CARES Act Summary
Dear Clients and Friends:
We hope that you are keeping yourself, your loved ones, and your community safe from COVID-19. With this email, we provide an update on the tax-related provisions in the CARES Act, Congress’s stimulus package that the President signed into law on March 27, 2020. See our email on March 27th for information related to various filing and payment relief and a brief synopsis of the Families First Coronavirus Response Act, which is referred to multiple times in this email.
Recovery rebates for individuals. The government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing jointly. An additional $500 payment will be sent to taxpayers for each qualifying child dependent under age 17.
Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint). There is no ‘‘phase-in’’—all recipients who are under the phaseout threshold will receive the same amounts. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.
The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed).
Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.
Waiver of 10% early distribution penalty. The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 to a qualified individual.
A qualified individual is (1) one who has been diagnosed or whose spouse or dependent has been diagnosed with coronavirus using an approved test; or (2) 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 Secretary of the Treasury.
Comment – Until guidance is issued, we cannot know how various terms in the definition will be interpreted, such as how much of a business an individual must own to qualify and what the “other factors” will consist of.
Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. The bill also allows loans of up to $100,000 from qualified plans, and repayment can be delayed.
Waiver of required distribution rules. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.
Charitable deduction liberalizations. The Act allows non-itemizing individuals a deduction of up to $300 for cash charitable contributions for the year 2020. Donations to donor advised funds do not qualify. Also, the previous limitations of contributions to 60% of adjusted gross income for individuals and 10% of taxable income for corporations, have been increased to 100% and 25% respectively. The limitation applicable to contributions of food inventory has also been increased to 25% of taxable income.
Exclusion for employer payments of student loans. An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.
Break for remote care services provided by high deductible health plans. For plan years beginning before 2021, the Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.
Break for nonprescription medical products. For amounts paid after December 31, 2019, the Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.
BUSINESS ONLY PROVISIONS
New SBA loan programs. Before diving into the tax related provisions, it’s important to mention the opportunity for businesses and non-profits to apply for SBA loans under one of several different programs. In addition to expanded SBA lending in general, the Act establishes the “Paycheck Protection Program” (PPP). Under this program, any business or 501(c)(3) nonprofit organization with no more than 500 employees may apply for a loan from a participating SBA lender. The loan amount is limited to the lesser of 250% of the average monthly payments by the borrower for qualifying payroll costs, or $10 million. To the extent proceeds are used for qualifying costs, the loan is forgiven. The Journal of Accountancy has an additional article on the PPP which can be found at https://www.journalofaccountancy.com/news/2020/mar/paycheck-protection-loan-for-small-businesses-coronavirus-pandemic.html .
Furthermore, for loans made from February 15, 2020 through June 30, 2020, loan forgiveness under this provision is not a taxable event as long as the forgiven amounts are used for one of several permitted purposes.
We suggest you reach out to your bank to explore this opportunity.
Employee retention credit for employers. Eligible employers can qualify for a refundable credit against, generally, the employer’s 6.2% portion of the Social Security (OASDI) payroll tax for 50% of certain wages (below) paid to employees during the COVID-19 crisis.
The credit is available to employers carrying on business during 2020, including non-profits, whose operations for a calendar quarter have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter, with the eligible quarters continuing until the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter.
For employers with more than 100 employees in 2019, the eligible wages are wages of employees who aren’t providing services because of the business suspension or reduction in gross receipts described above.
For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees haven’t been prevented from providing services. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in eligible wages and compensation paid by the employer to an employee. Thus, the credit is a maximum $5,000 per employee.
Wages don’t include those taken into account for purposes of (1) the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) the employer income tax credit for paid family and medical leave (enacted as part of 2017 tax legislation), or (3) the work opportunity credit (WOTC).
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in reasonable anticipation of receiving the credit. Importantly, the credit is not available to employers receiving SBA 7(a) “paycheck protection” loans. The credit is provided for wages paid after March 12, 2020 through December 31, 2020.
Delayed payment of employer payroll taxes. Taxpayers (including self-employeds) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax. The relief isn’t available if the taxpayer has debt forgiveness under the CARES Act for SBA 7(a) “paycheck protection” loans (see above). For self-employeds, the deferral applies to 50% of the Self-Employment Contributions Act tax liability (including any related estimated tax liability).
Net operating loss (NOL) liberalizations. The bill temporarily repeals the 80% income limitation for NOLs (enacted as part of the 2017 Tax Law) for years beginning before 2021 and allows a 5-year carryback for NOLs arising in 2018, 2019, and 2020.
Deferral of noncorporate taxpayer loss limits. The Act retroactively repeals the excess active business loss limitation rule as enacted by the 2017 tax act and defers its effective date to tax years beginning after December 31, 2020. That rule would have disallowed excess business losses of noncorporate taxpayers in excess of $250,000 ($500,000 for joint filers).
Acceleration of corporate AMT liability credit. The 2017 Tax Law repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully refundable. The Act allows corporations to claim 100% of AMT credits in 2019 as fully refundable and further provides an election to accelerate the refund to 2018.
Relaxation of business interest deduction limit. The 2017 Tax Law generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income (ATI). The Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% (up from 30%) of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation.
Technical correction to restore faster write-offs for interior building improvements. The Act makes a long anticipated technical correction to the 2017 Tax Law by retroactively treating qualified improvement property (QIP) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property.
Accelerated payment of credits for required paid sick leave and family leave. The Act authorizes IRS broadly to allow employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.
Pension funding delay. The Act gives single employer pension plan companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest. Also, a plan can treat its status for benefit restrictions as of December 31, 2019 as applying throughout 2020.
We anticipate further legislation with tax changes in the coming weeks and months. We’ll do our best to keep you advised.
Zirkle, Long, and Associates