Senate Passes CARES Act with Further Tax Relief for Individual & Business Taxpayers
In the late hours of March 25, and after several days of delays, the Senate passed a third stimulus bill, titled the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), to provide further relief to individual and business taxpayers in the wake of the continuing COVID-19 outbreak. While the House has not yet voted on the CARES Act, indications are they will quickly pass the bill and send it to President Trump for signature.
In a previous BKD Thoughtware® alert, we shared some of the proposed provisions within the initial draft of the legislation released by U.S. Senate Republicans last week. Here are the relevant tax-related highlights within the final bill as passed by the Senate:
Amendments to the Families First Coronavirus Response Act
The CARES Act amends portions of the Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020, including clarifying that employers subject to the FFCRA may elect to provide more paid leave than mandated by the FFCRA; however, the corresponding payroll tax credits are capped at the FFCRA’s mandatory paid leave wage amounts.
The CARES Act also expands eligible employees under the paid leave provisions of the FFCRA to workers who were laid off not earlier than March 1, 2020, had worked for the employer for at least 30 of the last 60 calendar days prior to being laid off and were rehired by the employer.
Most importantly, employers subject to the FFCRA may receive an advance (including any refundable portions) of FFCRA payroll credits to help cover the expense of providing the required paid leave under the FFCRA. The U.S. Department of Labor is expected to issue further guidance through forms, form instructions and regulations.
CARES Act Individual Provisions
The final legislation includes the following provisions for individual taxpayers:
Individual taxpayers can expect a recovery rebate check of $1,200 per individual ($2,400 for married couples filing jointly), plus $500 for each qualifying dependent child, as soon as the U.S. Department of the Treasury (Treasury) and IRS are able to process these payments. The recovery rebate begins to phase out for taxpayers whose adjusted gross income exceeds $150,000 for joint returns, $112,500 for head of household and $75,000 for all other taxpayers.
The amount of recovery rebate a taxpayer receives is based on information reported on the taxpayer’s 2019 tax return (or 2018 if the taxpayer has not yet filed a 2019 return). For individuals who did not file a return in either 2018 or 2019, the IRS will use the individual’s 2019 Social Security income. Within 15 days of payment, the IRS will send each eligible taxpayer a letter to a last known address with details of the amount, date and method of payment, along with a number to contact if the taxpayer did not receive the payment.
Special Rules for Use of Retirement Funds
The CARES Act waives the 10 percent penalty on early distributions from qualified retirement plans for up to $100,000 of COVID-19-related distributions in 2020. Taxpayers may repay these amounts within three years of withdrawal without regard to that year’s cap. Although these distributions are otherwise taxable for federal income tax purposes, the taxpayer may elect to include the distribution in taxable income ratably over a three-year period.
This relief is available to an individual:
- Who is diagnosed with SARS-CoV-2 or COVID-19;
- Whose spouse or dependent is diagnosed with such virus; or
- 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
The CARES Act also provides a temporary waiver of the required minimum distribution (RMD) rules for certain retirement plans and accounts. Under this provision, funds related to RMDs normally required to be made by plan participants during 2020 can instead remain in those participants’ accounts.
Charitable Contributions Deduction Modifications
Taxpayers who do not otherwise elect to itemize deductions are allowed an above-the-line deduction in 2020 for up to $300 for charitable contributions made in cash (not stock) to any qualifying Section 501(c)(3) public charity, excluding donor-advised funds.
In addition, for individuals who itemize, the CARES Act temporarily increases limitations on deductions for charitable contributions made in 2020. For individuals, the 60 percent of adjusted gross income limitation is suspended for 2020 for cash contributions to qualifying organizations, excluding donor-advised funds. For contributions of food inventory, the limitation is increased from 15 percent to 25 percent. Excess contributions may be carried forward to future years based on the existing charitable contribution carryforward rules.
Exclusion for Certain Employer Payments of Student Loans
Through December 31, 2020, employers may provide a student loan repayment benefit of up to $5,250 annually to employees tax-free. This extends to both new student loan repayment benefits and other educational assistance provided by an employer under current law.
The CARES Act provides expanded unemployment insurance benefits for individuals (including those who are self-employed) who become unemployed, partially unemployed or are unable to work due to COVID-19 on or after January 27, 2020, and on or before December 31, 2020. In general, the unemployment benefit a recipient receives is increased by $600 per week (referred to as Federal Pandemic Unemployment Compensation). Benefits may vary by state.
CARES Act Business Provisions
The final legislation includes the following provisions for businesses:
Employee Retention Credit for Employers Subject to Closure due to COVID-19
While the FFCRA allows payroll credits for employers who are required to provide paid leave to employees affected by COVID-19, the employee retention credit under the CARES Act provides a credit based on the economic strain COVID-19 may put on a business.
For wages paid after March 12, 2020, and before January 1, 2021, eligible employers (including tax-exempt organizations) would be allowed a new refundable payroll tax credit equal to 50 percent of the qualified wages paid. The total eligible wages per employee are $10,000, resulting in a maximum credit of $5,000 per employee. To qualify for the credit, an employer must meet all of the following criteria:
- The employer must have carried on a trade or business during calendar-year 2020
- The operation of that trade or business is either:
- Fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19; or
- Receiving gross receipts, for at least one calendar quarter, that are less than 50 percent of the gross receipts received during the same calendar quarter(s) in the prior year. This period of significant decline in gross receipts is recognized until the gross receipts for a calendar quarter are greater than 80 percent of gross receipts for the same calendar quarter in the prior year
The rules governing whether employers qualify for the credit depend on the number of employees who work for the employer. For employers with more than 100 full-time employees during 2019, an employee must be unable to provide services due to the circumstances outlined in 2a or 2b above. For employers with 100 or fewer full-time employees, the credit is allowed regardless of whether an employee is able to provide services, as long as the circumstances outlined in 2a or 2b above are met.
The CARES Act includes anti-abuse measures that prevent employers from double-counting wages used to determine the employee retention credit in the calculation of other credits such as the Work Opportunity Tax Credit under Internal Revenue Code (IRC) Section 51 or the Employer Credit for Paid Family and Medical Leave under IRC §45S. In addition, employers receiving small business interruption loans (covered below) are not eligible for the employee retention credit.
Delay of Payment of Employer Payroll & Self-Employment Taxes
The CARES Act expands the payroll tax relief provided under the FFCRA by allowing employers to delay remittance of their share of Social Security tax that would have been deposited between the date of the CARES Act’s enactment and December 31, 2020. Instead, 50 percent of those taxes must be deposited by December 31, 2021, and the remainder deposited by December 31, 2022.
Similar relief is provided for self-employed individuals under the CARES Act. However, those taxpayers still must pay 50 percent of the Social Security tax portion of these self-employment taxes, i.e., the employee’s share, in the same manner as usual. Employers who have had indebtedness forgiven under the Small Business Act are not eligible for this payroll and self-employment tax deferral relief.
Charitable Contributions Deduction Modifications
For corporations, the CARES Act temporarily increases the 10 percent limitation on charitable contribution deductions to 25 percent of taxable income. Excess contributions may be carried forward to future years, subject to the general charitable contribution carryforward rules.
Modifications for Net Operating Losses
Under the CARES Act, the current net operating loss (NOL) rules put in place by the Tax Cuts and Jobs Act (TCJA) are temporarily revised to allow losses arising in tax years 2018, 2019 or 2020 to be carried back five years. In addition, the provision limiting NOLs to only 80 percent of a taxpayer’s taxable income is suspended for taxable years beginning before January 1, 2021, allowing companies to fully offset taxable income by such carrybacks or carryforwards.
The CARES Act also provides a technical correction to the TCJA to retroactively align the effective date of the NOL limitation and NOL carryback/carryforward provisions. In addition, for noncorporate taxpayers, the limitation on excess business losses imposed by the TCJA would be retroactively postponed and applied only to taxable years beginning after December 31, 2020. Therefore, if a taxpayer had an excess business limitation on their 2018 return, there may be an opportunity to amend to claim the additional loss and receive a refund.
Modifications of Limitation on Business Interest Expense
The TCJA created a new limitation on business interest expense deductions for tax years beginning after December 31, 2017. The CARES Act temporarily modifies the 30 percent of adjusted taxable income (ATI) limitation—as originally provided in the TCJA—to 50 percent of ATI. While taxpayers may elect to use the 30 percent limitation instead, this provision would affect taxable years beginning in 2019 or 2020 and allow businesses to increase liquidity with a reduced cost of capital. In addition, businesses may elect to use their 2019 ATI to calculate their 50 percent of ATI limitation for 2020.
Unless they elect not to, partners of partnerships subject to the business interest expense limitation rules would be able to treat 50 percent of any allocated excess business interest expense (EBIE) from the partnership during 2019 as fully deductible in tax year 2020. The remaining 50 percent of EBIE is subject to the normal rules under IRC §163(j) and is only deductible by the partner in a future year if that same partnership passes through excess taxable income or excess business interest income.
Technical Amendments Regarding Qualified Improvement Property
The CARES Act includes a highly anticipated technical correction to the TCJA (commonly referred to as the retail glitch) that would allow taxpayers to apply the accelerated bonus depreciation rules to qualified improvement property. The effective date of this amendment would be retroactive to the TCJA’s enactment, thus creating refund opportunities for taxpayers. Refunds could be achieved by filing either an amended 2018 return or possibly an accounting method change with the taxpayer’s 2019 return, depending on whether the IRS considers this an automatic change.
Other Notable Business Provisions
- Corporations will be able to accelerate the recovery of refundable AMT credits, originally intended to be made available over several years. Instead, those refunds would be fully recoverable in 2019 versus 2021.
- The CARES Act also includes a provision waiving the federal excise tax on distilled spirits used for or contained in hand sanitizer that’s produced and distributed in accordance with U.S. Food & Drug Administration guidance during calendar-year 2020.
CARES Act Relief for Small Business Owners
The 7(a) loan program, administered by the U.S. Small Business Administration (SBA), provides financial assistance to small businesses. Overall, the CARES Act authorizes an additional $349 billion for general 7(a) business loans. For SBA Express loans, the statutory $350,000 limit is increased to $1 million through December 31, 2020. In general, the SBA responds to Express loans within 36 hours (compared to standard 7(a) loans, which may take weeks to process).
Recipients of 7(a) loans may be eligible for loan forgiveness on covered loans in an amount equal to the sum of the costs incurred on or after February 15, 2020, and on or before June 30, 2020, due to payroll cost, mortgage interest payments, rent or utility payments. The CARES Act also gives the SBA authority to provide paycheck protection loans to help employers cover costs, including wages, paid leave and state taxes on employee wages. These benefits are available to employers with no more than 500 employees, including nonprofit organizations.
We will continue to monitor tax-related legislation and keep you up to date with relevant news, changing guidelines and new regulations in the BKD COVID-19 Resource Center. If you have questions, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.