CARES Act Summary and Federal Tax Changes
Published March 27, 2020
Updates made to this article on April 6, 2020 are shown as highlighted text.
On March 27, 2020 President Trump signed into law the third coronavirus relief bill, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The bill is designed to support and stabilize the US economy by providing more than $2.2 trillion in economic relief, making it the most expensive piece of legislation ever passed.
To assist small businesses, the CARES Act provides businesses with fewer than 500 employees access to nearly $350 billion in loans during a “covered period” (February 15, 2020 through June 30, 2020). These “paycheck protection loans” are fully guaranteed by the federal government, have a maximum maturity of 10 years and an interest rate not to exceed 4%. The amount that can be accessed by a small business is limited to the lesser of 2.5 times the average monthly payroll costs and $10 million. Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service requirements. A portion of the loan is eligible to be forgiven on a tax-free basis to the extent of certain payments (generally payroll costs, rent, mortgage interest and certain utilities) made by the borrower during the 8-week period beginning on the date of the loan. The amount forgiven is reduced if the employer reduces its workforce or reduces salaries and wages paid to an employee during the covered period.
With respect to larger businesses, the bill establishes an Economic Stabilization Fund (“ESF”) of $500 billion to provide direct loans, loan guarantees, and other investments to eligible businesses who have incurred losses as a result of the COVID-19 crisis and the operations of the business are deemed to be in jeopardy. $46 billion of the ESF is targeted for airlines and other businesses crucial to national security, while the remaining $454 billion is dedicated to support Federal Reserve lending facilities. The Federal Reserve can leverage the Treasury’s $454 billion to provide up to $4 trillion more in emergency funding to eligible businesses, states and cities.
In terms of support for the healthcare system, the bill provides $140 billion in emergency funding to Health and Human Services (HHS), including $100 billion requested by hospitals and health care providers for COVID-19 related expenses and losses. The bill also provides $1.32 billion in supplemental funding to community health centers (CHCs) for the epidemic and extends funding for CHCs and a handful of other Medicare and Medicaid programs through November 30, which were set to expire on May 22. Other health care provisions include a 20% Medicare payment bump for providers treating coronavirus patients, coverage without cost-sharing of a COVID-19 vaccines, increased flexibility for the provision of telehealth, an overhaul of federal privacy restrictions on substance use treatment records, and the creation of an FDA user fee program for over-the-counter drugs.
The act also provides for expanded unemployment insurance. This section of the bill proved to be controversial and resulted in a delay in the vote when a group of GOP Senators took issue with language in the act they claim incentives employees to be laid off versus returning to their jobs. An amendment to address their concerns failed to pass.
The CARES Act also includes a number of tax breaks for businesses and individuals, as well as direct payments to individuals referred to as “2020 Recovery Rebates.” These tax breaks and direct payments share the common theme of reversing the flow of money normally sent to Washington D.C. back to households and employers. These measures will assist businesses and households as they attempt to deal with the devastating economic impact caused by the COVID-19 pandemic.
CARES Act Federal Tax Relief
Below is a brief summary of the key tax provisions contained in the CARES Act.
BUSINESS TAX RELIEF
- Deferral of Employer Payroll Tax Payments: Employers and self-employed individuals can defer payment of the 6.2% employer share of Social Security taxes on employee wages otherwise required to be remitted after the date of the enactment. Half of the deferred amount would be required to be paid by the end of 2021 and the rest by the end of 2022.
- Revive and Enhance Net Operating Loss Carryback Refund Claims: The provision in the bill would remove the NOL limitations in the TCJA (which limited the deduction to 80% of taxable income and repealed carryback provisions). It will restore and enhance NOL carrybacks so that a loss from 2018, 2019, or 2020 can be carried back five years to obtain a refund of taxes paid in those years, and temporarily removing the taxable income limitation to allow an NOL to fully offset income.
- Elimination of Loss Limitations: A provision in the bill modifies the limitations on business losses applicable to pass-through businesses and sole proprietors, so they can also benefit from the NOL carryback rules above. This change is effective for the 2018, 2019 and 2020 tax years. Taxpayers who have filed either a 2018 or a 2019 return with a loss that was limited by this provision should plan to amend their returns and seek a refund.
- Acceleration of Refunds for AMT Credit Carryovers: The TCJA eliminated the corporate alternative minimum tax but allowed corporations to claim a refundable credit of any unused portion through 2021. The bill accelerates the year for which a fully refundable credit can be claimed from 2021 to 2019, and allows corporations to elect to claim the fully refundable credit in 2018.
- Increasing Deductions for Business Interest Expense: The business interest limitation under IRC Section 163(j), currently set at 30% of adjusted taxable income based on EBITDA, would be set at 50% for 2019 and 2020. For partnerships the increase to 50% of adjusted taxable income is delayed until taxable years beginning in 2020. A partner receiving an allocation of suspended interest in 2019 is permitted to deduct half of such interest in 2020, with the remainder being subject to the previous TCJA carryover regime.
- Bonus Depreciation for Qualified Improvement Property (“QIP”) and Other TCJA Technical Corrections: The bill addresses two TCJA technical corrections:
- The first is the QIP correction (the so-called retail glitch), to clarify that it is 15-year property under the modified accelerated cost recovery system and 20-year property under the alternative depreciation system, and eligible for 100% bonus depreciation.
- QIP is defined as any improvement to an interior portion of a building which is nonresidential real property if the improvement is placed in service after the date the building was first placed into service by the taxpayer and is not an enlargement of the building, an elevator or escalator, or the internal structural framework of a building.
- The second would restore the limitation on downward attribution of stock ownership in applying constructive ownership rules to clarify that certain foreign subsidiaries should not be subject to those requirements.
- Both corrections would be retroactive to the enactment of the TCJA, which means it applies to QIP placed in service after September 27, 2017.
- Employee Retention Credit: Subject to certain eligibility requirements and limitations, a one-year only credit is allowed against the employer’s 6.2% share of Social Security payroll taxes for any business that is forced to suspend or close its operations due to COVID-19, but that continues to pay its employees during the shut-down. The credit, which can be claimed on a quarterly basis, is equal to 50 percent of qualified wages paid but is capped at $10,000 in aggregate per employee for all quarters. The credit applies to wages paid after March 12, 2020 and before January 1, 2021. This credit is very similar to the paid leave credits granted to employers under the Families First Coronavirus Response Act, but significantly neither the employee nor the employer have to be directly impacted by infection.
INDIVIDUAL, RETIREMENT & CHARITABLE
- 2020 Recovery Rebates for Individuals: The act provides direct payments of up to $1,200 for individuals and $2,400 for married couples, along with an extra $500 per child. Assistance would start to phase out for individuals earning more than $75,000 and for couples with more than $150,000 in income (complete phase-out at $99,000 single and $198,000 for couples). In order to be eligible for the rebate, the individual must not be: 1) a nonresident alien, 2) able to be claimed as a dependent on another’s tax return, 3) an estate or trust, and 4) must have included a SSN for both the taxpayer, the taxpayer’s spouse, and eligible children.
- Penalty Free Early Withdrawals from Retirement Accounts: Consistent with past disaster-related legislation, the bill provides special use for use of retirement funds.
- Early withdrawal penalties would be waived on coronavirus related distributions of 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.
- A coronavirus-related distribution is a distribution made to an individual during the 2020 calendar year: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
- Increased Deductions for Charitable Contributions
- A provision in the bill increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50-percent of adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent limitation is increased to 25 percent of taxable income for the 2020 tax year. This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent for the 2020 tax year.
- The bill would provide an above-the-line deduction of up to $300 for charitable contributions made in cash during 2020 for taxpayers that do not itemize deductions. Existing income limits would not apply to the new deduction. The new deduction would not be available for contributions to a donor-advised fund.
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Nothing in this document should be construed as providing tax advice. Please consult with your own professional tax advisor. In addition, this document represents the information that we have up to the date the presentation was made and cannot be relied upon for additional updates beyond that date.