The CARES Act provides significant opportunities for businesses with the Paycheck Projection Program and Retention Credit loans. In addition, the CARES Act provides other tax benefits to both businesses and individuals summarized below.
BUSINESS TAX RELIEF
Delay of Employer Portion of Payroll Taxes:
The CARES Act permits employers to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Payroll taxes due from the period beginning on the date the CARES Act is signed into law and ending on December 31, 2020, are deferred. The entirety of payroll taxes incurred by employers, and 50 percent of payroll taxes incurred by self-employed persons qualify for the deferral. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.
Modifications for NOLs, Losses and Interest:
The CARES Act relaxes the limitations on a Corporation’s NOLs by permitting NOL carrybacks of 5 years for NOLs arising in 2018, 2019 or 2020. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. Further, with respect to pass-through businesses and sole proprietors, the excess business loss limitations are relaxed. The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30% limitation to 50% of taxable income (with adjustments) for 2019 and 2020. These changes should allow businesses of all forms to utilize losses and provide cash flow and liquidity.
Technical Amendment to 2017 Act for Qualified Improvement Property:
The CARES Act also includes a long overdue fix to the 2017 Tax Cuts and Jobs Act that will permit businesses, particularly hospitality businesses, to fully expense the cost of upfits instead of having to depreciate those costs over the 39 years. The fix is made retroactive to the 2017 Tax Cuts and Jobs Act. The CARES Act corrects this Congressional oversight by defining qualified improvement property as 15-year property, thus allowing 100 percent of improvements to be deducted in the year incurred. The change is made as if included in the TCJA and, thus, is effective for property acquired and placed in service after September 27, 2017.
INDIVIDUAL TAX RELIEF
The most well-publicized provision is the $1,200 recovery rebates for individual taxpayers. The rebate amounts are advance refunds of credits against 2020 taxes, and equal to $1,200 for individuals, or $2,400 for joint filers, with a $500 credit for each child. The amount of each rebate is phased out by $5 for every $100 in excess of a threshold amount. This threshold amount is based upon 2018 adjusted gross income (unless a 2019 return has already been filed), and the phaseout begins at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. Thus, the rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of household with $136,500, and joint filers with $198,000.
In order to be eligible for a recovery rebate, the individual must not be: (1) a nonresident alien, (2) able to be claimed as a dependent on another taxpayer’s return, (3) an estate or trust, and (4) must have included a Social Security number for both the taxpayer, the taxpayer’s spouse, and eligible children (or an adoption taxpayer identification number, where appropriate). The bill includes additional rules for the application of the credit.
The bill also waives the 10-percent penalty on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions. For purposes of the penalty waiver, a coronavirus-related distribution is one made during the 2020 calendar year, to an individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus. Any income attributable to an early withdrawal is subject to tax over a three-year period, and taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years.
The bill also waives all required minimum distributions for 2020, regardless of whether the taxpayer has been impacted by the pandemic.
The bill enhances tax incentives for making charitable contributions for the 2020 tax year. First, it allows an above-the-line deduction of up to $300 for charitable contributions made by individuals.
Student Loans Paid by Employers:
The bill provides for an exclusion of up to $5,250 from income for payments of an employee’s education loans. In order for the exclusion to apply, the loan must have been incurred by the employee for the education of the employee (so, for example, the loan must not have been incurred to pay for the education of the employee’s child). The payment can be made to the employee or directly to the lender. The exclusion only applies for payments made by an employer after the date of enactment and before January 1, 2021.
The CARES Act is a massive bill, the majority of which does not have a tax impact. However, some smaller, but no less significant, provisions impacting federal tax are sprinkled outside of the tax-related division of the bill. These provisions include:
- The exclusion from tax of any forgiven small business loans, mortgage obligations, or other loan obligations forgiven by the lender during the applicable period;
- A safe harbor from the definition of a high deductible health plan permitting telehealth services to be included, even though such services do not carry a deductible;
- The inclusion of over-the-counter menstrual products as qualified medical expenses for purposes of distributions from health savings accounts and health flexible spending arrangements;
- Pension funding relief for failures to meet contribution requirements to defined contribution plans during 2020;
- Allowing certain charitable employers whose primary exempt purpose is providing services to mothers and children to use small employer charity pension plan rules; and
- Significant direct payments to individuals, as well as an expansion of the unemployment insurance program, adding $600 to the maximum weekly benefit and extending the time an employee can receive it.
We expect the federal and state response to COVID-19 will intersect with your individual and business tax situations, including certain tax relief measures and the tax consequences of other stimulus packages. We are monitoring both federal and state bills and administrative guidance and will continue to do our best to keep you informed during these trying times.
If you have questions about the tax relief available under the CARES Act, or any other tax issues, please contact Sandra Martin Clark or your Manning Fulton relationship attorney.