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On March 25, 2020, the U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
On Friday afternoon, March 27, the U.S. House of Representatives passed the bill, and President Trump has signed it.
This alert provides a summary of the most significant of these new tax provisions.
The various stimulus payments or loans which Congress is approving will take a time to implement. The goal is to have money flowing from the federal government to either individuals or businesses by mid-April. Yesterday a reported 3.3 million new unemployment claims were reported. The various tax changes or revisions, both at the individual or business level, will not reach the taxpayer until the filing of the 2021 income tax returns.
We are actively updating this material as more information is available.
A key economic stimulus provision of the Act provides for cash payments of up to $1,200 to individuals or $2,400 for couples who file joint tax returns, with additional $500 payments per qualifying child. The payments begin phasing out when a single taxpayer’s adjusted gross income exceeds $75,000 (or $150,000 for joint filers), and completely phase out for single taxpayers with adjusted gross income greater than $99,000 or joint incomes greater than $198,000 (the complete phase outs are increased by $10,000 per qualifying child).
Checks will be based upon either your 2019 1040 return if already filed or your 2018 return. Look at your adjusted gross income to determine your status. For individuals who are dependents, such as college students, you may not be receiving a stimulus checks. The stimulus checks will not be income taxable.
Checks are expected to be sent out by April 20, 2020 either by USPS or direct deposit if you had a refund for the 2019 1040 filing directly deposited into an account.
REAL ID DEADLINE
The deadline to get your enhanced driver’s license or updated ID has been extended from October 1, 2020 to September 30, 2021.
$17 billion has been allocated to the Small Business Administration (SBA) to cover six months of payments for small businesses with existing SBA loans, rent, mortgages and utility costs now eligible for SBA loan forgiveness.
There will also be funds available for small business to receive loans which can turn into grants if used for payroll, rent, mortgages or other to-be-determined expenses. The loans will be SBA loans which will be available through lenders who participate in the SBA program. The government is relaxing many requirements in the loan application process.
Congress is expanding the unemployment benefits in an attempt to replace the average worker paycheck. On top of the state-provided maximum benefits, an eligible worker would receive an extra $600.00 per week. Self-employed individuals, freelancers and gig workers are now being covered under the bill. Most states have already relaxed their requirements for unemployment in order to provide benefits to individuals who normally would go weeks without receiving any benefits after applying. The sudden change from a “full” economy with hurdles to receive unemployment benefits to a complete stop has required states to quickly change the rules. We have been advising clients to apply for unemployment as soon as possible.
NEW EMPLOYEE RETENTION PAYROLL TAX CREDIT FOR EMPLOYERS SUBJECT TO CLOSURE
The Act provides a new refundable payroll tax credit (against the 6.2% “employer share” Social Security tax) for 50% of qualified wages paid by employers whose (1) operations were fully or partially suspended due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year. For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order until the employer has a quarter where its receipts exceed 80% of what they were for the same quarter in the prior year. The credit is limited to the first $10,000 of compensation (including health benefits) paid to an employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020. There is some confusion whether if an employer receives an SBA loan whether the employer will also qualify for the tax credit.
DELAY OF PAYMENT OF EMPLOYER PAYROLL TAXES
The Act allows employers and self-employed individuals to defer making deposits of the 6.2% “employer share” Social Security tax on wages and self-employment income otherwise due through the end of the year. The deferred employment tax is to be paid over the following two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
RELAXATION OF LIMITATIONS ON NET OPERATING LOSSES (NOLs)
Under current law, NOL carryforwards are subject to a taxable income limitation, and NOLs cannot be carried back to reduce income in a prior tax year. This Act relaxes these limits by providing that a loss from 2018, 2019, or 2020 can be carried back five years. The Act also temporarily removes the taxable income limitation to allow a NOL carryforward to fully offset income.
RELAXATION OF LIMITATIONS ON EXCESS BUSINESS LOSSES OF NON-CORPORATE TAXPAYERS
The Act relaxes the excess business loss limitations applicable to losses from pass-through businesses and sole proprietorships so that their owners can benefit from the NOL carryback rules noted above. This will not impact taxpayers until they file their 2020 income tax return in 2021.
RELAXATION OF LIMITATION ON BUSINESS INTEREST
The Act temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns by increasing the 30% limitation to 50% of the taxable income for 2019 and 2020. However, entities taxed as partnerships do not use the 50% limit for 2019. Instead, interest disallowed at the partnership level is allocated to the partners and suspended. For 2020, 50% of the partner’s suspended interest becomes deductible and the remaining 50% remains suspended until the partnership allocates excess taxable income or excess interest income to the partner.
IMMEDIATE EXPENSING OF QUALIFIED IMPROVEMENT PROPERTY
The Act enables businesses, especially in the hospitality industry, to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. This provision corrects the “retail glitch” error in the 2017 Tax Cuts and Jobs Act. This change is retroactive to January 1, 2018.
INDIVIDUAL TAX PROVISIONS
Relaxed rules for coronavirus-related distributions from retirement funds.
The Act waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the Act provides flexibility for loans from certain retirement plans for coronavirus-related relief.
A coronavirus-related distribution is a distribution made before year-end 2020 to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Secretary of the Treasury.
Waiver of required minimum distribution (RMD) rules.
The Act waives the RMD rules for certain defined contribution plans and IRAs for calendar year 2020.
Above-the-line deduction for 2020 charitable contributions.
The Act allows an above-the-line charitable contribution deduction of up to $300 for 2020 cash contributions for taxpayers who do not itemize their deductions.
Relaxation of limitations on charitable contributions during 2020.
The Act increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50% of adjusted gross income limitation is suspended for 2020. For corporations, the 10% limitation is increased to 25% of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Student loan relief.
In order to encourage employers to implement student loan repayment programs, the Act allows an employee to exclude from income up to $5,250 in qualifying student loan repayments paid by an employer on behalf of the employee after the date of enactment and before January 1, 2021. The loans held by the Federal government will have an automatic payment suspension until September 30, 2020. Interest is not supposed to accrue during this time frame.