On March 27, 2020, President Trump signed into law the congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act is 880 pages long and is broken into two divisions:
- Division A – Keeping Workers Paid and Employed, Healthcare System Enhancements and Economic Stabilization
- Division B – Emergency Appropriations for Coronavirus Health Response and Agency Operations
The focus of this summary is only on the CARES Act’s Subtitle C – Business Tax Provisions and Subtitle B-Individual Tax Provisions. Aronson will be releasing separate analyses of the other relevant provisions of the CARES Act that are impacting our clients. These can also be found on our COVID-19 Resource Page.
Subtitle C – Business Provisions is broken down into the following 8 (eight) sections of which we will go into detail on the first seven (7) sections:
- Employee retention credit for employers subject to closure due to COVID-19 (Section 2301)
- Delay of payment of employer payroll taxes (Section 2302)
- Modifications for net operating losses (Section 2303)
- Modification of limitation on losses for taxpayers other than corporations (Section 2304)
- Modification of credit for prior year minimum tax liability of corporations (Section 2305)
- Modifications of limitation on business interest (Section 2306)
- Technical amendments regarding qualified improvement property (Section 2307)
- Temporary exception from excise tax for alcohol used to produce hand sanitizer (Section 2308)
1) Employee Retention Credit for Employers Subject to Closure Due to COVID-19:
Eligible employers are allowed a credit against applicable employment taxes for each calendar quarter for an amount equal to half of the qualified wages paid to each employee during that quarter.
The amount of credit is 50% of Qualifying wages paid up to $10,000 in total to an employee for all quarters (Maximum Credit per Employee is $5,000). The qualified wage base includes qualified health plan expenses properly allocable to such wages. The credit for any calendar quarter is limited to the applicable employment taxes on the wages paid to all employees during that same calendar quarter. Any quarterly excess credit will be treated as an overpayment and refunded to the employer.
Eligible employer is defined as:
- Any employer that was carrying on a trade or business during calendar year 2020.
- During any calendar quarter had either:
- The operation of that trade or business was fully or partially suspended during that calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
- Had a significant decline in gross receipts (as defined below)
- Begins in the first calendar quarter of 2020 for which employer’s gross receipts in that calendar quarter were less than 50% of the gross receipts for the same calendar quarter in the prior year (a year-over-year comparison); and
- Ends with the calendar quarter where gross receipts of the employer are greater than 80% of the same calendar quarter in the prior year.
- If an employer has greater than 100 full-time employees, the wage base on which the credit is determined will be limited to the only employees not providing services due to COVID-19.
- The Employee Retention Credit may also be limited if the employer receives other payroll tax credits (Work Opportunity Credit, Paid Family and Medical Leave, etc.).
- The Employee Retention Credit may be recaptured if the employer subsequently takes advantage of the Small Business Interruption Loan as that program creates ineligibility for this credit.
- The Employee Retention Credit shall only apply to wages paid after March 12, 2020 and before January 1, 2021.
- Newly issued IRS guidance instructs taxpayers to NOT include the Employee Retention Credit in the Q1 2020 Payroll tax filings, but to include 50% of qualifying wages paid between March 12, 2020 and March 31, 2020 with the Q2 2020 payroll filings.
2) Delay of Payment of Employer Payroll Taxes:
The due date for remitting the employer portion of payroll tax deposits for wages paid in 2020 have been deferred. This also applies to 50% of self-employment taxes related to Social Security and Railroad Retirement wages paid in 2020. 50% of the deferred deposit is required to be paid by December 31, 2021 and the remaining 50% is due by December 31, 2022.
If the employer (self-employed) takes advantage of the SBA loan forgiveness program (as provided under the CARES Act), it is ineligible for the payroll tax deferral program.
Certified Professional Employer Organizations (PEO) can be directed by their customers to apply the payroll tax deferral program and customer will be solely liable for the payment of applicable employment taxes.
3) Modifications for Net Operating Losses:
The limitations on Post-2017 net operating loss (NOL) carryovers imposed by the Tax Cuts and Jobs Act of 2017 (TCJA) have been temporarily repealed. The TCJA applied an 80% limitation on Post-2017 NOL utilization as well as eliminated the ability to carryback Post-2017 NOLs against Pre-2018 taxable income. The CARES Act now allows NOLs generated in 2018, 2019 and 2020 to be carried back five (5) years to provide taxpayers with potential tax refund claims. The TCJA limitations will go back into effect for tax years beginning after December 31, 2020.
Note: Tentative Refund Claims for NOL carrybacks (Form 1139) must be submitted in 120 days from date of enactment, which was March 27, 2020.
4) Modification of Limitation on Losses for Taxpayers Other than Corporations:
The TCJA created an excess business loss limitation on non-corporate taxpayers. That limited the use of business losses over a threshold amount: $250,000 or $500,000 for joint tax returns (indexed for inflation). The CARES Act pushes back the application of the Excess Business Loss Limitation to tax years beginning after December 31, 2020.
(Note: The way this Section 2304 is written, it would allow a retroactive effect causing the Excess Business Loss to be eliminated for tax years 2018 through 2020. However, since a return filed with a 2018 excess business loss would carry over to 2019 as a Net Operating Loss, it is unclear whether affected taxpayers would only need to adjust the post-2019 excess losses or be compelled to amend the earlier filing for tax year 2018.)
5) Modification of Credit for Prior Year Minimum Tax Liability of Corporations:
The TCJA eliminated the Corporate Alternative Minimum Tax (AMT). The CARES Act allows AMT credits to now be refundable on corporate tax returns filed before December 31, 2020.
6) Modifications of Limitation on Business Interest:
The TCJA imposed a limitation on business interest expense deductions based on 30% of “adjusted taxable income” (ATI). The CARES Act temporarily increases that limitation to 50% of ATI for tax years 2019 and 2020.
Taxpayers may elect out of this increased limitation. Taxpayers may also elect to use 2019 ATI to calculate the 2020 business interest expense limitation. If this election is for a short taxable year, the 2019 ATI on which the 2020 limitation is calculated is pro-rated based on the number of months in short taxable year.
7) Technical Amendments Regarding Qualified Improvement Property:
The final version of the TCJA inadvertently created technical errors in a number of areas. The CARES Act includes a technical correction for qualified improvement property. This correction allows symmetry in the 15 year useful life for both bonus deprecation and IRC Section 179 purposes. This is a retroactive application as if the TCJA included this modification.
Subtitle B – Individual Provisions of CARES Act
1) 2020 Recovery Rebates Advances
The CARES Act provides credits of up to $2,400 for married couples filing joint returns ($1,200 for all other filers). The credit amount is further increased by $500 for each eligible child (under age 17).
The amount of advance rebate is based on the following Adjusted Gross Income (AGI) Thresholds and filing status:
- $150,000 – Married Filing Joint
- $112,500 – Head of Household
- $75,000 – All other filers
If the AGI exceeds above thresholds, the rebate is reduced by 5% of income in excess ($50 for each $1000 that taxpayer’s income exceeds the statutory limits). The amount of rebate is fully phased out for joint filers at $198,000, head of household filers at $136,500, and single filers at $98,000 (without consideration of the $500 additional per child rebate).
For many taxpayers the amount of advance rebate will be based on their 2019 filed tax return (or 2018 if 2019 has not been filed yet). The reconciliation of actual tax credit will occur when the taxpayers file their 2020 tax return in 2021. This is done similar to the Advance Premium Credit under Affordable Care Act.
2) Special rules for use of retirement funds
Similar to prior federally-declared disaster relief programs (ex. hurricanes, tornadoes, floods, wildfires), the CARES Act provides the following:
A. 10% Penalty exemption on early distributions (up to $100,000) from retirement plans
This provision effectively allows individuals under age 59 ½ to access retirement funds and not be subject to the 10% penalty. A qualified individual is an individual:
- who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC)
- whose spouse or dependent is diagnosed with such virus or disease by such a test
- who experiences 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
- who is unable to work due to lack of child care due to such virus or disease
- who is closing or reducing hours of a business owned or operated by the individual due to such virus or disease
- who meets other factors as determined by the Secretary of the Treasury
In addition, these coronavirus-related distributions also include the following tax benefits:
- Exempt from the 20% mandatory federal income tax withholding
- Can be contributed back to the retirement plan during a 3-year period
- Can be included in income ratably over 3-year period
B. Flexibility for loans from qualified plans
- The max amount increased from $50,000 to $100,000
- The percentage of vested balance eligible to be distributed increased from 50% to 100% (up to $100,000)
- The 2020 repayment amounts can be deferred for one year
C. Temporary Waiver of Required Minimum Distributions (RMDs)
The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who are required to take distributions in 2020 as well as individuals who opted out to delay their first 2019 distribution until April 1, 2020 (individuals that turned 70 ½ in 2019 would in fact be exempt from two distributions in 2020).
For taxpayers that have already taken their 2020 RMDs, the provision provides for a special rollover rule (similar to the one enacted in 2009), allowing amounts subject to the RMD rules in 2020 that have already been taken to be rolled over back into a retirement account.
3) Allowance of Partial Above the Line Deduction for Charitable Contributions
The provision allows individuals to contribute to qualified charitable organizations (notably excluding donor advised funds) in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not. This provision is made permanent for tax years beginning after December 31, 2019.
4) Modification of Limitations on Charitable Contributions During 2020
The provision increases the limitation on deductions for charitable contributions for individuals by suspending the 50-percent of adjusted gross income limitation for 2020. If the total 2020 charitable contributions fully offset the 2020 income tax liability, any excess contributions may still be carried forward as a charitable contribution for up to 5 years.
5) Exclusion for Certain Employer Payments of Student Loans
The provision allows employers from the date of enactment of the law, through the end of the year, to provide employees with up to $5,250 towards employee’s student loans and exclude those amounts from their income. The $5,250 cap applies to both the new student loan repayment benefit as well as other traditional educational assistance like tuition reimbursement.
As the COVID-19 response evolves, Aronson’s tax advisors will continue to monitor changes to IRS practices and procedures and future guidance promulgated by the IRS to best support our clients during this difficult time. If you are facing any of these situations, contact one of Aronson’s tax professionals at 301.231.6200.