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Significant Tax Provisions of the CARES Act

Header Significant Tax - Significant Tax Provisions of the CARES Act
On March 27, 2020 President Trump signed into Law the Coronavirus Aid, Relief, and Economic Security Act.

The sweeping legislation gives substantial relief to business owners and individuals. It is the third stimulus package passed this year to help the country recover from the effects of the coronavirus pandemic, which, for some states, has forced non-essential businesses to shut down, leading to mass unemployment across the nation, with ripple effects being felt up and down the supply chain.

The CARES Act provides for economic stimulus in the form of loan forgiveness, support for small business, enhanced unemployment insurance and federal loans to industries impacted by the coronavirus pandemic.  In addition, The Act contains various tax relief provisions for both individuals and businesses.  The following is a summary of its most significant tax provisions:
heading 1 new - Significant Tax Provisions of the CARES Act

  • Direct cash payments of up to $1,200 for certain individual taxpayers and $2,400 for certain married couples filing jointly. These amounts would increase by $500 for every eligible child. The payment is available to married individuals filing a joint return with adjusted gross income of $150,000 or less, ($112,500 for Heads of Household and $75,000 for all others).  The payment phases out for taxpayers with adjusted gross income above these thresholds and is completely phased out at adjusted gross income of $198,000 for married individuals filing jointly ($146,500 for heads of household) and $99,000 for all other taxpayers.
  • The 10 percent penalty imposed on an early distribution from a retirement plan is waived for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes.
  • The deadline for making contributions to an IRA, HSA or an Archer MSA is extended to July 15, 2020.
  • The requirement to take a required minimum distribution from a retirement plan is waived for 2020. In addition, Coronavirus related distributions from eligible retirement plans are not subject to the 10% penalty for early distributions.
  • A $300 above the line charitable contribution is allowed for those taxpayers who elect not to itemize their deductions. In addition, the percentage limitation for charitable contributions of cash has been removed. Thus, individuals can deduct charitable contributions in full unless contributions exceed adjusted gross income.
  • An exclusion of up to $5,250 for Student Loans paid by Employers.

heading 2 - Significant Tax Provisions of the CARES Act

  • The Act provides for a deferral of 50% of the employer portion of Old-age, Survivors and Disability Insurance (social security tax) incurred for the period beginning upon enactment of the Act and ending on December 31, 2020.
  • The deferral also applies to 50% of the social security portion of self-employment taxes.
  • During the deferral period, the calculation of the penalty for failure to pay individual estimated taxes will not include the deferred amount of self-employment tax.
  • 50% of the deferred employment taxes are due on December 31, 2021, and the remaining 50% are due on December 31, 2022.
  • If an employer directs an agent or Professional Employer Organization to defer payment of applicable employment taxes, the employer is solely responsible for the payment of the deferred employment taxes by the deferred due dates.
  • The deferral provision does not apply if an employer has had debt forgiveness with respect to a loan made under the Paycheck Protection Program.

heading 3 - Significant Tax Provisions of the CARES Act

  • The Act provides for a refundable credit for eligible employers equal to 50% of qualified wages paid (up to $10,000 per employee) beginning March 13, 2020 through December 31, 2020.
  • The credit is taken against the employer portion of Old Age, Survivors and Disability Insurance (social security tax) reduced by the Credit for Employment of Qualified Veterans and the Credit for Research Expenditures of Qualified Small Businesses, as well as the credits for Qualified Sick Leave Pay and Paid Family Leave under the Families First Coronavirus Response Act.
  • An eligible employer is any employer that was in business during calendar year 2020 and either:
    • had its business partially or fully suspended during a calendar quarter as a result of a government ordered restriction due to COVID-19, or
    • has experienced a significant decline in revenue.
  • Qualified wages includes a properly allocable amount of qualified health plan expenses.
  • The income tax deduction for wages is reduced by the amount of the credit.
  • Any wages taken into account to determine the Employee Retention Credit cannot also be used to determine the Employer Credit for Paid Family and Medical Leave.
  • If a business employs a Professional Employer Organization (PEO) or similar arrangement, the credit shall belong to the business.
  • Penalties for failure to make a deposit of employment taxes are waived if such failure was due to the reasonable anticipation of the Employee Retention Credit.
  • If an eligible employer receives a loan under the Paycheck Protection Program, then the Employee Retention Credit is not allowed. If the eligible employer obtains the loan subsequent to taking the credit, there is a provision requiring recapture of the credit.

heading 4 - Significant Tax Provisions of the CARES Act

  • Qualified Improvement Property: The Act amends the Internal Revenue Code  to fix what has commonly been referred to as the “retail glitch” as follows:
    • Qualified Improvement Property (“QIP”) is now included in the 15 year property category under Code Section 168(e)(3)(E), and is therefore eligible for 100% bonus depreciation, meaning immediate expensing for Federal income tax purposes.
    • This change is effective as if it were included as part of the 2017 income tax legislation (the “TCJA”).  Therefore, qualifying property placed in service after September 27, 2017 is now properly classified as 15 year property and eligible for bonus deprecation.
    • QIP was previously defined under TCJA as any improvement to an interior portion of a building that is nonresidential real property as long as that improvement is placed in service after the building was first placed in service by any taxpayer. QIP specifically excludes expenditures for (1) the enlargement of a building, (2) elevators or escalators, or (3) the internal structural framework of a building. The CARES Act adds to this definition the requirement that the improvements must be made by the taxpayer.
    • Please note that it is not currently clear whether taxpayers will be able to file an application for a change in accounting method in the current (i.e., 2019 or 2020) tax year, or if amended returns for the affected years will be required.
    • At this point there does not appear to be any relief for taxpayers in a real estate trade or business who previously made an election under 163(j) to adopt the alterative depreciation method (which would prohibit bonus depreciation/immediate expensing) in order to avoid limitations on their interest deduction.
  • Net Operating Losses/Excess Business Losses – The Act provides:
    • The TCJA provided that net operating losses (NOLs) from 2018, 2019, & 2020, are only eligible to be carried forward to potentially offset future taxable income. Losses from those tax years may now be carried back potentially reducing taxable income for certain of the five previous tax years and generating refunds.
      • Taxpayers may elect to forego the carryback and carryforward instead.
    • The TCJA further limited the utilization of NOLs carried to 2019 & 2020 to 80% of taxable income. Those losses can now offset 100% of taxable income for those tax years.
    • The TCJA enacted Code Section 461(l), which limits the ability to use current year business losses to offset non-business income (such as portfolio interest, dividends, capital gains, etc.) to $250,000 ($500,000 for married taxpayers filing a joint return). This limitation is suspended for tax years 2018-2020.
      • The suspension of 461(l), coupled with the technical correction to the treatment of Qualified Improvement Property, will likely result in numerous NOLs warranting amended returns for 2018 (and potentially 2019 if previously filed).
  • Interest Expense Limitation: The TCJA also amended Code Section 163(j) to limit the interest deduction for certain businesses to 30 percent of “adjusted taxable income” (ATI, defined as taxable income increased by interest, depreciation and amortization deducted in arriving at taxable income).  For taxpayers other than partnerships (which includes limited liability companies classified as partnerships), the limitation on deductible business interest has been increased from 30% of ATI to 50% of ATI for tax years beginning in 2019 & 2020.  Another potentially favorable provision provides that taxpayers may also elect to compute their 2020 interest limitation with regard to 50% of their 2019 ATI.

Unfortunately the increased limit is not available to partnerships subject to Section 163(j) for tax years beginning in 2019.  Rather, 50% of a partner’s share of a partnership’s 2019 disallowed business interest expense is fully deductible in its 2020 tax year, and the remaining 50% is classified as excess business interest expense subject to normal 163(j) limitations.  For 2020 partnerships subject to the business interest limitations will compute any limitation using 50% of ATI instead of 30%. Partnerships may also elect to compute their 2020 interest limitation with regard to 50% of their 2019 ATI.

This legislation offers relief and many opportunities for individuals and businesses and we expect further guidance in the near future. If you have any questions about the legislation and how it may affect you and/or your business, please contact your MWE professional or call us at 516-747-2000.