On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. The CARES Act is a roughly $2 trillion package that includes significant expansions in small business lending, unemployment insurance, tax relief to individuals and employers, health care measures, $500 billion in economic stabilization funds and other measures aimed at combating the COVID-19 health care and economic crisis. Below is a general summary of select provisions of the CARES Act relating to taxes.
Recovery Rebate. The CARES Act provides a refundable tax credit (based on 2019 taxes, or for individuals who haven’t filed, against their 2018 taxes or 2019 Social Security statements) for eligible individuals. The credit can be as much as $1,200 per individual (or $2,400 for couples who file joint tax returns), plus $500 for each qualifying child. The credit is reduced by 5% of the amount by which the taxpayer’s adjusted income exceeds $150,000 for joint returns, $112,500 for heads of household, and $75,000 for other filers. No payments of the credit will be made after December 31, 2020.
Payroll Tax Deferral. The CARES Act defers employer payroll and railroad retirement tax payments (and 50% of self-employed Social Security tax payments) through the end of 2020. The deferred funds are paid over two years in 2021 and 2022. Deferral wouldn’t apply to employers with small business loan debt forgiven under the paycheck protection program (described above).
Employee Retention Credit. The CARES Act establishes a refundable credit against employer payroll and railroad retirement taxes for certain employers affected by the coronavirus that retain their employees. The credit is 50% of eligible employee wages paid after March 12, 2020 and before January 1, 2021 (with eligible wages for each employee being limited to $10,000, including certain health benefits). In order for an employer to receive the credit, a government order related to the pandemic must require them to partially or fully suspend operations, or their gross receipts must have declined by certain thresholds. Special rules apply for tax-exempt organizations.
Employers cannot receive the credit if they receive a loan under the paycheck protection program (described above). Employers cannot use the credit for wages paid to an employee for which they also receive a credit under the work opportunity tax credit or with respect to wages taken into account for purposes of determining the paid leave credit established by the 2017 tax overhaul (Public Law 115-97). Furthermore, wages taken into account for the paid leave credits established under the second coronavirus response law (Public Law 116-127) cannot also be used for the employee retention credit.
Retirement Plans. The CARES Act waives early withdrawal penalties on coronavirus-related distributions from qualified retirement accounts up to $100,000. It allows tax payments on distributions to be spread out over three years and allows 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 and waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
Charitable Contributions. The CARES Act permits individuals to deduct up to $300 of cash contributions, regardless of whether they itemize their deductions. The limitations on deductions for charitable contributions are also increased for individuals who itemize, as well as corporations. For individuals, the 50% of adjusted gross income limitation will be suspended for 2020. For corporations, the 10% limitation will be increased to 25% of taxable income. The limitation on deductions for contributions of food inventory also will be increased from 15% to 25%.
Net Operating Losses. The CARES Act expands the use of net operating losses (“NOLs”) for corporate and non-corporate businesses. Taxpayers will be able to use NOLs to offset income without the 80% taxable income limitation enacted as part of the 2017 tax reform and to carry back NOLs to offset prior year income for five years. These are temporary provisions that apply to NOLs incurred in the 2018, 2019, or 2020 tax years. For tax years after 2020, the 80% taxable income limitation is reinstated with certain modifications.
Interest Deductions. The CARES Act temporarily increases the limitation under section 163(j) of the Internal Revenue Code on deductibility of interest. Enacted as part of the 2017 tax reform, section 163(j) generally limits a taxpayer’s interest deduction based on 30% of adjusted taxable income (ATI). For 2019 and 2020, this limitation is raised to 50% of a taxpayer’s ATI.
AMT Credit Recovery for Corporations. The 2017 tax reform eliminated the corporate AMT but made remaining AMT credits refundable over several years, ending in 2021.The CARES Act allows corporate taxpayers with AMT credits to claim a refund for the entire amount of the credit instead of recovering the credit through refunds over a period of years.
Alcohol Excise Tax. Under the Act, taxpayers subject to the excise tax on distilled spirits will be excepted for distilled spirits removed in 2020 and used in or contained in hand sanitizer produced and distributed in response to SARS-CoV2 or COVID-19.
This client alert is for informational purposes and is not legal advice. The COVID-19 crisis has created a very fluid situation, in which changes to the law or related guidance can occur on a daily basis. Please contact your legal advisor for assistance before acting in relation to the subject of this client alert.
For additional COVID-19 resources, please see COVID-19 Updates.