The Senate has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the third phase of the government’s response to the impact of the Coronavirus. It is estimated that this package will exceed $2 trillion in cost, the largest relief package yet, dwarfing President Obama’s 2008 financial crisis stimulus package of $800 billion. The House is scheduled to bring the Act to vote on Friday March 27, 2020, and President Trump has indicated his support of the Act.
The Act contains many provisions including small business loans, help for distressed sectors, health provisions, and tax provisions. Below is a summary of the tax related provisions of the CARES Act.
Generally, subject to limitations, the CARES Act will provide an advanced payment to individuals of not more than $1,200 ($2,400 for joint filers) increased by $500 for each child under the age of 17. The advanced payment will be reduced for individuals with 2018 adjusted gross income (AGI) greater than $75,000 ($150,000 for joint filers, $112,500 for head of household). The reduction will be 5% of the amount that the taxpayer’s AGI exceeds the aforementioned thresholds. Therefore, a single taxpayer with no children would not receive an advanced payment if their AGI exceeded $99,000 (calculated - 1,200-5%*(99,0000-75,000)). Likewise, joint filers with no children would receive no credit if their AGI exceeded $198,000. Amongst other limitations, individuals that are non-resident or are claimed as a dependent will not be eligible for the advance payment. The advance payments will be coordinated with a credit on the individual’s 2020 return for true-up of the actual amount due to the individual based on their 2020 adjusted gross income.
The Act will increase the ability for many individuals to deduct a portion of their charitable contributions:
The Act provides relief for individuals that must use funds from their retirement fund; that is a coronavirus related distribution.
The Tax Cuts and Jobs Act (TCJA), passed at the end of 2017, limited the amount of net business losses an individual could deduct against other types of income to $250,000 ($500,000 for a joint return) for years 2018 through 2025. CARES modifies the effective date of the loss imitation provisions to 2021 through 2025. This will allow individuals with otherwise allowable business losses to fully deduct the losses against all income for taxable years 2018, 2019 and 2020. This may also create a net operating loss that may be carried back as discussed below in the business provisions.
WORKER RETENTION CREDIT
The Act encourages companies that have been negatively impacted to retain employees by providing a credit for wages paid to employees that have been retained.
DELAY OF EMPLOYER PAYROLL TAXES
The Act also provides a deferral in the timing to deposit the employer portion of payroll taxes, thus providing immediate assistance to cash flow. Businesses would not be required to deposit the employer share of FICA taxes (6.2% portion) from the date of enactment until December 31, 2020. However, 50% of the amount deferred would be required to be deposited on December 31, 2021, with the remaining 50% deposited on December 31, 2022. The business must still deposit the employer’s share of the hospital insurance tax (1.45% portion) as well as all of the employee’s share of the payroll taxes withheld. Any taxpayer that has loans forgiven under the CARES Act is not eligible for this deferral.
Similar to individuals, the Act also increases the ability for many businesses to deduct a portion of their 2020 qualifying cash charitable contributions. This temporarily increases the threshold for deducting qualified charitable contributions to 25% (from 10%) of taxable income.
MODIFICATION TO NET OPERATING LOSS RULES
The CARES Act relaxes many of the limitations on a business’s or an individual’s ability to utilize net operating losses (NOL) that were in place because of TCJA.
PRIOR YEAR MINIMUM TAX
With the TCJA’s repeal of alternative minimum tax (AMT), many businesses had AMT credit carryovers that were being refunded subject to an annual calculation beginning in 2018. CARES has eliminated this calculation beginning for taxable years beginning after December 31, 2017, thus making the amount of AMT carryovers completely refundable on the businesses 2018 or 2019 tax return.
LIMITS ON BUSINESS INTEREST EXPENSE DEDUCTION
TCJA generally placed limitations on the amount of business interest expense that could be deducted on an annual basis. CARES modifies these limitations as follows:
BONUS DEPRECIATION ON QUALIFIED IMPROVEMENT PROPERTY
CARES fixes a drafting error in the TCJA, by allowing a 100% write-off of qualified improvement property by using the bonus depreciation provisions. This amendment is retroactive to property placed in service after December 31, 2017, which could allow businesses to receive refunds by amending their 2017, 2018 or 2019 (if filed) returns to deduct the cost of qualified improvement property.
UHY will publish more information about the other relevant sections of the CARES Act.