By Ashley Withers
This afternoon, the President signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act contains significant tax relief for individuals and businesses. Below are the tax highlights.
Relief for Individuals
Individual Stimulus Payment/Credit
- Most individuals should receive checks issued by the IRS as soon as possible in the amount of $1,200 for single taxpayers or $2,400 for married filing joint returns, plus $500 for each dependent child under age 17.
- The checks are an advance payment of a refundable tax credit.
- Single taxpayers will find their payments reduced for 2019 adjusted gross income above $75,000 and eliminated above $99,000.
- Married filing joint taxpayers will find their payment reduced for 2019 adjusted gross income above $150,000 and eliminated above $198,000.
- If the 2019 return hasn’t been filed then the IRS will base the check on the 2018 return. Where no return is required, the IRS will use other sources such as social security benefit statements.
Early Withdrawal of Retirement Funds
- Coronavirus impacted individuals may withdraw up to $100,000 in retirement funds without incurring a 10% penalty in 2020. Although no penalty is incurred on early withdrawals, such withdrawals remain subject to usual federal income taxation (payable over a 3 year period). Such federal income taxation may be avoided, however, if such withdrawn funds are repaid within 3 years.
- To qualify for the favorable treatment, an individual must either:
- be diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC,
- have a spouse or dependent diagnosed with one of the two diseases, or
- experience adverse financial consequences as a result of being quarantined, furloughed, or laid off or having work hours reduced, or being unable to work due to lack of child care.
Increased Charitable Deductions
- Individuals who do not itemize deductions can make up to a $300 cash donation to qualifying charities and deduct the donation “above-the-line” in computing adjusted gross income. This deduction is available in addition to the standard deduction, and is permanent beginning in 2020.
- Individuals who do itemize deductions can make cash donations to certain charities and deduct up to 100% of those donations from their adjusted gross income (even if they would otherwise be subject to the 60% limit based on adjusted gross income). For corporations, their charitable deduction limit was increased from 10% to 25% of its adjusted gross income. This deduction change is only for the 2020 tax year.
Aviation Excise Taxes
Certain Aviation Excise Taxes Suspended
- Aviation excise taxes on kerosene and on the transportation of both persons and property generally has been suspended through the end of 2020.
Tax Relief for Businesses and Employers
Paycheck Protection Loans
- Many business loans made before February 15, 2020 qualify for principal reduction in the amount the business may have paid in interest, payroll (generally for the percentage of payroll retained, and further reduced if an employee’s wages are reduced by more than 25%), interest paid on secured business debt, rent and utilities. Unlike prior debt cancellation rules, this principal reduction will not result in taxable income to the borrower.
- Employers of fewer than 500 are allowed to take Small Business Association (SBA) loans for payroll, mortgage interest, rent, utilities, and other debt service requirements for the February 15 through June 30, 2020 period. Under provisions that allow loan forgiveness, like the paragraph above, this provision will not result in taxable income to the borrower.
Emergency Government Disaster Loans
- SBA lending is expanded to allow access to Economic Injury Disaster Loans. While the law provides for advances on which no repayment is required, the Act fails to exclude forgiveness of such loans from income. Thus, any such non-payment (at least of principal) seems likely to generate taxable income to the borrower.
Employee Retention Credit Against Employment Taxes
- Employers may qualify for a refundable employer retention credit for any quarter if the business was shut down by government order related to COVID-19 or suffers a 50% drop in quarterly revenue from the same quarter of the prior year (and continuing until revenues recover to 80% of the prior year). The amount is 50% of up to $10,000 per employee of qualified wages (including a portion of certain health plan expenses). The credit is against social security payroll taxes and any excess is refundable in the same manner as a payroll tax overpayment refund (i.e., promptly).
- An employer who takes out a payroll protection loan under direct assistance provisions located elsewhere in the Act is not eligible for the employee retention tax credit.
Delay of Payment of Employer Payroll Taxes
- The due date for social security taxes (and deposits) is deferred until January 1, 2021. The deferral also applies to 50% of self-employment taxes that are attributable to the social security tax rate.
- An employer who takes out a payroll protection loan under direct assistance provisions located elsewhere in the Act is not eligible for the deferral of social security dates.
Relaxation of Limitations on Use of Net Operating Losses
- Prior to the Tax Cuts and Jobs Act (TCJA), individuals and businesses could carry net operating losses (NOLs) back two years and forward 20 years. Under these prior rules, NOLs could offset up to 100% of taxable income, subject to limitations under the corporate alternative minimum tax rules.
- The TCJA generally left these rules in place for pre-2018 NOLs, but provided that NOLs occurring in 2018 and thereafter (1) could not be carried back, (2) could be carried forward indefinitely, and (3) could offset only 80% of taxable income in the year to which they were carried forward.
- The CARES Act permits NOLs occurring in 2018, 2019 and 2020 to be carried back for up to five years and carried forward for up to 20 years. Taxpayers can elect not to carry NOLs back and instead have them only carried forward. The Act would also allow NOLs that are carried to 2019 and 2020 to offset up to 100% of taxable income in those two tax years.
One Limitation on Deduction Business Losses Temporarily Suspended
- There are several limitations on the ability of an individual to deduct losses from a business against other income. One of these, which was added in 2017, limits the amount of “net business loss” that an individual may deduct against other business income to $250,000 for single individuals and $500,000 for married couples filing jointly. Any loss above these thresholds is treated as an NOL.
- The CARES Act removes this limitation for losses occurring in 2018, 2019 and 2020, meaning that a taxpayer whose 2018 loss was limited by this provision may file an amended 2018 return and get a refund. The CARES Act does, however make clear that, for 2021 and subsequent years, wages will not be treated as other “business” income, meaning that this provision will have more teeth when it comes back into effect.
Accelerated AMT Credit Refunds
- With the repeal of the corporate alternative minimum tax (AMT) under the TCJA, refundable AMT credits were made available to corporations over several years, ending in 2021. The CARES Act accelerates companies’ recovery of those AMT credits.
Changes to the Interest Limitation Rules
- The CARES Act increases businesses deductions for interest expenses to 50% of their adjusted taxable income for 2019 and 2020 – a 20% increase from the previously existing 30% cap.
- In computing the 50% limitation in 2020, businesses can elect to use their 2019 adjusted taxable income. As a result, businesses experiencing losses in 2020 could greatly benefit from being able to use a more favorable adjusted taxable income amount from the prior year.
- Partnerships can only use the 50% limitation in 2020 (and not in 2019). But, partners will be able to deduct up to 50% of the prior year’s interest expense in 2020.
100% Bonus Depreciation Available for Qualified Improvement Property
- The TCJA contained a drafting error that prevented taxpayers from being able to immediately deduct (100% bonus depreciation) the cost of improvements made to the interior of a non-residential building (referred to as “qualified improvement property” (QIP)).
- The CARES Act corrects the drafting error and assigns QIP a 15-year depreciable life and allows taxpayers to immediately deduct 100% of the cost of the improvements. This correction is effective for 2018 onward. Taxpayers might consider amending a prior tax return to take advantage of the bonus depreciation available for 2018 or 2019.
Temporary Exception from Excise Tax for Alcohol Used to Produce Hand Sanitizer
- Distilleries, whether previously assisting in the manufacture of hand sanitizer or changing operations to provide distilled spirits for use in the manufacture of hand sanitizer, may cause such spirits to be removed from their distillation facilities without being subject to excise tax.
Student Loan Relief
Exclusion from Income of Employer Payment of Employee Student Loans
- For the rest of this year, an employer can pay an employee’s student debt (up to $5,250, aggregated with other educational assistance) without the employee having to include such amounts as income from employment. Such employee may not deduct the interest paid on such loans by the employer (up to the capped amount), however.
Temporary Relief for Borrowers
- The CARES Act temporarily suspends payments due on federal student loans, as well as the involuntary collection on any such loans, including offsetting a taxpayer’s tax refund. The CARES Act specifically limits the ability to involuntarily collect on taxpayer refunds through September 30, 2020.
Ashley P. Withers is an attorney in the tax practice of Jackson Walker’s Dallas office. She focuses her practice on tax planning for complex corporate, partnership, family, and inter-generational transactions as well as tax controversy matters including IRS audits and appeals. Her experience includes analyzing anti-conduit financing arrangements, 1099 and W-2 reporting compliance, taxability of litigation settlements, and tax implications of stock transfers in various situations. Ashley has become particularly adept at working with clients to understand and utilize Qualified Opportunity Zones (QOZs), which permit investors to sell or exchange appreciated assets, invest the gain in certain ventures within a geographically designated QOZ, and receive substantial tax benefits as a result.
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