The Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748), signed into law on March 27, 2020, is a $2.2 trillion package enacted to help individuals and businesses get through the health and economic crisis triggered by the coronavirus pandemic. The act is extensive and affects not only taxes in 2020, but those in prior years as well. Because of the huge scope of the act, this article covers only tax rules.
Rebate Checks for Individuals
Rebate checks are advance payments of a new refundable tax credit [Internal Revenue Code (IRC) section 6428]. These rebate checks for individuals with adjusted gross income (AGI) below set amounts are being paid via the IRS. Eligibility is determined by 2019 AGI, if returns for 2019 have been filed, or on 2018 returns if not. Different AGI thresholds apply to joint filers, heads of households, and other filers (i.e., singles, married persons filing separately). There is a phase-out range in which individuals can receive a partial payment. There is also an added amount for each dependent child; correspondingly, an individual who is another taxpayer’s dependent does not receive a rebate check.
Because the rebate check is an advance of a 2020 tax credit, some taxpayers may be eligible for an additional amount when they file their 2020 income tax return. This can occur, for example, if 2020 AGI is lower than the amount used to determine the rebate check. If 2020 AGI is higher, however, there is no clawback of the rebate. The rebate checks are not included in gross income.
Retirement Plan Relief
In times of financial trouble, many individuals turn to their retirement plans as a source of cash. The act provides several provisions to address this:
- No required minimum distributions are necessary in 2020. This waiver applies without regard to whether there is any coronavirus- related need.
- The 10% early distribution penalty that usually applies to those under age 591⁄2 on withdrawals up to $100,000 from IRAs, 401(k) accounts, and other qualified retirement plans, as well as deferred compensation plans, is waived if coronavirus-related. This means the individual (or spouse) has been diagnosed with COVID-19 or experiences adverse financial consequences because of quarantine, business closure, layoff, or reduced hours due to the pandemic.
- Income from a coronavirus-related distribution can be spread over three years to minimize the tax impact on the distribution.
- Distributions can be recontributed to the plans from which they came within three years. Recontribution amounts are not subject to annual contribution limits.
Charitable Contributions by Individuals and Businesses
To encourage charitable giving, the act provides several tax incentives for individuals and businesses:
- Individuals who do not itemize can take an above-the-line deduction for charitable contributions in 2020 up to $300. The contributions do not have to relate to coronavirus relief efforts. In fact, contributions made in 2020 prior to enactment of the CARES Act can be taken into account for this purpose.
- Individuals who itemize personal deductions in 2020 can deduct all cash contributions. Usually, there is a 50%-of-AGI limit on such contributions.
- Corporations can deduct contributions up to 25% of taxable income for 2020, instead of the usual 10% limit.
- Contributions of food inventory, deductions for which are usually limited to 15% of AGI, are deductible up to 25% in 2020.
Payroll Tax Changes
The act includes several changes designed to encourage continued employment of workers while easing the cash flow burden on businesses struggling to survive the crisis. The key provision is a new employee retention credit (section 2301 of the act). The credit is equal to 50% of qualified wages paid to employees who are not working because of business being fully or partially suspended due to government orders related to the coronavirus or a significant decline in gross receipts (50% less in the current calendar quarter compared with the same quarter in 2019). The credit applies to wages paid after March 12, 2020, through December 31, 2020. The amount taken into account per employee is limited to wages (including healthcare benefits) up to $10,000 for all quarters. The credit is taken against applicable employment taxes (the employer’s share of the Social Security portion of FICA); it is not an income tax credit and does not factor into the general business credit.
Other payroll tax changes include the following:
- Deferral of payroll taxes from the date of enactment through December 31, 2020. This applies only to the employer’s share of Social Security taxes in FICA. Fifty percent of the deferred taxes are payable by December 31, 2021, and the other 50% by December 31, 2022. Similar deferral is allowed for a portion of self-employment tax paid by individuals; the “employer portion” of Social Security taxes (6.2% of total self-employment tax) can be deferred.
- Tax-free treatment of student loan repayment assistance. Employer payments of employees’ student loan debt (up to $5,250) made after the date of enactment and before January 1, 2021, are considered a tax-free fringe benefit. This benefit is not included in wages and is not subject to employment taxes.
Because many businesses are expecting losses in 2020, the tax rules for losses have dramatically changed. First, the limit on losses for noncorporate taxpayers, which was introduced by the Tax Cuts and Jobs Act (TCJA) to curtail current deductions above a set dollar amount, has been repealed by the act.
Second, and most importunately, the rules for net operating losses (NOL) have been greatly expanded. Prior to the TCJA, there had been a two-year carryback for NOLs; carrybacks and carryovers could offset 100% of taxable income. The TCJA ended the carryback (other than for farming businesses) and capped offsets from carry- forwards to 80% of taxable income. The CARES Act restores and expands the carryback. For 2018, 2019, and 2020, there is a five-year carryback for all businesses and a 100% offset to taxable income; this means that any businesses with losses in those years and 2019 can file amended returns to claim immediate tax refunds. For 2020 NOLs, tax professionals should keep in mind that quick refunds can be claimed prior to filing tax returns. (See instructions to Form 1045 for individuals and Form 1139 for C corporations.)
Other Business Tax Provisions
There is a limitation on deducting business interest by other-than-small businesses (those that meet a gross receipts test) or farming and real estate businesses that elect to be exempt. The act eases the limitation to permit more interest to be deducted. But for 2019 and 2020, the limit is increased to 50% of adjusted taxable income; furthermore, on 2020 returns, taxpayers can elect to use 2019 adjusted taxable income. Taxpayers should make this election where the 2019 amount is higher than the 2020 amount.
The TCJA had failed to make an intended change to the recovery period for qualified improvement property (certain internal building improvements), mistakenly leaving it at 39 years. The CARES Act makes the necessary technical correction to fix the recovery period at 15 years; this means qualified improvement property now is eligible for 100% bonus depreciation. The change is effective retroactively for property purchased and placed in service after September 27, 2017. This presents a refund opportunity for 2017 or 2018 returns.
The Paycheck Protection Program included in the CARES Act is an expansion of the Small Business Administration’s (SBA) 7(a) loan program for small businesses. One of the features of this program is loan forgiveness. Generally, income from the cancellation of debt is included in gross income; however, the CARES Act specifically allows this to be treated as tax-free.
High deductible health plans (HDHP) are a prerequisite for contributing to a health savings account (HSA). The HDHP usually must require that the insurance deductible be exhausted before policy benefits apply. The CARES Act, however, allows HDHPs to provide telemedicine services without a premium without being disqualified. In addition, HSAs usually do not permit tax-free reimbursement for over-the-counter items without a doctor’s prescription. The act allows tax-free reimbursements for menstrual products; no prescription is necessary.
Much of the work created by the CARES Act falls on the IRS, which must issue the rebate checks and update instructions and publications changed by the new law. More guidance on new provisions will also be necessary.
Sidney Kess, JD, LLM, CPA, is of counsel to Kostelanetz & Fink and a senior consultant to Citrin Cooperman & Co., LLP. He is a member of the NYSSCPA Hall of Fame and was awarded the Society’s Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Advisory Board. Reprinted with permission from the March 30, 2020 edition of the New York Law Journal © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected]