CARES Act Tax Provisions Summary
Written by senior manager, Tony Montanaro, CPA/ABV, CFE
The Senate passed The Coronavirus Aid, Relief, and Economic Security (CARES) Act, H.R. 748 earlier this week. The House is expected to pass it shortly and it is also expected that the President will quickly sign it into law. It includes a significant number of tax measures as part of the $2.2 trillion economic aid package. The aim of the tax relief included in the bill is to provide additional liquidity to individuals and businesses impacted by the COVID-19 pandemic.
Tax Relief for Individuals
The CARES Act provides recovery rebates to individual taxpayers. The rebates are advance refunds of credits against 2020 taxes and are based on taxpayers’ 2018 income tax returns (or 2019 if already filed). The bullet points below summarize key aspects of the rebate.
- $1,200 for individuals, $2,400 for joint filers, and a $500 credit for each dependent child.
- Phaseout begins at adjusted gross income (“AGI”) of $75,000 for single filers, $112,500 for heads of household, and $150,000 for joint filers and completely phaseout at $99,000 for single filers, $136,5000 for heads of household, and $198,000 for joint filers.
- Rebates are not available for nonresident aliens, individuals claimed as a dependent on another return, estates and trusts.
Individuals (and joint filers) who receive a lower rebate due to the phaseout but earn less during the 2020 tax year than in 2018 (or 2019 if already filed) would be eligible to receive additional rebates up to the $1,200 max ($2,400 for joint filers) when they file their 2020 tax return. Conversely, individuals who receive a refund based on their 2018 or 2019 AGI do not have to repay the refund if their 2020 AGI exceeds the phaseout threshold.
The 10% penalty on early withdrawals of up to $100,000 from qualified retirement plans is waived for individuals for coronavirus-related reasons. The penalty waiver is generally allowed for any distribution made due to the following reasons:
- An individual (or spouse) being diagnosed with COVID-19 with a CDC-approved test; or
- The individual experiences adverse financial consequences resulting from quarantine, business closure, layoff, or reduced hours due to COVID-19.
Any income attributable to the early withdrawals will be taxed over a three-year period and the amount of the withdrawal may be recontributed to the plan without regard to annual contribution caps if done within three years of the withdrawal.
Minimum distribution requirements are waived for 2020, with no additional COVID-19 related prerequisites.
Student loans paid by employers
Employees may exclude up to $5,250 from their income for an education loan paid by an employer. The loan must relate to a loan incurred by the employee for the education of the employee and may include educational assistance items such as fees and books. The exclusion only applies to payments made from the enactment date of the Act through January 1, 2021.
Individuals will be allowed a $300 “above-the-line” deduction for charitable contributions. This “above-the-line” deduction means that even individuals who do not itemize their deductions may claim the deduction. In addition, for the 2020 tax year the 50% of AGI limitation is waived, allowing individuals to claim an unlimited itemized deduction for charitable contributions.
Tax Relief for Businesses
Employee Retention Credit
The CARES Act provides eligible employers a credit up to $10,000 per employee against payroll taxes equal to 50% of qualified wages paid to employees. Employers experiencing a partial or complete operational suspension as a result of the COVID-19 outbreak or those with gross receipts less than 50% of their gross receipts for the same quarter in the prior year are eligible for the credit. Employers claiming the credit due to the 50% reduction in gross receipts may continue to do so until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. The credit applies to wages paid after March 12, 2020 and before January 1, 2021. For employers with more than 100 employees, wages eligible for the credit are wages the employer pays employees who are not providing services due to the operational suspension or drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit.
Net Operating Losses
The 80% income limitation for net operating loss (“NOL”) deductions for years beginning before 2021 is temporarily repealed, allowing sufficiently large NOL carrybacks or carryovers to fully offset taxable income. For losses incurred during the 2018, 2019, and 2020 tax years, a five-year carryback is permitted. C Corporations may amend or modify tax returns for tax years potentially dating back to 2013 to utilize an NOL carryback.
The CARES ACT suspends loss limitation rules that previously preluded owners of flow-through entities and sole proprietorships from carrying back NOLs, allowing taxpayers owning such businesses to benefit from NOL carrybacks. To provide some background, provisions implemented with the Tax Cuts and Jobs Act (“the TCJA”) preclude individual owners of sole proprietorships and flow-through entities from deducting losses in excess of $250,000 ($500,000 for married taxpayers filing jointly). Under the TCJA, any excess loss is converted to a NOL which cannot be carried back to prior tax years. The CARES Act suspends the foregoing loss limitation rules for the 2018, 2019, and 2020 tax years.
Alternative Minimum Tax (AMT)
The AMT credit is modified for corporations to make it a fully refundable credit for 2018. Under previous tax law, corporations could claim a refundable portion of any unused AMT credits through 2021. The amount of refundable credit was limited to 50% of any excess AMT in 2018 through 2020, before being fully refundable in 2021. The CARES Act accelerates the year in which a fully refundable credit can be received to 2019 and taxpayers may elect to claim a fully refundable credit in 2018.
Business Interest Expense Limitation
For tax years beginning after 2017, the business interest expense limitation is increased from 30% of adjusted taxable income to 50% The limitation does not apply to taxpayers with average annual gross receipts for the prior three-year period of $26 million or less for 2020. Also, taxpayers have the option to use their 2019 adjusted taxable income to calculate the limitation for 2020 (based on the expectation that most businesses will have lower income in 2020 compared to 2019).
Qualified Improvement Property
The Act also amends a provision of the TCJA relating to the depreciable life of qualified improvement property. The CARES Act defines all qualified improvement property as 15-year property, making such property eligible for bonus depreciation so long as the other pertinent requirements are satisfied. The change is effective retroactively for property acquired and placed in service after September 27, 2017. 2017 and 2018 tax returns may be amended for these changes.
Excise Tax Relief
Alcohol products used in the production of hand sanitizer are temporarily exempted from excise taxes. Excise taxes on aviation and kerosene used in aviation fuel are also suspended. The exemptions and suspensions only apply to 2020.
The CARES Act contains loan forgiveness programs aimed at providing support to small businesses. Loans forgiven under these programs are excluded from taxable income. As a reminder, absent an exception, generally when a taxpayer’s debts are cancelled, the taxpayer must recognize taxable income equal to the amount of cancelled debt. The loan forgiveness programs at issue provide eligible small businesses an exception.
For corporations, the AGI limitation applicable to the charitable contribution deduction is increased from 10% to 25%. For charitable contributions of food inventory, the AGI limitation is increased from 15% to 25% for the 2020 tax year.
The Act contains other tax-related provisions including:
- An amendment to the rules for high-deductible health plans, permitting such plans to cover telehealth and certain other remote care services without charging a deductible;
- The inclusion of over-the-counter menstrual products as qualified medical expenses for purposes of health savings account distributions;
- Pension funding relief for failure to satisfy contribution requirements to defined contribution plans during 2020; and
- Permitting certain charitable employers whose primary exempt purpose is proving services to mother and children to use small employer charity pension plan rules.
- Employer-side Social Security payroll tax payments may be delayed until January 1, 2021, with 50 percent owed on December 31, 2021 and the other half owed on December 31, 2022. The Social Security Trust Fund will be backfilled by general revenue in the interim period.