On March 27 the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to address the unprecedented public health and economic crisis related to COVID-19.
This $2 trillion bill is meant to impact both individuals and businesses and contains significant tax-savings measures. It could affect prior tax years while also creating immediate cash-flow.
Impact on Individuals
Perhaps the most impactful provision for American citizens is the CARES Act’s promise of cash payments of up to $1,200 per single individual and $2,400 for a married couple. Parents will also receive an additional $500 per qualifying child. Payments are phased-out for individuals with incomes greater than $75,000 and for married couples filing jointly with income greater than $150,000.
Provisions are such that payments will be based on 2018 tax returns, though, like the Affordable Care Act’s tax premium credit, there is a true-up related to the amount for which you are eligible on your 2020 tax return. Nonresident aliens, dependents and estates and trusts are not eligible for a stimulus check.
Retirement Plan Rules
Since this bill aims to generate more access to cash, it loosens retirement fund rules. In particular, it waives the 10 percent early withdrawal penalty for distributions up to $100,000 for coronavirus-related use. It also allows for the federal income tax on such distributions to be paid over a three-year term. Finally, these distributions can be contributed back into the retirement fund within three years with no impact on that year’s contribution limit.
The CARES Act also adds flexibility regarding loans from certain retirement accounts when used for coronavirus-related needs. The loan maximum is now the lesser of $100,000 or 100 percent of the accrued benefit. Repayment is also now delayed.
Further, the CARES Act temporarily waives the required minimum distribution (RMD) for 2020. So, if you don’t need the cash, you won’t be forced to cash-out your investment at a low value.
For the tax year 2020, up to $300 of cash contributions to charities will be considered in determining adjusted gross income (AGI) regardless of whether a taxpayer itemizes or not. The limit for C corporations has been raised to 25 percent of taxable income, up from 10 percent, and the prior limitation on deductions for charitable contributions of food inventory has been raised to 25 percent.
Impacts on Businesses
Employee Retention Credits
An employer who is subject to full or partial closure due to a COVID-19 related shut-down order or whose gross receipts declined by more than 50% will be offered a credit against employment taxes for each quarter in an amount equal to 50 percent of qualified wages for each employee.
There is a limit of $10,000 in qualified wages for any employee for all calendar quarters, and the credit is limited to the employment taxes owed when reduced by other applicable credits. If the employee retention credit exceeds this amount, the difference can be refunded as an overpayment.
Under this provision, an eligible employer is one who (a) was carrying on a trade or business during the calendar year 2020; (b) with respect to any calendar quarter for which (i) operations are fully or partially suspended due to orders from an appropriate government authority limiting commerce, travel, or group meeting due to COVID-19 or (ii) in which (beginning in first calendar quarter after 12/31/2019) there has been a significant decline in gross receipts (i.e., less than 50% gross receipts for the same quarter in the prior year and ending with calendar quarter for which gross receipts are greater than 80% same calendar quarter in the prior year.
Tax-exempt organizations may also benefit from the Employee Retention Credit.
Payroll Tax Deferral
Both employers and self-employed individuals may defer payment on the employer portion of either employment taxes or self-employment taxes during a “payroll tax deferral period” (December 31, 2021, and December 31, 2022). On these dates, 50 percent of deferred taxes must be paid.
The deferral period is defined in this legislation as beginning on the date of enactment and ending on January 1, 2021. It does not appear that this provision will be retroactive to January 1, 2020.
Relaxed Net Operating Loss Rules
Previously, the Tax Cuts and Jobs Act (TCJA) created rules that limited the use of net operating losses (NOL). However, many of these rules would be suspended under the CARES Act:
- NOLs from 2018, 2019 or 2020 may be carried back for five years.
- There is a temporary removal of the 80 percent limit on the use of NOL carryforwards.
Businesses impacted by this rule should consider seeking to carry back losses that will allow them to obtain a refund.
Alternative Minimum Tax Credit Refund
The TCJA entitled C corporations with alternative minimum tax credits to receive a refund of these credits over the four-year period of 2018-2021. The CARES Act allows corporations to receive the refund over the two-year period of 2018-2019.
Amendment of the Business Interest Limitation
Under Internal Revenue Code Section 163(j), the use of net business interest expense was limited to 30 percent of Adjusted Taxable Income. The CARES Act amends this rule for tax years 2019 and 2020 by increasing that limit up to 50 percent. An additional benefit of this amendment is that, since 2020 income is likely to be lower than 2019 income for many businesses, it is possible to elect the use of the 2019 Adjusted Taxable Income for the 2020 tax year, as well.
Bonus Depreciation Fix
When the TCJA was passed, it was intended to permit businesses to write-off costs associated with Qualified Improvement Property (QIP). However, there was an error in drafting the legislation. The CARES Act fixes the error and specifically permits retroactive bonus depreciation. So, 2018 and 2019 tax returns may be amended to provide a source of cash. This provision will be especially helpful for the hospitality industry.
Excise Tax Temporary Exemption
The CARES Act also provides an exemption from excise tax on alcohol that is used to produce hand sanitizer.
The CARES Act provides loans to small business owners to help maintain payroll costs and keep people employed. The loans can also be forgiven if the employer maintains the same or greater number of employees or does not reduce the pay of any employee by more than 25%. Small businesses (businesses with less than 500 employees and certain other businesses) that are affected by the fallout from the pandemic will have access to $350 billion in SBA loans earmarked to help them get through this crisis without having to let people go or shut down altogether.
What all this means to you
This newly enacted law provides sorely needed relief to millions of Americans who literally do not know how they will survive this crisis financially. For those who are fortunate to still have their livelihood, it allows them to continue to participate in our consumer-based economy and stimulate it. Small businesses that didn’t know if they’d be able to keep their employees, can maintain their payroll costs and keep the lights on. State and local governments will have financial relief as they and healthcare workers stand on the frontlines of this pandemic in their communities. While imperfect and with its critics, the CARES Act was critical to helping our nation and all of its citizens. The passage of it is a good thing.
We are overwhelmed by the unity and goodwill we have seen in our community and in stories across the country and world. What we can all do to slow the spread and flatten the curve (as we have all heard many times) is stay at home, practice social distancing, and stay safe.
We sincerely hope that you and yours are healthy and safe. Take care, be well and stay the course. Better times are coming.