On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (the CARES Act), which provides several economic assistance and tax measures as part of a $2 trillion aid package designed to help the economy as it suffers from the effects of the coronavirus pandemic.
Hereby, we summarize some of the most important measures in the CARES Act:
Individuals
Recovery rebates
The Act provides for payments to taxpayers, (recovery rebates) which, in general, consists of advance of refundable credit for the tax year 2020. Under this provision, eligible individuals are allowed a credit of $1,200 ($2,400 for joint filers), plus $500 for each qualifying child, for the first taxable year beginning in 2020. An eligible individual is any individual who has a Social Security number and who is not a nonresident alien or an individual who can be claimed as a dependent on another taxpayer’s return, or an estate or trust.
Phase Out
The allowable credit is reduced by 5% of the eligible individual’s adjusted gross income in excess of $75,000 (all filers other than joint and head of household), $112,500 (head of household), or $150,000 (joint filers). The credit phases out entirely at $99,000 ($198,000 for joint filers).
How will the IRS calculate income?
If you have already filed you 2019 tax return, the IRS will use your 2019 income, marital status and dependents. (The usual deadline for filing tax returns, April 15, has been pushed back to July 15 this year in another response to the pandemic.) For those individuals who have not filed their 2019 income tax return, the IRS will use data from last year’s filings. Americans who don’t earn enough to be required to file a tax return can submit one to the IRS now to make sure the agency has accurate information on them.
Timing for Recovery Credit
It is not cleared yet the timing Treasury will send out the payments. However, Treasury Secretary Steven Mnuchin expressed he wants the payments to go out within three weeks whereas Senate Minority Leader Chuck Schumer said President Donald Trump hopes the Internal Revenue Service can start sending the money much sooner than that, on April 6. Some commentators on different media have expressed that the 1 week to 3 weeks period is very optimistic considering some previous relief took longer, about two months. Also, checks sent in the mail may take longer to reach taxpayers. The government is also contemplating using pre-loaded debit cards to send the payments to people who do not have bank accounts.
Retirement plans
In general, taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the 10% additional tax for early distributions. Eligible distributions can be taken up to December 31, 2020. Coronavirus-related distributions may be repaid within three years. For these purposes, an eligible taxpayer is one who has been, or spouse or dependent, diagnosed with SARS-CoV-2 virus or COVID-19 disease or who experiences adverse financial consequences from being quarantined, furloughed, or laid off, or who has had his or her work hours reduced, or who is unable to work due to lack of child care. Any resulting income inclusion can be taken over three years. The bill also allows loans for up to $100,000 from qualified plans, and related repayment can be delayed.
The bill delays 2020 minimum required contributions for single-employer plans until 2021.
Charitable deductions
The CARES Act creates an above-the-line charitable deduction for 2020 up to $300. The bill also modifies the adjusted gross income (AGI) limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. The bill also increases the food contribution limits to 25%.
Health plans
The CARES Act also amends certain rules for high-deductible health plans (HDHPs) to allow them to cover telehealth and other remote care services without charging a deductible.
Also, over-the-counter menstrual care products are added to the list of items that can be reimbursed out of a health savings account, Archer medical savings account, or health reimbursement arrangement.
Entities
Payroll tax credit refunds
The CARES Act also provides for advance refund of the payroll tax credits previously enacted in the Families First Coronavirus Response Act. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using forms and instructions the IRS will provide. The IRS is instructed to waive any penalties for failure to deposit payroll taxes under Internal Revenue Code Sections 3111(a) or 3221(a) if the failure was due to an anticipated payroll tax credit.
Employee retention credit
The CARES Act also creates an employee retention credit for employers that close due to the coronavirus pandemic. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are employers who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit.
Charitable deductions
The CARES Act creates an above-the-line charitable deduction for 2020 up to $300. The bill also modifies the adjusted gross income (AGI) limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. The bill also increases the food contribution limits to 25%.
Payroll tax delay
The CARES Act delays payment of 50% of 2020 employer payroll taxes and self-employment taxes until December 31, 2021; the other 50% will be due Dec. 31, 2022.
Net operating losses
The bill temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback). Taxpayers may evaluate if the NOL carryback will result in a tax refund. If that is the case, an amended tax return may be filed for applicable previous years to claim the refund.
Excess loss limitations
The CARES Act repeals the Sec. 461(l) excess loss limitation. Sec. 461(l) previously added by the most recent Tax Reform, and disallows excess business losses, if exceeds $250,000 ($500,000 for married taxpayers filing jointly) of noncorporate taxpayers.
Corporate alternative minimum tax (AMT)
In general, the CARES Act modifies the AMT credit for corporations to make it a refundable credit.
Interest limitation
For tax years beginning in 2019 and 2020, IRC Section 163(j) (interest expense limitation) is amended to increase the adjusted taxable income percentage from 30% to 50%. Also, taxpayers can elect to use 2019 income in place of 2020 for the computation.
Qualified improvement property
The CARES Act also makes technical corrections with respect to qualified improvement property under Sec. 168 by considering it 15-year property. Consequently, it is expected a tax impact on the allowable depreciation expense for this type of property.
Aviation taxes
In general, several aviation excise taxes are suspended until 2021.
We are paying close attention to further guidance from Treasury and IRS in response to the CARES Act.
Stay tuned to our publications for more information.
W Legal Desk Advocats, legal TEAM.