CARES ACT

CARES Act 3/27/20

Congress and the President have passed the Coronavirus Aid, Relief, and Economic Security(CARES) Act on March 27, 2020.  The bill hopes to add significant liquidity to the economy by providing loan forgiveness, supporting small businesses, enhancing unemployment insurance and providing federal loans to industries severely impacted by the pandemic.  Below are some of the highlights of the Act.

Individual Tax Relief

Recovery Rebates

The most publicized and well-known provision is the $1,200 recovery rebate for individual taxpayers.  The rebate is an advance refund 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 rebate is phased out by $5 for every $100 in excess of threshold amounts.  The thresholds are 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) adjusted gross income over $99,000, heads of household with $136,500, and joint filers with $198,000.

Retirement Relief

The bill waives the 10-percent penalty on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions.  Requirements of the waiver are that the distribution is made in 2020 to an individual, or spouse that is 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.  Income taxes on the distribution are subject to tax over a three-year period, and taxpayers may re-contribute the withdrawn amounts to a qualified retirement plan without annual caps if made within three years.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.

Charitable Contributions

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.  This allows individuals who can’t itemize to deduct up to $300 of charitable contributions.

Also, the percent-of-adjusted gross income (AGI) limitations are increased for all taxpayers as well as for specific types of contributions. For 2020, individuals can claim an unlimited itemized deduction for a charitable contribution, which is normally limited to 50 percent of AGI.  For corporations, the usual 10-percent of AGI limitation is increased to 25 percent for the 2020 tax year.  

Student Loans paid by Employers

The bill provides an exclusion of up to $5,250 from income for payments of an employee’s education loans.  The loan must have been incurred by the employee for the education of the employee, or the education of the employee’s child.

Business Tax Relief

Employee Retention Credit

The Act would grant eligible employers a credit against employment taxes equal to 50 percent of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business or a significant decline in gross receipts.  The credit is available to be claimed on a quarterly basis, but the amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters.  The provision contains several requirements defining qualified wages, qualified employees, and qualified employers.  The credit applies to wages paid after March 12, 2020, and before January 1, 2021.  This provision is similar to the Families First Coronavirus Response Act signed into law March 18, 2020, but does not require the employee or the employer to be directly impacted by infection.

Payroll Tax Deferral

The CARES Act defers the payment of payroll taxes from the date the Act is signed into law through December 31, 2020.  The 6.2 percent OASID portion of payroll taxes incurred by employers, and 50 percent of the equivalent payroll taxes incurred by self-employed persons qualify for the deferral.  Half of the deferred payroll taxes are due December 31, 2021 with the remainder due on December 31, 2022.

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 of tax years dating back to 2013 in order to take advantage of the carryback.  The bill also eliminates loss limitation rules applicable to sole proprietors and passthrough 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.

Qualified Improvement Property

When Congress drafted the Tax Cuts and Jobs Act, it allowed for 100 percent bonus depreciation rules to apply to property with a recovery period of 20 years of less.  It was Congress’ intention to include Qualified Improvement Property as property with a recovery period of 15 years, thus allowing bonus depreciation on the property, however it failed to do so making it subject to 39-year recovery period with no bonus depreciation.

The CARES Act corrects this 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 place in service after September 27, 2017.  The correction allows any expenses incurred by owners to make improvements to the physical premises related to these businesses to be deducted in the 2017 or 2018 tax year on an amended return or the 2019 tax year on a return due July 15, 2020.

Forgiveness of Loans

The bill also excludes tax on any forgiven small business loan, mortgage obligation, or other loan obligations forgiven by the lender.

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