The CARES Act authorizes the expenditure of $2 trillion in federal funds to combat the coronavirus. Though this article focuses on tax-related provisions, the CARES Act also provides for, among other things, (i) forgivable loans for small employers to continue to pay employees, (ii) increased unemployment compensation (even for individuals who would not otherwise qualify), (iii) $150 billion to be paid to states and other governments for purposes of paying COVID-19 related expenses incurred between March 1 and December 31, 2020, (iv) a $500 billion fund for loans and loan guarantees for large businesses affected by the coronavirus, (v) a broad array of health care provisions, and (vi) emergency appropriations for numerous federal agencies.
Section 1102 appropriates $349 billion for a “Paycheck Protection Program” to encourage employers to retain employees by offering forgivable payroll continuation loans to employers under Section 7(a) of the Small Business Act, for purposes of paying payroll costs, costs related to the continuation of group health care benefits, rent, utilities and certain interest payments. Section 1106(i) provides that any amount of a payroll continuation loan that is forgiven shall be excluded from the employer’s income.
Section 2201 adds Internal Revenue Code (“IRC”) § 6428 entitled “2020 Recovery Rebates for Individuals.” This provision requires the Treasury Department to make payments of (1) $1,200 per individual ($2,400 in the case of eligible individuals filing a joint return), plus (2) an amount equal to the product of $500 multiplied by the number of qualifying children of the taxpayer who are younger than age 17 at the end of the year. An “eligible individual” is any individual other than (a) any individual with respect to whom a dependency exemption is allowable to another taxpayer, (b) any nonresident alien individual, and (c) an estate or trust.
An individual with adjusted gross income (AGI) in 2019 of not more than $75,000 ($150,000 in the case of a joint return) is entitled to the full rebate. For individuals with AGI in excess of those amounts, the rebate is phased out ratably up to a maximum AGI of $99,000 ($198,000 in the case of a joint return). These amounts are determined based on the taxpayer’s return for 2019 or, if the taxpayer has not filed his or her 2019 return, the 2018 return. The use of the 2019 return numbers is optional based on when the taxpayer files the 2019 return. From a planning perspective, a taxpayer may wish to accelerate (or defer) the filing of the 2019 return based on the respective AGI amounts for each of 2018 and 2019. The Act directs the Treasury to make such payments “as rapidly as possible.”
Section 2202(a) allows qualifying individuals to take withdrawals of up to $100,000 from qualified retirement plans (including IRAs) in 2020, without being subject to the 10% early withdrawal penalty. A qualifying individual is any individual (i) who (or whose spouse or dependent) is diagnosed with COVID–19, or (ii) 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, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary. A plan administrator may rely on an employee’s certification that the employee satisfies such conditions.
Although a coronavirus-related distribution is not subject to the early withdrawal penalty, the distribution is still subject to income tax. However, the Act permits an individual to avoid income tax by replacing into the plan the withdrawn funds at any time during the three-year period beginning on the day after the date on which such distribution was received.
Any amount that is required to be included in income may be so included ratably over the three-year period beginning with 2020.
Further, Section 2202(b) increases the amount that an individual may receive as a loan from a qualified employer plan during the 180-day period beginning on the date of the enactment of this Act is increased from $50,000 to $100,000, and defers loan repayments for individuals meeting the requirements for a coronavirus related distribution.
Minimum required distributions from qualified retirement plans are waived for 2020, including for those who reached age 70⅟₂ in 2019 (the pre-SECURE Act required beginning date) and would otherwise be required to take a MRD for 2019 in 2020.
The CARES Act also facilitates plan amendments needed to authorize plans to permit such withdrawals and loans.
The CARES Act includes changes to encourage cash charitable contributions:
Section 2204 allows an above-the-line deduction for cash contributions of up to $300 (in 2020 and in subsequent years) for individuals who elect not to itemize deductions (this deduction is not limited to 2020).
Section 2205 increases the limits on the amounts of cash contributions made in 2020 that a taxpayer may deduct in 2020. An individual taxpayer may deduct 2020 cash contributions up to 100% (increased from 50%) of the taxpayer’s contribution base (AGI but without NOLs) reduced by other charitable contributions. Also, a corporate taxpayer may deduct 2020 cash contributions up to 25% of the taxpayer’s AGI (increased from 10%) reduced by other charitable contributions. Excess contributions may be carried over to succeeding years, but the higher contribution base is not available in succeeding years for the carried-over amounts.
A taxpayer must make an election for these increased limits to apply.
Section 2205(b) increases the limits on the amount of qualified contributions of food made during 2020 that a taxpayer may deduct. The limit is increased (a) from 15% to 25% of the taxpayer’s taxable income in the case of a C corporation and (b) from 15% to 25% of the taxpayer’s aggregate net income from all trades or businesses from which such contributions were made for such year, in the case of other taxpayers. This increase remains in effect after 2020.
Section 2206 adds student loan payments to the types of employer-provided educational assistance payments that employers may make tax-free on behalf of employees under IRC § 127. The loan must be a qualified education loan (as defined in IRC § 221(d)(1)) incurred by the employee for the education of the employee. The employer may make the payment to the employee or to a lender. The exclusion applies to payments made after enactment of the CARES Act and before January 1, 2021.
Section 2301 provides an employee retention credit for employers subject to closure or significantly reduced revenues due to COVID-19. An eligible employer is allowed a credit against applicable employment taxes for each calendar quarter of 50% of the qualified wages paid to each employee of such employer for such calendar quarter. The amount of qualified wages, including the applicable share of any group health insurance premiums, with respect to any employee which may be taken into account for all calendar quarters cannot exceed $10,000.
The credit allowed with respect to any calendar quarter will first offset the applicable employment taxes on the wages paid for such calendar quarter. Any credit amount in excess of such employment taxes is refunded to the taxpayer.
The term “applicable employment taxes” means the employer’s portion of FICA taxes (the OASDI portion, excluding the hospital tax).
An “eligible employer” is any employer (a) which was carrying on a business during calendar year 2020, and (b) with respect to any calendar quarter for which (i) the operation of the business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or (ii) the employer has had gross revenues decline by more than 50% for the quarter (as compared to the same quarter in 2019).
An employer with more than 100 full-time employees may only consider wages paid to employees who are not providing services due to the business suspension or decline in gross receipts.
This section includes numerous provisions designed to prevent employers from taking double benefits. For example, an employer cannot count any wages taken into account under section 7001 or section 7003 of the Families First Coronavirus Response Act. Also, if an eligible employer receives a payroll continuation loan under Section 1102 of the CARES Act, such employer is not eligible for this employee retention credit.
Section 3606 makes the payroll tax credit for required paid sick leave (Section 7001 of division G of the Families First Coronavirus Response Act) and the payroll tax credit for required paid family leave (Section 7003 of division G of the Families First Coronavirus Response Act) refundable “according to forms and instructions provided by the Secretary.”
Section 2302 extends the payment date for the employer portion of the FICA tax (the OASDI portion, excluding the Medicare portion) and 50% of the OASDI portion of the SECA tax during the “payroll tax deferral period.” The “payroll tax deferral period” means the period beginning on the date of the enactment of the CARES Act and ending before January 1, 2021. The payment date is extended until December 31, 2021, with respect to 50% of the amounts deferred, and December 31, 2022, with respect to the remaining amounts.
Section 2303 amends some of the net operating loss (NOL) rules enacted by the Tax Cuts and Jobs Act (TCJA). The TCJA provided that (a) NOLs arising in tax years beginning after 2017 can only offset 80% (decreased from 100%) of the taxpayer’s taxable income and (b) carrybacks of post-2017 losses are no longer permitted. Section 2303 repeals the 80% limit (for 2020 and retroactively for tax years 2018 and 2019) and permits taxpayers to carry back NOLs from any of 2018, 2019 and 2020 for the five-year year period preceding the year in which the loss arose. This provision will allow a corporation suffering a loss in any of those three years to carry the loss back and obtain refunds of prior years’ taxes.
Section 2304 also modifies the TCJA’s limitation on losses for taxpayers other than corporations. The TCJA (IRC § 461(l)) limited the amount of business losses that non-corporate taxpayers could deduct to $250,000 ($500,000 in the case of a joint return) in any one year. This modification is for tax years 2018 through 2020. Taxpayers with business losses in 2018 or 2019 in excess of the TCJA limits can amend their returns and obtain refunds.
Section 2305 permits an accelerated refunding of the corporate alternative minimum tax (AMT) credit. The TCJA repealed the corporate AMT. The TCJA also allowed corporations to offset regular income tax liability by any minimum AMT credit they may have for any tax year and further made such credit refundable for any tax year beginning after 2017 and before 2022 in an amount equal to 50% (100% for tax years beginning in 2021) of the excess minimum tax credit for the tax year. Thus, the full amount of the corporation’s MTC would be allowed in tax years by 2022. The Act makes the remaining minimum tax credit 100% refundable in 2019 (or by election, in 2018).
The TCJA also amended IRC § 163(j) to limit the amount of business interest that taxpayers may deduct in any taxable year to 30% of the adjusted taxable income of such taxpayer for such taxable year. Section 2306 raises this limit from 30% to 50% for taxable years 2019 and 2020. Taxpayers may elect out of this change.
The CARES Act also helpfully permits taxpayers to elect to use their adjusted taxable income for 2019 for purposes of calculating the limit for 2020.
The retail glitch arose out of the TCJA’s attempt to simplify the depreciation of building improvements – improvements to the interior of a commercial building after the building was placed in service (for example, interior modifications in leased restaurant space) – and make them eligible for 100% bonus depreciation. As a result of a drafting error, such improvements were not eligible for 100% depreciation and were subject to 39-year depreciation (the same as the building itself).
Section 2307 fixes the so-called “retail glitch” (created by the TCJA) retroactively as if the amendment had been included in the TCJA, permitting the 100% bonus depreciation and a 15-year recovery life.
Section 2308 temporarily provides for an exception from excise tax imposed by IRC § 5214(a) for alcohol used to produce hand sanitizer.
Section 4707 suspends certain aviation excise taxes from the date of enactment until the end of 2020.
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As this is being written, discussion has already begun on a fourth phase of COVID-19 stimulus. So stay tuned.