(Note: On March 27, 2020, the House approved this bill and President Trump signed it into law.)
On March 25, 2020, the Senate voted 96-0 to approve the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This bill provides substantial tax and other relief intended to provide economic stimulus to address the impact of the COVID-19 pandemic. The House is expected to pass the bill by the end of the week, possibly by voice vote, and send the measure to the President's desk for his signature.
High-level key tax provisions
- Recovery checks for individuals: Within weeks, US individuals will receive up to $1,200 and an additional $500 for every child. This amount will be reduced for higher-income taxpayers and begin phasing out after $75,000 in adjusted gross income for a single taxpayer, $112,500 for a head of household filer, and $150,000 for married couples who file a joint return. The amount is completely phased-out for single taxpayers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers. The IRS will base these amounts on the taxpayer's 2019 tax return if filed, or in the alternative their 2018 return.
- Penalties for early withdrawal: Consistent with past disaster-related legislation, the bill would waive early withdrawal penalties on coronavirus-related distributions from qualified retirement accounts up to $100,000. It would allow tax payments on distributions to be spread out over three years and would allow individuals to return distributions to the retirement account over three years, with such redeposits not subject to annual contribution limits. The bill also provides flexibility for loans from certain retirement plans.
- Required minimum distributions: The bill also waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
- Charitable contributions: Individuals will be permitted to deduct up to $300 of cash contributions, regardless of whether they itemize their deductions. For individuals, the 50% of adjusted gross income limitation will be suspended for 2020.
- Net operating losses: Individual taxpayers with losses may be able to carryback business losses.
- Employee retention credit for employers subject to closure due to COVID-19: Subject to certain limitations, eligible employers will receive a 50% credit on qualified wages against their employment taxes for each quarter, with any excess credits eligible for refunds. An eligible employer is one with operations suspended by orders issued in response to COVID-19 or has suffered a significant decline (more than 50% decrease year over year) in gross receipts during the quarters that begin with the quarter in which gross receipts declined by more than 50% and ending with the quarter in which gross receipts have recovered by more 80%.
- Delay of payment of employer payroll taxes: Employers and self-employed individuals will be able to defer payments of the employer share (6.2% of employee wages) of Social Security payroll taxes that would have otherwise been owed from the date of enactment of the legislation through December 31, 2020. The provision requires that the deferred taxes be paid over a two-year period, with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
Otherwise, required estimated tax payments during the deferral period would also exclude the payroll taxes that are being deferred. The Social Security trust funds are held harmless for the deferral of employer payroll tax deposits by requiring deposits into the trust funds from general appropriated funds.
- Modifications for net operating losses: The bill allows for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business. Businesses will be able to amend or modify tax returns for tax years dating back to 2013 to take advantage of the carryback. The bill also eliminates loss limitation rules applicable to sole proprietors and pass-through entities to allow them to take advantage of the NOL carryback. Additionally, the bill allows for NOLs arising before January 1, 2021, to fully offset income. Under current law, NOLs are limited to 80 percent of taxable income. In addition, for corporations, the 10% limitation will be increased to 25% of taxable income.
- Modification of credit for prior year minimum tax liability for corporations: Taxpayers with AMT credits will be able to claim a refund for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act of 2017 (TCJA).
- Modification of limitation on losses for taxpayers other than corporations: NOL relief is extended to passthroughs and sole proprietors by allowing excess business losses under section 461 for taxable years before 2021 and will allow carryover losses into subsequent taxable years as a technical correction to section 461(l)(2) enacted by the TCJA.
- Modifications of limitation on business interest: Taxpayers will be able to deduct more interest expense because the limitation, under section 163(j), on the interest deductions based on 30% of adjusted taxable income (ATI) under the TCJA will be increased, temporarily for 2019 and 2020, to 50% of a taxpayers' ATI.
- Technical amendments regarding qualified improvement property: Taxpayers that make and have made improvements to their facilities will be able to deduct those costs immediately (instead of depreciating those costs over time) as a correction to the statutory language enacted by the TCJA. This technical correction is effective as of the enactment of the TCJA, allowing taxpayers to amend returns to claim refunds for costs that were being depreciated.
- Charitable contributions for corporate taxpayers: Modification of limitations on charitable contributions during 2020 will allow corporate taxpayers to deduct more of their charitable contributions by increasing the taxable income limitation from 10% to 25%.
Significant non-tax considerations for businesses:
- Among the numerous provisions addressed in the CARES Act, it also provides the Small Business Administration (SBA) the authority to issue stream-lined loans to qualified businesses to assist them to fund certain payroll, rent and other costs. It is possible that such loans may be forgiven in the future if certain requirements are met. Please stay tuned for a subsequent update which will outline these provisions in detail.
There may be opportunities to amend, modify and/or make carryback claims to prior tax years to claim business losses. Careful consideration should be given as to the timing of filing 2019 returns once this bill is passed by the House and signed into law by the President. Small businesses may avail themselves of SBA loan options processed in an expedited manner, at favorable terms and with the potential for certain forgiveness opportunities. There are many details yet to be released.
Your HORNE team is prepared to help you navigate this ever-changing environment. If you have questions or concerns about how this impacts you, please feel free to reach out to a member of the HORNE Tax team.