As ramifications posed by the COVID-19 pandemic continue to unfold, Congress on March 27, 2020 passed and the President signed the Coronavirus Aid, Relief and Economic Security (CARES) Act. The legislation was designed to bring sweeping changes to tax and finance laws in order to give much-needed financial relief to people and businesses.
Following is a summary of key items of the legislation. Please note that it will take some time for us to review and analyze all critical components of this over 600-page document. This is not meant to be an all-inclusive summary and does not cover many key details, deadlines and qualifications as of this writing. We will be updating this document and will issue separate communications on certain pieces of the CARES Act over the coming weeks. As always, we recommend that you discuss your situation with your tax professional prior to taking any action.
Financial Relief for Individuals
One-time cash payments to taxpayers, based on 2019 or 2018 tax returns
- Amounts vary depending on adjusted gross income, filing status, number of qualifying children. Not all taxpayers will qualify for the aid.
- Individuals who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs such social security income, are eligible for the advance rebate.
Increase in unemployment benefits
- Laid-off employees may receive unemployment compensation of $600/week for four months and an additional 13 weeks of benefits for participating states.
- Covers part-time, self-employed and contract workers.
Tax filing dates and payments
- As previously announced, the April 15 tax filing date has been extended to July 15, 2020.
- Individuals will now be allowed to postpone first quarter estimated tax payments to July 15, 2020.
- There is no cap on the amount of tax payments being postponed.
- Principal and interest payments on federally-held student loans have been suspended through September 30, 2020.
- Payments up to $5,250 made before January 1, 2021, by an employer either to the employee or to a lender of principal and/or interest on qualified education loans will not be taxable to the employee. This will apply from the date the bill is signed into law until the end of 2020.
Retirement Fund Changes
Tax penalty waived
- Distributions related to COVID-19 from eligible retirement plans are not subject to the 10% tax on early distributions. These distributions must be made after January 1, 2020 and before December 31, 2020 for coronavirus-related purposes. (1)
- These distributions may not exceed $100,000 for any taxable year.
- Amounts distributed may be repaid at any time over a three-year period starting on the date the distribution was made.
- The penalty free distribution covers retirement plans and IRAs.
- Traditional pensions are not covered by this waiver.
(1) A coronavirus-related distribution is a distribution made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) 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.
- The Act provides flexibility with loans from certain retirement plans for COVID-19 related relief.
Required Minimum Distributions (RMDs)
- The Required Minimum Distributions (RMDs) from certain defined contribution plans and individual retirement accounts, are waived for 2020.
- Modification of limitations on cash contributions: The 60% adjusted gross income (contribution base) limitation on charitable contributions is suspended for 2020. 100% of cash gifts to public charitable organizations (not supporting organizations or donor advised funds) made in 2020 can be deducted against 2020 adjusted gross income for those making large dollar donations.
- Up to $300 of charitable contributions in 2020 can be deducted against adjusted gross income by individuals who do not elect to itemize deductions, as long as the contributions are not made to donor-advised funds or non-operating private foundations.
Financial Relief for Businesses
For Small Businesses (1-499 employees)
Payroll Protection/Interest-free loans
Expansion of Economic Injury Disaster Loan eligibility (EIDL) (from SBA)
- As part of its disaster assistance program, the SBA is providing low-interest working capital loans of up to $2 million to small businesses and nonprofits affected by the coronavirus. See this article for more details.
For Midsize Businesses (500-10,000 employees)
- Businesses of 500 to 10,000 employees, while not eligible for the Paycheck Protection Program, are eligible for direct loans under the CARES Act. Such businesses are required to make a good faith certification that they will comply with requirements listed in the Act.
For All Businesses
Employee Retention Credit (2)
- A refundable payroll tax credit for 50% of wages paid by eligible employers (including nonprofits) to certain employees during the COVID-19 crisis.
- The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
Delay of payment of employer payroll taxes (2)
- Taxpayers (including the self-employed) can delay paying the employer portion of certain payroll taxes through the end of 2020. Specific percentages and applicable dates apply.
(2) The Employer Retention Credit or employer payroll tax deferral is not available to employers receiving Small Business Interruption Loans under the Act.
Delay of estimated tax payments for corporations
- Corporations that file or owe tax payments on April 15 may postpone both the filing and tax payments until July 15, 2020.
Modifications for net operating losses (NOL)
- Prior to CARES Act, a corporation’s NOLs were subject to a taxable income limitation, and they could not be carried back to reduce income in a prior tax year. With the CARES Act, a loss from 2018, 2019 or 2020 can be carried back five years.
- The taxable income limitation will be temporarily removed in order to allow businesses to use an NOL to fully offset income.
- This loss limitation also applies to pass-through businesses and sole proprietors, so they can benefit from the NOL carryback rules and access critical cash flow to maintain operations and payroll for their employees.
Modifications for Sec. 461(l) Excess Business Loss Limitations
- New law temporarily modifies the loss limitation for noncorporate taxpayers, applicable to tax years beginning after December 31, 2017 to allow deductions of excess business losses arising in 2018, 2019, and 2020.
- Act clarifies that wages not considered business income when provision returns in 2021.
Accelerated corporate alternative minimum tax credits (AMT)
- Corporations may claim outstanding minimum tax credits (subject to limits) for tax years before 2021, at which time any remaining minimum tax credit may be claimed as fully refundable. The minimum tax credit is refundable for any tax year beginning in 2018 or 2019 (in an amount equal to 50% ( 100% for tax years beginning in 2019) of the excess minimum tax credit for the tax year, over the amount of the credit allowable for the year against regular tax liability. It also provides for an election to take the entire refundable credit amount in 2018. Application for a tentative refund must be filed with the IRS before December 31, 2020.
Interest expense deduction increased
- Businesses may temporarily increase the amount of interest expense they can deduct on their tax returns, to 50% of the taxable income for 2019 and 2020. The current allowable amount is 30%. Partnerships, however, do not get to change their limit during 2019. Instead, any interest disallowed at the partnership level is passed out to the partners and is suspended at the partner level under the normal rules. In 2020, however, 50% of the suspended interest “frees up,” and will be fully deductible, while the other 50% will remain suspended until the partnership allocates excess taxable income or excess interest income to the partner (or the partnership is no longer subject to Section 163(j)).
Qualified improvement property
- The CARES Act makes a technical correction to the Tax Cuts & Jobs Act of 2017 by designating qualified improvement property placed in service after December 31, 2017 as 15-year property for depreciation purposes. This is especially beneficial for those in the hospitality and retail industries, as it makes qualified improvement property eligible for100% bonus depreciation, allowing them to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building.
- Limitation on the deductibility of cash charitable contributions during 2020 in increased from 10% to 25% of taxable income.
- The limitation on deductions for contributions of food inventory is increased from 15% to 25%.
As always, Smith and Howard is here to help. If you have any questions or need help implementing any of these changes, please contact us by completing the form below.