Business Tax Provisions in the Coronavirus Aid, Relief and Economic Security (CARES) Act
On Friday, Mar. 27, President Donald Trump signed the massive $2 trillion coronavirus stimulus package – the Coronavirus Aid, Relief and Economic Security [CARES] Act – into law to provide assistance to workplaces and employees.
As with most legislation, additional guidance will be needed in several areas. While most of the CARES Act does not have tax impacts, here are some key highlights:
Refundable payroll tax credits
Employee retention credit for employers that had to fully or suspend operations because of an order by the government or had a significant reduction in gross receipts, and for all small employers:
- The credit is only available if: (1) operations were fully or partially suspended, due to a COVID-19 related shut down order or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year through the earlier of the fourth quarter of 2020 or the end of the quarter during which gross receipts are at least 80% of gross receipts for the same quarter of the prior year.
- The maximum refundable credit is 50% of up to $10,000 of eligible wages.
- Businesses with over 100 employees are eligible only with respect to wages paid for employees that were not providing services to the employer due to the reasons stated above.
- A trade or business with 100 or less employees is eligible for the credit regardless of whether the employee is providing services to the employer or not.
- For companies with over 100 employees, the credit is only available if (1) operations were fully or partially suspended due to a COVID-19 related shutdown order or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year.
- For a trade or business that employ less than 100 employees, the above limitations do not apply.
- NOTE: These credits are not available to businesses receiving Small Business Interruption Loans (Paycheck Protection Program)
- The specifics and limitations of this provision can get quite complex and are beyond the scope of this blog.
Employer-side Social Security payroll tax payments may be delayed
The act allows employers and self-employed individuals to defer payment of the employer share of FICA taxes. Payments of such taxes for 2020 that are otherwise due through the end of 2020 would be payable over two years (50% by 12/31/2021 and 50% by 12/31/2022.) Self-employed taxpayers can also defer 50% of their self-employment tax under the provision. The delayed payments are not available to any business that receives loan forgiveness under the Paycheck Protection Program or similar program.
Paycheck Protection Program Loan Forgiveness
Employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer's share of social security tax that otherwise would be required to be made beginning on March 27, 2020 without incurring failure to deposit and failure to pay penalties. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer's share of social security tax due after that date. However, the amount of the deposit and payment of the employer's share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the applicable dates as described above.
Expansion of NOL Carryback rules
Previously, NOLs could only be carried forward, not backward, and could shield up to 80% of taxable income. With the CARES Act, NOLs generated in 2018, 2019, and 2020 can be carried back, up to 5 years, and can shield 100% of taxable income in tax years before 2021.
Increase in business interest deduction
The Tax Cuts and Jobs Act (TCJA) imposed limitations on deductibility of business interest expense. The CARES Act modified that limitation to generally allow business interest expense deductions of up to 50% of adjusted taxable income rather than 30%, for tax years beginning in 2019 and 2020. Additionally, for years beginning in 2020, the taxpayer may elect to apply the limitation based on adjusted taxable income for the last taxable year beginning in 2019. Special rules apply if the 2020 year is a short taxable year.
This change would require amended returns by corporations and individuals that were subject to the limitation. A special rule would allow partners in partnerships to treat 50% of the 2019 excess business interest as a 2020 deduction that is not subject to the limits, with the balance subject to the applicable limitations.
This is welcome relief to many highly leveraged businesses and for the real estate industry – but businesses that would prefer to continue with the 30% limitation, an election is available to do so.
Retail “bug” fix
The Act finally fixes a drafting error in the TJCA. Qualified Improvement Property (certain costs associated with improving the interior portion of existing buildings) is now classified as 15-year property and is eligible for 100% bonus depreciation, rather than 39-year property as previously classified under TCJA.
This change is effective retroactively, so 2018 returns can be amended to take advantage of the shorter life or the business could request an automatic change in accounting method on their 2019 or subsequent return.
Modification of charitable contribution limitation for corporations
The C Corporation charitable deduction limit for cash contributions in 2020 is increased to 25% of taxable income rather than 10%. The 25% limit also applies to contributions of food inventory.
Larger utilization of tax credit carryforwards and AMT credit
Corporations can utilize any remaining alternative minimum tax credit carryovers, in full, in the first taxable year beginning after 2018.
Student Loan Payments by Employers
Up to $5,250 of certain employer payments made before 2021, whether to the employee or to a lender, of principal or interest on any qualified education loan incurred by the employee for the employee’s own education, can be tax free to the employee.
Look for much more guidance in the future from the Internal Revenue Service and Treasury regarding the implementation of these new provisions.
Key Individual Provisions of the CARES Act
The following are highlights of key individual provisions of the CARES Act.
Changes to Retirement Plan Payments and Loan Rules
Required minimum distribution (RMD) for 2020 are waived:
- This will avoid the plan having to sell plan assets when they may be at their lowest values.
- Also applies to RMDs for inherited IRAs.
- If a taxpayer has already taken 2020 RMD, they have the ability to pay it back.
Coronavirus-related distributions of up to $100,000 from an IRA, employer sponsored retirement plan, or combination of both, which are made in 2020 by an individual who has been impacted by the coronavirus because they:
- Have been diagnosed with COVID-19;
- Have a spouse or dependent who has been diagnosed with COVID-19;
- Experience adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced because of the disease;
- Are unable to work because they lack childcare as a result of the disease;
- Own a business that has closed or operate under reduced hours because of the disease; or
- Meet some other reason that the IRS decides to say is OK.
If you need to take a distribution due to any of the reasons listed above, here are a couple other key things to be aware of:
- 10% early withdrawal penalty is waived;
- Not subject to mandatory withholding requirements;
- Income may be spread over three-year period, pro rata; however, the taxpayer can elect to include all the income in 2020;
- Additionally, the amounts are eligible to be repaid over 3 years – taxpayer can roll all or any portion of the distribution back into the retirement account, and it will be considered treated as a tax-free rollover. If distributions are rolled using this option, an amended return can and should be filed to claim a refund of any tax paid attributable to the rolled over amount.
Loans from employer-sponsored retirement plans
- The limit on the amount of loans that can be taken from a qualified plan for coronavirus-related purposes is increased to the lesser of $100,000 or 100% of the vested benefit;
- Delay of payments – any payments that would otherwise be owed on the plan loan from the date of enactment through the end of 2020, may be delayed for one year.
If you plan to do any of these transactions with your IRA/retirement plan, please be sure to keep concise records as to the transactions and communicate with your tax advisor.
Changes to Individual Loss Limitation Rules
Under old law:
- For 2018 – 2025, “excess business losses” of an individual were limited to $250,000 if single, and $500,000 if married filing jointly, under section 461(l);
- Wages were presumed to count as business income.
- Section 461(l) is suspended for 2018, 2019, and 2020. Losses can be used without limitation (provided passive activity, basis, at risk limitations are satisfied.)
- When 461 kicks back in during 2021, wages will not count as business income.
- For taxpayers who do not itemize, up to $300 of charitable contributions can be taken as a deduction in calculating AGI for the 2020 tax year. This will provide a tax benefit even to those who do not itemize.
- AGI Limitation for cash contributions temporarily repealed:
- AGI limitation was increased to 100% of adjusted gross income (AGI) from the prior 60% under TCJA;
- Taxpayer can completely wipe out 2020 tax liability with charitable contributions;
- If charitable contributions exceed the 2020 100% of AGI limit, the excess can be carried forward for 5 years;
- Qualified Charitable Contributions under this provision prohibits such contributions from funding either donor advised funds or 509(a)(3) “supporting organizations.”
Student Loan payments
- Federal student loan payments deferred until September 30, 2020.
- During this time no interest will accrue on the debt.
Unemployment Compensation Benefits
- ‘Regular’ unemployment compensation is bumped by $600 per week, and the benefit period is extended by 13 weeks.
- Unemployment benefits will be available for the first week of unemployment, waiving the normal one-week waiting period.
- Expansion of benefits to those who would normally not qualify such as self-employed and independent contractors.
Definition of Qualified Medical Expenses for Certain Tax-favored accounts is expanded to include over-the-counter expenses
- Beginning in 2020, the definition of qualified medical expenses, for purposes of Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and Healthcare Flexible Spending Accounts (FSAs) is expanded to include over the counter medications.
- Qualified medical expenses for such accounts are further expanded to include amounts paid for ‘menstrual care products,’ defined as “a tampon, pad, liner, cup, sponge, or similar product used by individuals with respect to menstruation or other genital tract secretions.”
If you have any questions, please contact your Herbein tax professional or email us at firstname.lastname@example.org. Articles compiled by Keith Hoffman and Stacy Weller, respectively.
Herbein is responding to the COVID-19 (Coronavirus) pandemic with our Coronavirus Resource Center, which provides regularly updated information, answers to frequently asked questions and other resources to help during this global health crisis. Continue to check back for more updates in the coming weeks.