Tax Provisions of the CARES Act
On Friday, March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which includes relief for taxpayers adversely affected by the COVID-19 pandemic. Below is a summary of the tax-related amendments made by the CARES Act. These tax law changes present opportunities for business and individual taxpayers to obtain tax refunds, defer tax payments, and lower their current or future taxes.
Business Tax Provisions
Employee Retention Credit
Eligible employers are entitled to a refundable credit of as much as $5,000 per employee against their payroll tax liability. This applies to employers that have fully or partially suspended operations due to certain COVID-related government orders, or that experience a 50% or greater reduction in gross receipts during specified periods. There are numerous eligibility requirements for this credit.
Delay of Employer Payroll Taxes
Employers can defer payment of the 6.2% employer payroll tax attributable to wages paid during 2020: Half of the deferred taxes will be due December 31, 2021, and the remaining half are due December 31, 2022. Similar relief applies to self-employed individuals who owe comparable self-employment taxes.
Treatment of Net Operating Losses
Net operating losses (“NOLs”) arising in 2018-2020 are eligible for a 5-year carryback. In addition, the limitation on the amount of NOL that can be used to offset income (80% of taxable income) will not apply until 2021. Other specialized NOL provisions apply to REITs, life insurance companies, and taxpayers who repatriated foreign earnings under I.R.C. Section 965.
Excess Business Losses of Non-corporate Taxpayers
Non-corporate taxpayers will not be subject to certain restrictions on the use of their excess business losses in 2018, 2019, and 2020, to offset other taxable income.
Corporate AMT Credits
Corporations can claim full refunds in 2018 and/or 2019 for unused alternative minimum tax credits.
Limitation on Business Interest Expense
Taxpayers will be able to deduct a greater amount of interest expense in 2019 and 2020 - up to 50% of an adjusted measure of taxable income rather than the 30% limitation applicable under current law.
Technical Corrections Regarding Qualified Improvement Property
Bonus depreciation has been extended to improvements to nonresidential buildings known as “qualified improvement property” (“QIP”). This amendment is a technical correction of the 2017 Tax Reform Act, which omitted treating QIP as eligible for 100% bonus deprecation, and is retroactively effective.
Individual Tax Provisions
Tax Credit Rebates
Taxpayers can qualify for refundable tax credits of $1,200 per adult non-dependent filer and $500 per eligible child, subject to phase-out at various adjusted gross income levels beginning at $75,000 for single filers, and $150,000 for joint filers.
Modification of Limitations on Charitable Contributions During 2020
Corporations, and individuals who elect to itemize deductions, can deduct higher amounts of charitable contributions made during 2020. Increased deductions also extend to contributions of food inventory.
Partial Above-the-Line Deduction for Charitable Contributions of Cash
Non-itemizing individuals can deduct up to $300 of cash contributions made to charitable organizations in a taxable year beginning in 2020.
Penalty-Free Retirement Plan Distributions and Participant Loan Expansion
Taxpayers can withdraw up to $100,000 from a qualified retirement plan or individual retirement account (“IRA”) in 2020 without application of the 10% early withdrawal penalty. Income attributable to such distributions will be subject to tax ratably over the next three years beginning in the year of the withdrawal. To qualify, certain self-certifications with respect to a COVID-19 diagnosis or a COVID-19-related adverse financial consequence must be made. Other relief provisions may also apply to qualified individuals who timely repay the distribution. The participant loan maximum is increased to $100,000 and outstanding loans due in 2020 may be deferred for 1 year. While certain of these benefits may be implemented immediately, employers must subsequently undertake plan amendments relating to the change.
Temporary Waiver of Required Minimum Distributions from Certain Retirement Plans and IRAs
Required minimum distributions (“RMDs”) from a defined contribution plan (including 401(k), 403(b) and 457(b) plans) or an IRA in calendar year 2020 are suspended. This relief applies to RMDs not withdrawn before January 1, 2020, and RMDs payable in 2020 due to a required beginning date occurring in 2020 under the terms of the applicable plan or IRA. This otherwise fixes the gap that resulted from the SECURE Act that did not provide relief for taxpayers that turned 70.5 in 2019 and were required to take an RMD by April of this year.
Student Loan Repayment Assistance
Student loan repayment assistance of up to $5,250 can be excluded from income in 2020.
Many of the amendments described above contain significant eligibility limitations. Other amendments may give rise to benefits only if the taxpayer files amended tax return(s). Please contact an attorney from Honigman’s Tax practice group for further information on the CARES Act tax provisions.