deprecation or for treatment as 15-year depreciable property (or 20 years, if the alternative depreciation system applies), rather than having a 39-year recovery period, as required under the 2017 Tax Cuts and Jobs Act.
- Temporary Excise Tax Exception for Alcohol Used to Produce Hand Sanitizer: The CARES Act suspends excise taxes on alcohol withdrawn during 2020 for use in or contained in hand sanitizer produced and distributed in a manner consistent with FDA guidance related to the outbreak of virus SARSCoV- 2 or COVID-19.
- Temporary Repeal of Aviation Excise Taxes: Under the CARES Act, excise taxes on air transportation and on kerosene used in commercial aviation are suspended form March 28, 2020 to December 31, 2020.
- Modification of Corporate Charitable Contribution Limitations for 2020: Under the CARES Act, for 2020, the limitations applicable to charitable contributions made by individuals and corporations have been modified. A corporation’s qualifying contributions can be as much as 25% of (modified) taxable income. In addition, the limitation applicable to certain donations of food inventory to charitable organizations has been raised from 15% of income of the corporation to 25% for qualifying donations made in 2020.