Tax-Related Provisions of the CARES Act

On March 27, President Trump signed a $2 trillion relief package to address the economic consequences of the coronavirus pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748) (the Act) includes several tax-related provisions that are intended to provide economic relief to individuals, including refundable credits that will be issued immediately, expanded deductibility of charitable contributions and a waiver of penalties on withdrawals from retirement accounts. The Act also provides relief to businesses, including an employment tax credit for businesses that suffer economically as a result of the pandemic, a delay in the required deposit of employment taxes for all businesses, and modifications of certain tax provisions that were enacted in the 2017 tax reform legislation known as the Tax Cuts and Jobs Act (the TCJA). Certain international tax-related provisions that were contained in an earlier proposed version of the Act were not included in the final bill that was passed. A summary of the key tax-related provisions is set forth below.

Individual Provisions

• Refundable credit for individuals. The Act provides that eligible individuals with incomes of up to $75,000 ($150,000 for a joint return) will receive checks from the United States Treasury in the form of a refundable credit of $1,200 ($2,400 for a joint return), plus $500 for every child in a family. The amount of the payment phases down with higher incomes, and phases out completely at individual income levels of $99,000 ($198,000 for a joint return).
  
  
• Retirement plan distributions. Under the Act, no penalty is imposed on withdrawals of up to $100,000 made in 2020 from qualified retirement accounts by individuals who face coronavirus-related hardships. Qualifying hardships include being diagnosed with COVID-19 by a CDC-approved test, having a spouse or dependent who is diagnosed with COVID-19 by a CDC-approved test, and adverse financial consequences from quarantine, furlough, lack of child care or loss of working or business hours. Any amount distributed (that would otherwise be taxable) will be included in taxable income ratably over a three-year period beginning with the year in which the funds are distributed. Taxpayers may (but are not obligated to) repay such withdrawn amounts during the same three-year period without regard for contribution limits.
  
  
• Temporary waiver of required distributions from certain retirement plans. The minimum distribution requirement for certain defined contribution plans and individual retirement accounts is waived for 2020.
  
  
• Charitable deductions. For taxable years beginning in 2020, the Act permits individual taxpayers who do not itemize deductions to take an above-the-line deduction of up to $300 for charitable contributions made in cash during such taxable year, except for contributions to supporting organizations or donor advised funds.
  
  The Act also allows taxpayers to elect to disregard the limitation on the deductibility of charitable contributions as a percentage of their adjusted gross income for contributions made in cash during the 2020 calendar year, except for contributions to supporting organizations or donor advised funds.

Business Provisions

• Delayed deposit of employment taxes. The Act treats an employer’s share of Social Security taxes and 50% of the Social Security component of self-employment taxes required to be deposited from the date of enactment through a period ending on or before Jan. 1, 2021, as timely deposited if 50% of such amounts are deposited by Dec. 31, 2021, and the remainder by Dec. 31, 2022. Thus, employers and self-employed individuals can significantly delay the deposit of such taxes.

Note that the Act does not provide any extensions for filing or payment of other federal taxes. However, the IRS has separately extended to July 15, 2020, federal income and gift tax filings and payments due April 15, 2020. For more information, see Treasury Extends April 15 Income Tax Payment and Filing Deadline.

• Employment tax credit. The Act provides “eligible employers” with a credit against the employer’s share of Social Security taxes in an amount equal to 50% of “qualified wages” with respect to each of its employees, subject to an aggregate limitation of $10,000 per employee. Excess credits are refundable to the employer. The provision covers wages paid after March 12, 2020, and before Jan. 1, 2021, but only with respect to eligible employers who do not take a small business interruption loan authorized under the Act.
  
  An eligible employer is one which was carrying on a trade or business during 2020 and, with respect to any calendar quarter, either (i) the operation of such trade or business is partially or fully suspended as a result of a governmental order due to the coronavirus pandemic (a “Covered Business Suspension”) or (ii) the employer suffers a significant decline in gross receipts (a “Significant Decline”). A Significant Decline period commences with the first calendar quarter beginning after Dec. 31, 2019, during which the employer realizes less than 50% of gross receipts for the same calendar quarter during the prior year and ends with the calendar quarter beginning after the first quarter during which such employer’s gross receipts are greater than 80% of gross receipts for the same calendar quarter during the prior year. Tax-exempt organizations experiencing the suspension of operations akin to a Covered Business Suspension may also qualify as eligible employers.

For eligible employers whose average number of full-time employees during 2019 exceeded 100 (Eligible Large Employers), qualified wages are those wages paid to employees who are not performing services for such employer due to a Covered Business Suspension or a Significant Decline (and, presumably, qualified wages are only those wages paid during the relevant period). For eligible employers whose average number of full-time employees during 2019 was not greater than 100, qualified wages are (i) any wages paid by such employer to an employee during a Covered Business Suspension (apparently without regard to whether such employee is still performing any services for the employer) or (ii) wages paid to an employee during a Significant Decline period. Qualified wages with respect to any eligible employer include certain health care expenses of such employer as are properly allocable to such wages.

The credit is determined after reduction by (i.e., is net of) certain credits allowed against the applicable employment taxes under Section 3111 of the Internal Revenue Code and under sections 7001 and 7003 of the Families First Coronavirus Response Act enacted earlier this month (relating to pandemic-related paid sick leave and paid child care leave). For more information, see Payroll Tax Credits for Paid Sick Leave and Child Care Leave Authorized for Eligible Employers with Workers Impacted by the COVID-19 Pandemic.

The provision includes rules designed to avoid duplicative benefits and double counting of employees, as well as anti-abuse rules.

The provision authorizes the Secretary of the Treasury to issue regulations or other guidance as may be necessary to, among other things, allow an advance payment to eligible employers of the employee retention credit and provide rules for employers who recently entered into business.

• Net operating losses. The Act temporarily relaxes the taxable income limitations on a taxpayer’s use of net operating losses (NOLs), and temporarily reinstates the ability to carry back NOLs. These changes will allow taxpayers to utilize losses and amend prior-year returns, which can provide critical cash flow and liquidity.

Specifically, the Act provides that NOLs generated in taxable years beginning in 2018, 2019 or 2020 may now be carried back five years from the year of the loss. (The TCJA had eliminated the ability to carry back NOLs generated in taxable years beginning after Dec. 31, 2017.) The Act also allows all NOLs carried forward or back to taxable years beginning before Jan. 1, 2021, to offset 100% of taxable income (rather than 80% with respect to post-2017 NOLs as provided by the TCJA) in such years. For taxable years beginning after Dec. 31, 2020, the changes made by the TCJA generally continue to apply. Thus, taxpayers may offset 100% of taxable income with NOLs generated in taxable years beginning before Jan. 1, 2018 (which expire after 20 years from the year generated), but may only utilize NOLs generated in taxable years beginning after 2017 (which have no expiration) to offset 80% of such taxable income (computed after reduction for offset by pre-2018 NOLs).

The Act provides special rules with respect to REITs, life insurance companies and shareholders of certain foreign corporations.

• Excess business losses. The Act delays until taxable years beginning after 2020 implementation of a TCJA provision that disallows (through 2025) a deduction for excess business losses of noncorporate taxpayers. The provision thus retroactively allows such taxpayers to deduct such previously disallowed losses for 2018 and 2019 (possibly requiring amended returns to be filed) as well as for 2020.

Absent this relief, a noncorporate taxpayer’s ability to deduct business losses against nonbusiness income for 2018 through 2020 would have been annually limited to $250,000 for single individuals and $500,000 for joint filers, with any excess losses carried forward and treated as an NOL in subsequent tax years.

The Act also provides new rules for calculating excess business losses.

• Net interest expense. Following the TCJA, with certain exceptions, net interest expense could only be deducted to the extent of 30% of adjusted taxable income. The Act increases the limitation to 50% for taxable years beginning in 2019 and 2020. In addition, for a taxable year beginning in 2020, a taxpayer may elect to apply the limitation by reference to the adjusted taxable income in a taxable year beginning in 2019.
  
  
• Qualified improvement property. The Act fixes a technical glitch in the TCJA that unintentionally subjected “qualified improvement property” to depreciation over 39 years. Under the Act, “qualified improvement property” is treated as “15-year property” for purposes of depreciation, and thus is eligible for 100% bonus depreciation. “Qualified improvement property” generally means any improvement made by the taxpayer to a building’s interior; however, improvements do not qualify if they are attributable to the enlargement of a building or the internal structural framework of a building. This change, which is retroactive to Dec. 22, 2017, represents a potential tax savings opportunity for many taxpayers through increased depreciation deductions and may represent a refund opportunity for some taxpayers who made qualifying improvements since Dec. 22, 2017, and before passage of the Act.
  
  
• Charitable Contributions. The limitation on the deductibility of charitable contributions by corporations is increased to 25% (from 10%) of taxable income.
  
  
• Expedited corporate AMT credit refundability. Following the repeal by the TCJA of the corporate alternative minimum tax (AMT) for taxable years beginning after Dec. 31, 2017, any AMT carryovers to tax years after that date generally could be utilized to offset the taxpayer’s regular tax liability (after reduction by certain other credits). In addition, the TCJA provided that for a corporate taxpayer’s 2018, 2019 and 2020 taxable years, to the extent that AMT credit carryovers exceeded regular tax liability (after reduction by certain other credits), 50% of such carryovers were refundable, with any remaining AMT credits becoming fully refundable in 2021. The Act amends that provision of the TCJA to expedite usage of AMT credits by corporate taxpayers, thereby enhancing corporate liquidity. A corporation with AMT credits from prior years may elect to take the entire refundable credit amount at once beginning with its first taxable year beginning in 2018. If a corporate taxpayer does not so elect, the AMT credit becomes completely refundable in the case of a taxable year beginning in 2019.