Summary of Tax Provisions in the Coronavirus Aid, Relief and Economic Security (“CARES”) Act
March 27, 2020
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act (the “Act”), H.R. 748, which passed the Senate with a 96-0 vote on March 25, 2020 contains a number of tax measures as part of a $2 trillion aid package designed to help an economy suffering from the coronavirus outbreak. A summary of the tax provisions in the CARES Act is provided below.
IMPACT ON INDIVIDUALS
Recovery Rebates
The Act provides direct payments to taxpayers by creating a new tax credit for 2020 that will be paid to many taxpayers as an advance. On March 30, 2020, the IRS announced that advance rebate payments will begin to be issued within the next three weeks.
Direct deposit of funds: Taxpayers who have authorized the IRS to electronically deposit refunds on any return filed after January 1, 2018 will receive the payment by direct deposit. The IRS is currently developing a web portal to collect direct deposit information from taxpayers who have not previously provided direct deposit information to the IRS. Taxpayers who do not provide direct deposit information will receive mailed checks.
Amount of payments: Individuals are eligible to receive up to $1,200 and joint filers can receive up to $2,400, plus an additional $500 per child. Rebates are phased out for taxpayers with higher incomes. The table below summarizes the amount of rebates available and the income at which rebates will be reduced or phased out.
|
Filing status |
Single or |
Married Filing Jointly |
Head of Household |
|
Number of children |
0 |
0 |
1 |
|
Amount of rebate |
$1,200 |
$2,400 |
$1,700 |
|
Additional rebate for each additional child |
$500 |
||
|
Income limitation for full rebate (AGI) |
$75,000 |
$150,000 |
$112,500 |
|
Rebate reduction |
Reduced by 5% of the amount that AGI exceeds the above limit. |
||
|
AGI cut-off for rebate eligibility |
$99,000 |
$198,000 |
$146,500 |
|
Increase to cut-off AGI for each additional child |
$10,000 |
||
Tax Filing Required: Income is determined by the adjusted gross income (AGI) listed on a taxpayer’s 2019 income tax return. For those who have not filed a 2019 return, the AGI on the 2018 return will be used. Individuals who are not required to file a return – including low-income taxpayers and Social Security recipients – will need to file a simple tax return with the IRS to receive a payment. Additional information about the simple return will be available on the IRS website shortly.
Restrictions: This rebate is not available to nonresident aliens, those who can be claimed as dependents on another’s return, estates or trusts, or anyone who did not report a valid social security number on their last return.
Early distribution penalties on retirement accounts waived
The Act excludes coronavirus-related disbursements from the 10% tax on early distributions for retirement accounts. Individuals can withdraw up to $100,000 without penalty if the individual, their spouse, or dependents are diagnosed with coronavirus, or who have experienced adverse financial consequences as a result of quarantine, furlough, loss of employment or reduction in hours as a result of the coronavirus. These amounts can be repaid over 3 years, and any amounts included in taxable income can be pro-rated over 3 years. Distributions must be taken by December 31, 2020.
Changes to retirement plan loan limits and due dates
The Act increases the limit for loans from retirement accounts that are taken for six months after passage of the Act. The loan limit is increased from $50,000 to $100,000.
Additionally, any loans currently outstanding from retirement accounts, with a repayment due date through December 31, 2020, are deferred for 1 year.
Waiver of minimum distributions from retirement plans
Minimum distribution rules for retirement accounts are waived for 2020.
Health insurance and over-the-counter products
The Act allows high-deductible plans to provide telehealth and other remote services free of charge without losing their status a high-deductible plan.
Additionally, it adds over-the-counter menstrual care products to the list of items that can be reimbursed out of a Health Savings Account, Archer Medical Savings Account, Health Flexible Spending Account, or Health Reimbursement Arrangement.
Charitable contributions
For taxpayers who do not itemize, the Act allows for a $300 above-the-line deduction for qualified charitable donations starting in 2020. For taxpayers who itemize, qualified cash contributions made to charitable organizations in 2020 are not subject to income limitations, taxpayers can deduct up to 100% of their AGI. Additionally, for contributions of food inventory in 2020, the limitation on deduction is increased to 25% of an individual’s AGI (increased from 15%). Some limitations apply.
Employer-paid student loan repayment assistance programs (“LRAP”)
The Act excludes from an employee’s taxable income up to $5,250 per year of payments made by employers, under LRAPs, toward an employee’s student loans.
IMPACT ON BUSINESSES
The Act delays the due date for certain employment and self-employment taxes, provides a refundable employee retention credit, and provides for advance payment of payroll credits to immediately help employers with cash flow.
Delay in due date and payment of employment taxes
The Act allows employers to delay payment of the employer-paid portion of applicable payroll taxes due starting on the date of enactment of the Act through December 31, 2020. Half of the deferred payments are due on December 31, 2021, and the remainder on December 31, 2022.
The Act also allows self-employed individuals to defer 50% of their applicable self-employment taxes. This requires 50% of 2020 applicable self-employment taxes to be paid with 2020 taxes, with 25% of 2020 applicable self-employment taxes due on December 31, 2021 and the remaining 25% of 2020 self-employment taxes due on December 31, 2022.
Employee retention credit
The Act provides a payroll tax credit for employers who close as a result of governmental orders issued related the coronavirus outbreak but who retain and pay their employees. The credit also applies to employers who have a 50% reduction in gross receipts as compared to the same quarter in 2019.
The credit is equal to a maximum of 50% of an employees’ qualified wages, up to $10,000 per employee. For employers with more than 100 employees: the credit applies to wages paid while employees are not providing services due to a partial or full suspension in commercial activity due to the coronavirus outbreak. For employers with 100 or fewer employees: the credit applies to any wages paid during a period of partial or full suspension of commercial activity due to the coronavirus outbreak. The credit also applies also to employer-paid qualified health plan expenses attributable to these wages.
The credit applies against the employer-paid portion of social security taxes (6.2%) and is refundable if the credit exceeds those taxes. This credit does not apply to any wages paid under the paid FMLA or paid sick leave provisions of the Families First Coronavirus Response Act (“FFCRA”). Nor does it apply to employers who are state, local, federal governments or those who take a loan under the Small Business Loans provided in the Act.
Advance payment of employment credits
The Act provides for the advance payment of the employee retention credit, and the FFCRA paid FMLA leave and paid sick leave credits, allowing employers to withhold the value of the credits from taxes that would normally be deposited with the IRS. The Act also waives penalties for employers who do not deposit payroll taxes in anticipation of receiving a credit under these provisions.
Minimum contributions to defined benefit plans
The Act defers minimum contributions for single-employer defined benefit plans for 2020 until January 1, 2021.
Net operating losses (“NOLs”)
The Act allows NOLs incurred in tax years beginning after December 31, 2017 and before January 1, 2021 to be carried back 5 years and generally removes the 80% of taxable income limitation for these NOLs. These rules do not apply to real estate investment trusts (“REIT”) and different rules apply to insurance companies. The Act also includes a technical correction to the effective date of changes made by the Tax Cuts and Jobs Act (“TCJA”) to the NOL rules.
Business loss limitations
The Act removes the limit on deductibility of business losses for non-corporate taxpayers for 2018, 2019, and 2020. The limit was put in place by the TCJA.
Corporate alternative minimum tax (“AMT”)
The Act allows for full refundability of AMT credits in 2019, instead of 2021. Alternatively, corporations can elect to receive the entire credit for the 2018 tax year if they file a refund by December 31, 2020. The IRS will have 90 days to act on these refund requests.
Business interest deduction
The Act increases the amount of business interest that can be deducted to 50% of adjusted taxable income (from 30%) for 2019 and 2020. It also allows taxpayers to use their 2019 adjusted taxable income to compute the limitation for the 2020 tax year.
Exemptions from excise taxes
The Act waives certain excise taxes charged for air transport of people and property from the date of enactment of the Act through December 31, 2020.
Additionally, the Act waives excise taxes on distilled spirits for 2020 if the alcohol is used to produce hand sanitizer under guidance from the Food and Drug Administration.
Charitable contributions
The Act allows corporations who make qualified charitable contributions in cash in 2020 to deduct contributions up to 25% of their taxable income. Additionally, for contributions of food inventory in 2020, the limitation on deduction is increased to 25% of a corporation’s taxable income (increased from 15%). Some limitations apply.
Qualified improvement property (“QIP”)
The Act corrects an error in the TJCA which made QIP subject to depreciation over 39 years. QIP is now depreciable over 15 years which makes it eligible for bonus depreciation.