The Senate passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), to provide additional financial assistance to individual and business taxpayers due to the coronavirus pandemic. As of this writing, the House just passed the CARES Act and it is now being sent to President Trump for signature.
Amendments to the Families First Coronavirus Response Act
The CARES Act changes sections of the Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020. One update is that employers subject to the FFCRA may elect to provide even more paid leave than stated by the FFCRA. Note, the related payroll tax credits are capped at the FFCRA’s mandatory paid leave wage amounts.
In addition, the CARES Act expands eligible employees under the paid leave provisions of the FFCRA to workers who were laid off not earlier than March 1, 2020, had worked for the employer for at least 30 of the last 60 calendar days prior to being laid off, and were rehired by the employer.
Employers subject to the FFCRA may receive an advance, including any refundable portions, of FFCRA payroll credits to help cover the expense of providing the required paid leave under the FFCRA.
CARES ACT INDIVIDUAL PROVISIONS
Individual taxpayers will receive a recovery rebate check of $1,200 per individual and $2,400 for married couples filing jointly, plus $500 for each qualifying dependent child. The recovery rebate phases out for taxpayers whose adjusted gross income exceeds $150,000 for joint returns, $112,500 for head of household, and $75,000 for all other taxpayers.
The amount a taxpayer receives is based on information from the taxpayer’s 2019 tax return; if the taxpayer has not yet filed a 2019 return, the amount is based on the 2018 tax return.
The bill liberalizes the retirement plan rules, for 2020, for premature distribution penalties, plan loans and required minimum distributions (RMDs).
The 10% premature early withdrawal penalty is waived for distributions of up to $100,000 from qualified retirement accounts and individual retirement accounts for coronavirus-related purposes. In addition, the federal income tax on such distributions can be paid over a three-year period. The law also provides that these distributions can be recontributed back to the plan within a three-year period without affecting that year’s contribution cap.
The bill provides more flexible rules concerning loans from certain retirement accounts for coronavirus-related relief. The maximum amount of loans (when combined with existing loans) which can be taken from the plan is the lesser of $100,000 (up from $50,000) or 100% of the participant’s accrued benefit (up from 50%).
Charitable Contributions Deduction Modifications
Taxpayers who do not otherwise elect to itemize deductions are allowed an above-the-line deduction in 2020 for up to $300 for charitable contributions made in cash (not stock) to any qualifying Section 501(c)(3) public charity, excluding donor-advised funds.
In addition, for individuals who itemize, the CARES Act temporarily increases limitations on deductions for charitable contributions made in 2020. For individuals, the 60 percent of adjusted gross income limitation is suspended for 2020 for cash contributions to qualifying organizations, excluding donor-advised funds. For contributions of food inventory, the limitation is increased from 15 percent to 25 percent. Excess contributions may be carried forward to future years based on the existing charitable contribution carryforward rules.
Employer Payments of Student Loans Assistance Program
Through December 31, 2020, employers may provide a student loan repayment benefit of up to $5,250 annually to employees tax-free. This extends to both new student loan repayment benefits and other educational assistance provided by an employer under current law.
Expanded Unemployment Insurance Benefits
The CARES Act provides increased unemployment insurance benefits for individuals (including those who are self-employed) who become unemployed, partially unemployed or are unable to work due to COVID-19 on or after January 27, 2020, and on or before December 31, 2020. In general, the unemployment benefit a recipient receives is increased by $600 per week. Benefits may vary by state.
CARES ACT PROVISIONS FOR SMALL BUSINESS OWNERS
The 7(a) loan program, administered by the U.S. Small Business Administration (SBA), provides financial assistance to small businesses. Overall, the CARES Act authorizes an additional $349 billion for general 7(a) business loans. For SBA Express loans, the statutory $350,000 limit is increased to $1 million through December 31, 2020. In general, the SBA responds to Express loans within 36 hours, compared to standard 7(a) loans, which may take weeks to process.
Recipients of 7(a) loans may be eligible for loan forgiveness on covered loans in an amount equal to the sum of the costs incurred on or after February 15, 2020, and on or before June 30, 2020, due to payroll cost, mortgage interest payments, rent or utility payments.
In addition, the CARES Act gives the SBA authority to provide paycheck protection loans to help employers cover costs, including wages, paid leave and state taxes on employee wages. These benefits are available to employers with no more than 500 employees, including nonprofit organizations.
Employee Retention Credit
An eligible employer is allowed a credit against applicable employment taxes for each calendar quarter equal to 50% of qualified wages for each employee for such calendar quarter.
- The amount of qualified wages for any employee taken into account by an employer for all calendar quarters is limited to $10,000.
- The credit is limited to the employment taxes owed as reduced by other credits for all employees of the eligible employer for such calendar quarter.
An eligible employer is one who (a) was carrying on a trade or business during calendar year 2020; (b) with respect to any calendar quarter for which (i) operations are fully or partially suspended due to orders from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19 or (ii) in which (beginning in first calendar quarter after 12/31/2019) there has been a significant decline in gross receipts (i.e., less than 50% gross receipts for the same quarter in the prior year and ending with calendar quarter for which gross receipts are greater than 80% same calendar quarter in prior year). Tax-exempt organizations can also benefit from this credit.
Employer and Self-Employer Individual Deferral of Payroll Taxes
Employers and self-employed individuals can defer the payment of the employer portion of employment taxes or self-employment taxes due during the “payroll tax deferral period” to December 31, 2021, and December 31, 2022. 50% of the deferred taxes will be required to be paid on these dates. Penalties will not apply for failure to make timely deposits for withholding these amounts.
The Payroll Tax Deferral Period is defined as the period beginning on date of enactment to January 1, 2021. This does not appear to be retroactive to January 1, 2020.
Net Operating Loss (NOL) Rules
Rules limiting the use of net operating losses under the Tax Cuts and Jobs Act (TCJA) are suspended under the Stimulus Bill.
- NOLs from 2018, 2019 or 2020 are eligible to be carried back for five years.
- Additionally, the 80% limit on use of NOL carryforwards is also temporarily removed so that the NOL can fully offset income.
Limitation of Individuals’ Use of Business Losses
Under the TCJA, non-corporate taxpayers’ net business losses were limited under IRC section 461(l) to $250,000 ($500,000 for a joint filer). The Stimulus Bill would permit use of net business losses without limit for the 2018 tax year through 2020.
Corporate Alternative Minimum Tax Credit Refund
Under the TCJA, a C corporation with alternative minimum tax credits was entitled to a refund of these credits over a four-year period — 2018, 2019, 2020 and 2021. Under the Stimulus Bill, the corporation can receive the refund over a two-year period 2018 and 2019. Furthermore, if there will be any delay in filing the 2019 C corporation return, an election can be made to include the entire refundable amount in 2018.
Business Interest Limitation Under IRC Section 163(J)
The TCJA includes a limitation on the use of net business interest expense to 30% of Adjusted Taxable Income. The Stimulus Bill amends this rule for 2019 and 2020 and increases the limit from 30% of Adjusted Taxable Income to 50%. Additionally, since it is likely that 2020 income will be lower than in 2019 due to the current economic circumstance, an election can be made to use the 2019 Adjusted Taxable Income for the 2020 tax year.
The Tax Cuts and Jobs Act intended to permit immediate write-off of costs related to Qualified Improvement Property. Due to a drafting error, this provision was not put into that legislation and caused QIP only to be eligible for depreciation over 39 years. The Stimulus Bill fixes this drafting error and specifically permits bonus depreciation to be taken on qualified costs retroactively. This allows amendment of 2018 and 2019 filed returns and provide a source of cash, particularly for those in the hospitality industry.
Excise Tax Exemption
The bill also provides a temporary exception from excise tax on alcohol which is used to produce hand sanitizer. We are waiting to see if the House of Representatives made changes to these provisions. Clearly, they are all intended to provide additional cash to taxpayers.
Tarlow is Here to Help — Contact Us with Questions
At Tarlow, our Partners and staff members are closely monitoring tax-related legislation and regulations. We will continue to update you by sending communications about relevant news and changing guidelines. If you have any questions, please contact your Tarlow advisor.