Late in the evening on Wednesday, March 25, 2020, the United States Senate unanimously passed H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act”. The CARES Act was approved by a vote in the House and signed by President Trump on Friday, March 27, 2020. This legislation is the third and most expensive stimulus bill to be enacted as a result of the COVID-19 pandemic in the United States. It will provide more than $2 Trillion of assistance to individuals, businesses, healthcare providers and state governments. Some of this assistance will be provided through the Tax Code. That is the focus of this summary. Provisions generally are prospective from enactment or apply to calendar year 2020. However, certain business provisions of the Act apply retroactively to earlier taxable years and taxpayers will be able to amend prior years’ tax returns and claim refunds.
2020 Recovery Rebates
The most publicized part of the CARES Act is the provision of recovery rebates to quickly get cash into the hands of lower and middle class Americans. All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, will be eligible for a $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. This rebate will also be paid to 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 rebate amount is reduced (but not below zero) by five percent of so much of the taxpayer’s adjusted gross income as exceeds a phase-out threshold equal to:
- $150,000 in the case of a joint return,
- $112,500 in the case of a head of household, and
- $75,000 in the case of a single taxpayer.
The amount is completely phased-out for joint filers with no children having incomes exceeding $198,000, $146,500 for head of household filers with one child, and $99,000 for single filers with no children.
Coronavirus Related Distribution of Retirement Funds
The CARES Act waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief by increasing the loan limit to the lesser of $100,000 (from $50,000) or the present value of the nonforfeitable accrued benefit under the plan (from one-half of the present value of the nonforfeitable accrued benefit).
A coronavirus-related distribution is 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 Treasury Secretary.
Temporary waiver of required minimum distribution rules for certain retirement plans and accounts
Generally, taxpayers are required to begin taking required minimum distributions from certain defined contribution plans or IRAs beginning April 1 in the calendar year after the calendar year in which they turn 72 or if later, they retire. The CARES Act waives these required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise have to sell investments in their accounts at depressed valuations due to the COVID-19 pandemic in order to make required distributions.
Allowance of partial above the line deduction for charitable contributions
Under current law, individuals may deduct charitable contributions only if they itemize deductions (rather than take the standard deduction). For the 2020 taxable year, the CARES Act allows individual taxpayers who do not itemize deductions to deduct up to $300 of cash charitable contributions.
Modification of limitations on charitable contributions during 2020
The CARES Act increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50-percent of adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent limitation is increased to 25 percent of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent.
Exclusion for certain employer payments of student loans
The CARES Act will enable employers to provide a new student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both this new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
Employee retention credit for employers subject to closure due to COVID-19
The CARES Act provides a refundable credit against the employer share of Social Security tax for 50 percent of qualified wages paid by employers to employees from March 13, 2020 through December 31, 2020. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. Qualified wages are limited to first $10,000 of compensation, including health benefits, paid to an eligible employee.
Delay of payment of employer payroll taxes
The CARES Act will allow employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government. Self-employed individuals pay this tax as self-employment taxes. 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. Self-employed individuals may reduce estimated tax payments to reflect this deferral.
Modifications for net operating losses
Under current law, net operating losses (NOL) are subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an 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 to allow an NOL to fully offset income. These changes will allow businesses to utilize losses and amend prior year returns to provide cash flow and liquidity during the COVID-19 emergency.
Modification of limitation on losses for taxpayers other than corporations
Under current law, a noncorporate taxpayer can deduct business losses against no more than $250,000 (or $500,000) of nonbusiness income (amounts adjusted for inflation). The CARES Act modifies the loss limitation applicable to pass-through businesses and sole proprietors, so in 2020, they can utilize excess business losses.
Modification of credit for prior year minimum tax liability of corporations
The corporate alternative minimum tax (AMT) was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The CARES Act accelerates the ability of corporations to recover those AMT credits to claim a refund now.
Modification of limitation on business interest
The Tax Cuts and Jobs Act limited the amount of interest a business may deduct to 30 percent of taxable income. The CARES Act temporarily increases the amount of interest expense businesses are allowed to deduct to 50 percent of taxable income (with adjustments) for 2019 and 2020. Further, taxpayers could elect to use 2019 taxable income for purposes of determining the 2020 limitation.
Technical amendment regarding qualified improvement property
The CARES Act corrects an error in the Tax Cuts and Jobs Act that assigned a 39-year life for depreciation purposes to any improvement to the interior of a nonresidential real property that’s placed in service after the building itself (“qualified improvement property”). Congress intended to assign a 15-year life to qualified improvement property and allow 100 percent bonus depreciation of such property. The CARES Act correction assigns a 15-year life to qualified improvement property and enables businesses to write off immediately the costs associated with such property. This amendment is made effective for property placed in service after December 31, 2017. Taxpayers to whom this provision applies may claim refunds by amending a prior year return.
Temporary exception from excise tax for alcohol used to produce hand sanitizer
The CARES Act waives the federal excise tax for calendar year 2020 on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration.