Article written by:
Azra Nakicevic, CPA
Director, Tax & Business Advisory Services
Article originally published March 26, 2020
Last updated March 30, 2020
On March 27, 2020. the Coronavirus Aid, Relief, and Economic Security (CARES) Act was approved by the House of Representatives and signed into law by President Trump. This bill is intended to provide a third round of federal government support in the wake of the COVID-19 health and economic crisis, and includes several changes in tax policy aimed at providing tax benefits to individuals and businesses. Following is the summary of the tax provisions within the CARES Act.
Employee Retention Credit
- A fully refundable credit against the employer’s 6.2% share of Social Security taxes for businesses that, (a) are forced to close their operations, or (b) remained open, but during any quarter in 2020, gross receipts were less than 50% of what they were for the same quarter in 2019.
- Credit is available for qualified wages paid by qualified employers from March 13, 2020, through December 31, 2020.
- The tax credit is equal to 50% of qualified wages paid to each employee for the quarter and is limited to $5,000 per employee ($10,000 in eligible wages times 50%)
- For employers with 100 or fewer employees, qualified wages include all wages paid during the quarter for which the employer qualifies.
- For employers with more than 100 employees, qualified wages only include these that are paid by the employer during the periods in which the employee is not working.
- An employer who receives the Paycheck Protection Program loan under the CARES Act is not eligible for the credit.
Employer Payroll Tax Payments
- In addition to the tax credit against Social Security taxes described above, the new law will allow all employers to delay payments on their share of the 6.2% Social Security tax that would otherwise be due during 2020. One-half of the deferred payment will be due on 12/31/2021 and the remaining half on 12/31/2022.
- A similar deferral is available for self-employed individuals.
Net Operating Loss Provisions
- Losses from 2018, 2019, and 2020 can be carried back five years and applied against taxes in those years.
- Under the current law, taxpayers are only allowed to carry forward NOLs. This change may create a permanent tax benefit for taxpayers who carry back their NOLs to pre-TCJA, higher tax rate years.
- Taxpayers will temporarily be able to offset 100% of taxable income with NOLs, as opposed to 80% of taxable income under the current law.
Excess Business Loss Limitations
- Temporary suspension of excess business loss limitations for individuals under IRC Section 461(l) for tax years 2018, 2019, 2020. As a result, taxpayers who were subject to excess business loss limitations on already filed tax returns for 2018 and 2019 may be able to file amended tax returns and claim refunds.
Changes to Interest Expense Limitations
- Taxpayers subject to interest expense limitations under IRC Section 163(j) will be able to deduct interest expense of up to 50% of their EBITDA, a change from the current limitation of 30%. This change will be applicable for 2019 and 2020, for most taxpayers.
- Partnerships will be able to utilize 50% of EBITDA limitation for 2020 only. However, partners will be able to deduct 50% of the disallowed interest expense in 2020, irrespective of other limitation rules.
- Because many taxpayers will not have taxable income in 2020, they can elect to use their 2019 EBITDA in computing any interest expense limitation for 2020.
Qualified Improvement Property (QIP) Technical Correction
- Tenant improvements made by taxpayers to nonresidential real property will be eligible for a 15-year depreciable life and bonus depreciation, as opposed to the current 39-year life (and no bonus depreciation). These corrections will be effective for any eligible improvements made in 2018 and future years. As a result, taxpayers may be eligible to amend previously filed tax returns or take a deduction in the current year by filing an Accounting Method Change to take advantage of additional bonus depreciation on QIP.
- An above-the-line deduction of up to $300 for charitable contributions made in cash by individuals who do not itemize (i.e., claim the standard deduction). This provision is applicable for the tax year 2020 and beyond.
- For individual taxpayers that itemize, cash contributions made during 2020 will not be subject to AGI limitations.
- Charitable contributions made by corporations will be limited to 25% of taxable income, as opposed to the current 10% limitation.
Individual Stimulus Payments
- Individuals will receive checks from the IRS equal to $1,200 (for single taxpayers) or $2,400 (for married filing joint returns), plus $500 for each child under the age of 17.
- Payments may be reduced or fully eliminated depending on individual taxpayer’s AGI reported on 2018 or 2019 tax returns. The phase-out will start at $75,000 of AGI for single filers and $150,000 of AGI for joint filers.
- Taxpayers may be eligible for a tax credit against 2020 tax liability if they were not eligible for direct payment based on their 2018/2019 income, and are below income threshold limitations for 2020.
Retirement Fund Withdrawals
- Taxpayers will not be subject to a 10% penalty for early eligible withdrawals from retirement funds of up to $100,000. Any withdrawals will still be subject to income tax unless the distribution is repaid within three years, or the taxpayer elects to spread the income over a three-year period.
- Exclusion from income for student loan payments made by the employer of up to $5,250.
There are six main groups that will benefit from the wide-reaching provisions of the CARES Act: individuals, small businesses, large corporations, hospitals and public health, state and local governments, and education. To learn about the impact on each group, click here.