Taxes on Individuals
The CARES Act contains rebate amounts equal to $1,200 for individuals, or $2,400 for joint filers, with a $500 credit for each qualifying child. These rebates are advanced refund credits against 2020 taxes. The rebate amounts are phased out based on the 2018 adjusted gross income (unless a 2019 return has already been filed). The phase-out begins at $75,000 for single filers and $150,000 for joint filers. The rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000 and joint filers with $198,000.
The bill waives the 10-percent penalty on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions. Eligible distributions can be taken through December 31, 2020, by an individual diagnosed with COVID-19 with a CDC-approved test, an individual whose spouse or dependent is diagnosed with the virus by such a test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus. Coronavirus-related distributions may be repaid within three years, and taxpayers may re-contribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years. Any income inclusion resulting from retirement plan withdrawals can be spread over a three year period. The bill also allows loans of up to $100,000 from qualified plans, and repayment can be delayed. The bill temporarily suspends the required minimum distribution rules for 2020.
The bill enhances tax incentives for making charitable contributions for the 2020 tax year. The bill creates an above-the-line charitable deduction for 2020 (not to exceed $300). This allows an individual to claim a deduction for a charitable contribution even if they don’t itemize deductions. The bill also modifies the AGI limitations on charitable contributions for 2020 to 100% of AGI for individuals. The bill also increases the 2020 corporate contribution limit to 25%.
Student Loans Paid by Employers
The bill provides for an exclusion of up to $5,250 from income for payments of an employee’s education loans. To qualify for the exclusion, the loan must have been for the employee for the employee’s own education. The payment can be made to the employee or directly to the lender. The exclusion only applies for payments made by an employer after the date of enactment and before January 1, 2021.
Taxes on Businesses
Employee Retention Credit
The bill creates an employee retention credit for employers that close due to the coronavirus crisis. Eligible employers receive a credit against employment taxes equal to 50 percent of qualified wages paid to employees 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.
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 of 100 or more employees. All wages paid qualify for the credit for employers with less than 100 employees. The credit is available to be claimed on a quarterly basis. The credit applies to wages paid after March 12, 2020, and before January 1, 2021.
Payroll Tax Deferral
The CARES Act defers the payment of payroll taxes to provide employers additional cash during the time of crisis. The bill delays payment of 50% of 2020 employer payroll taxes until December 31, 2021, and the other 50% will be due December 31, 2022. For self-employment taxes, 50% will not be due until those same dates. Payroll taxes due from the enactment of the act through December 31, 2020, are deferred.
Payroll Tax Credit Refunds
The bill provides for advance refunding of the payroll tax credits enacted under 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 IRS forms and instructions.
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. The bill eliminates loss limitation rules applicable to sole proprietors and pass-through entities to allow them to take advantage of the NOL carryback.
Minimum Tax Credits
Currently, the amount of the refundable corporate AMT credit is limited to 50 percent of any excess minimum tax in 2018 through 2020, before being fully refundable in 2021. The bill accelerates the year for which a fully refundable credit can be claimed to 2019, and allows corporations to elect to claim the fully refundable minimum tax credits in 2018.
Business Interest Expense Limitation
For 2019 and 2020 tax years, this bill increases the limitation amount to 50 percent (from 30%) of the taxpayer’s adjusted taxable income for 2019 and 2020. Also, taxpayers can elect to use 2019 income in place of 2020 for the computation.
Qualified Improvement Property
The CARES Act makes a technical correction to a prior Congressional oversight regarding qualified improvement property under Section 168 and makes it 15-year property. As 15-year property, these assets would also potentially qualify for bonus depreciation.
Excise Tax Relief
The bill provides a temporary exception from alcohol excise taxes for alcohol for use in or contained in hand sanitizer. Also, the bill suspends excise taxes on aviation and kerosene used in aviation fuel. The exception and suspensions are applicable to 2020 only.
The CARES Act is 880 pages. Some smaller provisions impacting federal taxes include:
- The exclusion from tax of certain forgiven small business loans, mortgage obligations, or other loan obligations forgiven by the lender during the applicable period.
- Pension funding relief for failures to meet contribution requirements to defined contribution plans during 2020.
Understand the entirety of the CARES Act can be a daunting task and it’s easy to get confused or miss a crucial piece of information. If you’re looking for more information or just need help understanding the CARES Act and how it may affect you and your business, reach out to a CRI tax advisor.