CARES Act: Individual and Business Relief ProvisionsMarch 27, 2020
Rebates Tax Relief to U.S. Individual Taxpayers
The CARES Act provides cash to eligible individuals and families through a process known as “recovery rebates.” The rebate amount for individual taxpayers is $1,200 and married couples filing jointly will receive a maximum of $2,400. There is also an additional rebate of $500 for each child under the age of 17 who qualifies for the tax credit. Individuals with no income or who have income from non-taxable sources are also eligible for the rebate.
Rebates will be phased out based on the Adjusted Gross Income (AGI) of the taxpayer. The phaseout amount is 5% of the taxpayer’s AGI that exceeds:
- $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 any other qualified individual (not including estates or trusts).
Qualified Retirement Plans
The CARES Act provides a waiver of the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus related purposes made on or after January 1, 2020. “Coronavirus related” distributions may be recontributed (in one or more contributions up to the amount distributed) within three years from the date the distribution was received without regard to annual contribution limits. To the extent the distribution is not repaid within the three-year period, the income inclusion on a coronavirus related distribution can be spread ratably over three tax years.
The new law also includes a provision that waives the 2020 required minimum distribution regardless of whether the taxpayer has been impacted by coronavirus. The waiver applies to taxpayers with a required beginning date during 2020, and the calendar year 2020 is disregarded for purposes of the five-year rule.
To incentivize charitable contributions, the CARES Act provides an above-the-line deduction for “qualified charitable contributions” up to $300 for individuals who do not itemize deductions. A “qualified charitable contribution” is a charitable contribution which is made in cash to a charitable organization that is not a supporting organization, Donor Advised Fund or a contribution carryover from a prior year. The CARES Act also increases the income limitations on charitable deductions by suspending the 50% adjusted gross income (AGI) limitation for 2020.
Thus, individuals may deduct qualified contributions in 2020 up to 100% of their AGI. Any excess qualified contributions are carried forward to future years in the same manner as other charitable contribution carryovers.
Business Tax Provisions
Employee Retention Credits and Payroll Tax Deferment
Businesses and non-profits that do not receive Small Business Administration (SBA) loans eligible for forgiveness may be entitled to claim refundable credits against their quarterly payroll tax liabilities. The maximum credit is 50% of qualified employee wages up to $10,000 (a credit of $5,000 per employee) paid between March 12 and December 31, 2020. For employers with more than 100 employees, only wages paid to employees who are not working due to COVID-19 are eligible for the credit. There is no work requirement for employers with 100 or fewer employees. The credit is reported on the employer’s quarterly employment tax return and is a refundable credit to the extent that it exceeds the combined employer and employee payroll and withholding taxes.
Also, all employers and self-employed individuals may defer the payment of the 6.2% employer payroll tax on wages paid during 2020. Half of the amount otherwise payable is due December 31, 2021 and the remainder is due December 31, 2022. However, this deferral is not available to an employer who has any SBA loan forgiven under the program discussed above.
Lessened Limitations on Use of Net Operating Losses (NOLs)
The CARES Act makes certain changes to the loss provisions made by the Tax Cuts and Jobs Act (TCJA) in order to allow companies to claim refunds for certain losses incurred in prior years. Specifically, the CARES Act removes the 80% of taxable income limitation on NOLs arising in tax years 2018, 2019 or 2020, and allows those NOLs to be carried back five years.
Alternative Minimum Tax Credit
The TCJA eliminated the alternative minimum tax for corporations for tax years after 2017. Corporations could claim refundable credit for any unused minimum tax credits through 2021. The amount of the credit is limited to 50% of any excess minimum tax in 2018-2020 and becomes fully refundable in 2021. The CARES Act accelerates the year the credit becomes fully refundable to 2019 and allows a corporation to elect to claim the fully refundable credit in 2018.
Modification of the Section 163(j) Limitation on Business Interest Expense
The new law temporarily increases the amount of interest expense that businesses may deduct. For tax years beginning in 2019 and 2020, the 30% limitation is replaced by a 50% limitation for taxpayers other than partnerships. A taxpayer other than a partnership may elect not to apply the 50% limitation for tax years 2019 or 2020. A partnership may elect not to apply the 50% limitation for only the 2020 tax year.
For partnerships with tax years beginning in 2019, 50% of the excess business interest expense allocated to the partner is treated as a deduction (without regard to the excess taxable income limitation) in the partner’s first taxable year beginning in 2020 and is not subject to the 163(j)(1) limitation. The remaining 50% of the excess business interest expense is treated the same as any other excess business interest expense.
Immediate Cost Recovery of Qualified Improvements
The CARES Act corrects the TCJA provision that excluded qualified improvement property from the 15-year class life and prevented bonus depreciation.
Suspension of Limitation on Excess Business Losses
The CARES Act removes the 461(l) (relating to certain farm losses) limitation for tax years beginning after December 31, 2017 and before January 1, 2021 (i.e., 2018, 2019 and 2020 tax years). The legislation also made several technical corrections to TCJA regarding the calculation of the 461(l) (relating to certain non-corporate entities) limitation, including:
- treating the disallowed loss as a NOL carryover under Section 172(b) in the subsequent year(s);
- clarifying that the aggregate trade or business deductions of the tax are calculated without regard to Section 172 (NOL deduction) or Section 199A (Qualified Business Income Deduction);
- clarifying that the excess business loss is calculated without regard to deductions, gross income or gains attributable to any trade or business of performing services as an employee; and
- adds an additional provision clarifying the treatment of capital losses by providing that (a) deductions for capital losses are not considered in determining the aggregated trade or business deductions of a taxpayer, and (b) capital gains attributable to the trade or business of the taxpayer is the lesser of net capital gains of the taxpayer attributable to a trade or business or the net capital gain income of the taxpayer.
Business Loan Provisions
The CARES Act provides for new direct SBA loan programs. Any “small business” (generally a business with less than 500 employees) can apply for loans up to the lesser of 2.5X their average monthly payroll costs or $10 million. Loan proceeds must be used to pay for payroll costs, mortgage interest, rent and/or utilities and are made on a non-recourse basis with no personal guarantees. The interest rate is capped at 4%, and the loan is payable over no longer than 10 years.
Businesses are eligible for tax-free forgiveness of some or all of the principal amount borrowed, presuming they expend the proceeds on qualifying expenditures (payroll, rent, interest, etc.) during the eight-week period following the loan funding date. Businesses that receive loans but that cut back on workforce levels or gross payroll after February 15, 2020 are only eligible for limited forgiveness (pursuant to certain formulas) unless they restore their current workforce levels and gross payroll to pre-COVID-19 emergency amounts by June 30, 2020.
Also, the SBA Economic Injury Disaster Loan (EIDL) program has been liberalized. More small businesses may apply for loans of up to $2 million, depending on economic damages and ability to repay, with an interest rate of no more than 4% and a repayment term of up to 30 years. Small (less than $200,000) loans are made without the need for personal guarantees, and applicants are eligible to receive advances of up to $10,000 within three days of applying. While EIDL loans are not subject to forgiveness, they do present an additional potential source of funds for businesses that are struggling through the current crisis, and loan proceeds may be expended on things other than payroll, interest, rent or utilities.
If you have any questions, please feel free to contact your Marks Paneth tax advisor. You may also visit our Pandemic Resource Center for additional updates and guidance on the coronavirus (COVID-19).