Tax Benefits Available Under the $2 Trillion Coronavirus Relief Package
Last updated April 16, 2020
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) today, providing for $2.2 trillion in spending and tax relief provisions for businesses and individuals to help boost the U.S. economy.
Key Tax Provisions for Individuals
2020 Recovery Rebates for Individuals
Under the CARES Act, eligible U.S. resident individuals (generally, any individual with a valid social security number other than an individual claimed on another taxpayer’s tax return or an estate or trust) with adjusted gross income up to $75,000 (or $150,000 if married) will receive a $1,200 cash rebate from the IRS ($2,400 in the case of eligible individuals filing a joint return), plus an additional $500 for each child under age 17. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the applicable threshold ($75,000 for single filers, $112,500 for head of household filers, and $150,000 for joint filers), and is completely phased out for those with incomes of more than $99,000 for single filers (with no children), $146,500 for head of household filers (with one child), and $198,000 for joint filers (with no children).
This rebate is available to those with employment-related income and those whose income comes from government assistance (e.g., Supplemental Security Income).
Rebate Distribution. The IRS began distributing the rebates on April 13, 2020. For most taxpayers, the rebates will come automatically, as the IRS will use the taxpayer’s 2019 or 2018 tax return information to calculate and issue the rebates. In general, the rebate will be deposited directly into the bank account reflected in a taxpayer’s most recently filed tax return.
On April 23, 2020, the IRS noted on the IRS’s website that eligible taxpayers with a tax return filing requirement who have not filed a tax return for 2018 or 2019 must file for 2019 to get their rebate. Taxpayers should file electronically and include direct deposit information to get their rebate faster.
For those taxpayers who have not previously provided their direct deposit bank account information to the IRS and/or those who have not recently filed tax returns (such as those with income under $12,200 last year, who weren’t required to file, as well as some seniors, veterans and individuals with disabilities), the IRS has launched a tool to enter their direct deposit information to get their payments. The tool can be found here.
Social Security beneficiaries who are not typically required to file tax returns will not need to file anything to get their rebates. Instead, the IRS will use the information on the Form SSA-1099 and Form RRB-1099 to get the relevant information, and will deposit Social Security recipients’ rebates automatically into the same bank accounts into which they receive their Social Security benefits.
On April 15, 2020, the IRS announced its new “Get My Payment” web-based tool that allows taxpayers (1) to see the amount of their economic impact payment (“EIP”) and the scheduled delivery date by either direct deposit or paper check (or it will show that the payment has not yet been scheduled), and (2) to provide their direct deposit information to the IRS to speed up their receipt of their EIP if this information was not provided to the IRS in the past. Taxpayers only need a few pieces of information to quickly obtain the status of their payment and, where needed, provide their bank account information. Having a copy of the taxpayer’s most recent tax return can help speed the process.
If anyone needs assistance with a tax return filing, but is concerned about visiting a tax professional or other organization to get help, the Treasury Department indicated that the rebates will be available throughout the rest of 2020.
Early Withdrawal of Retirement Funds Without Penalty & Increased Loan Amounts
The CARES Act waives the 10 percent early withdrawal penalty for distributions of up to $100,000 from qualified retirement accounts such as a 401(k) plan and IRAs if the distribution is for a coronavirus-related distribution and is made on or after January 1, 2020 and before December 31, 2020. Any funds withdrawn under this provision can be repaid within three years without any tax consequences. If the funds are not repaid within the three year period, then the tax owed on the amounts withdrawn will be spread out over three years.
The CARES Act also allows loans up to the lessor of the account balance or $100,000 from certain retirement plans if the loan is needed by the taxpayer due to the coronavirus. Loans were previously limited to 50 percent of the account balance or $50,000. This provision is applicable to loans made within 180 days of the enactment of the CARES Act. In addition, those with existing loans due December 31st will receive an additional year to repay the loan.
A distribution or a loan is considered coronavirus-related if it is made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, has experienced a reduction in work hours, has been unable to work due to lack of child care due to COVID-19, had to close or reduce hours of a business owned or operated by him or her due to COVID-19, or other similar factors as determined by the Treasury Secretary.
Temporary Waiver of RMDs for Certain Retirement Plans
The CARES Act waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. The purposes of this provision is to provide relief to individuals who would otherwise be required to withdraw funds from such retirement plans and accounts during the economic slowdown due to the coronavirus.
Expansion of Tax Breaks for Charitable Contributions
The CARES Act makes a few notable changes with respect to certain charitable contributions made in 2020. First, the CARES Act allows taxpayers who do not itemize an “above-the-line” deduction for up to $300. Second, for those that itemize their deductions and for corporations, the CARES Act increases the limitation on deductions. Specifically, for individuals, the 50 percent of adjusted gross income limitation is suspended for 2020. For corporations, the 10 percent limitation is increased to 25 percent of the corporation’s taxable income. However, this tax break applies only to cash contributions. The CARES Act also increases the limitation on deductions for charitable contributions of food. The limitation is increased from 15 to 25 percent.
Income Exclusion for Certain Employer Payments of Student Loans
Through December 31, 2020, employers may provide employees with a student loan repayment benefit of up to $5,250, which will be tax-free to the employee. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law.
Key Tax Provisions for Businesses
Employee Retention Tax Credit for Employers Subject to Closure due to the Coronavirus
The CARES Act provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the coronavirus crisis, available to employers whose operations were mandated to be suspended due to the virus, or whose gross receipts for a calendar quarter beginning after December 31, 2019 declined by more than 50 percent when compared to the same calendar quarter in the prior year. The credit is based on qualified wages paid to the employees.
For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when no services were being provided due to coronavirus-related circumstances. For eligible employers with 100 or fewer employees, all employee wages qualify for the credit, whether the employer is open for business or shut down. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee, and will apply to wages paid or incurred from March 13, 2020 through December 31, 2020.
Delay of Payment of Employer Portion of Payroll Taxes
Under the CARES Act, employers can defer payment of the employer’s share of Social Security tax otherwise payable (generally, a 6.2 percent tax on employee wages). Self-employed taxpayers can defer payment of 50 percent of their self-employment tax. The deferred tax will be paid over the following 2 years, with half of the amount due by December 31, 2021 and the other half due by December 31, 2022.
Modifications to the Limitations on Net Operating Losses
Prior to the passage of the CARES Act, net operating losses (“NOL”) of corporations were subject to a taxable-income limitation, and could not be carried back to reduce income in a prior tax year. Under the CARES Act, (1) the taxable income limitation is temporarily removed to allow an NOL to fully offset income, and (2) any NOLs of a business which arise in a tax year beginning in 2018, 2019 or 2020 can be carried back 5 years.
In addition to the above change as regards the NOLs of corporations, the CARES Act also modifies the loss limitation provisions applicable to pass-through businesses and sole proprietors.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations
Although the Tax Cuts and Jobs Act of 2017 (the “2017 Act”) repealed the corporate alternative minimum tax (“AMT”), corporate AMT credits were made available as refundable credits over several years, ending in 2021. The CARES Act accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the coronavirus emergency.
Modifications of Limitations on Business Interest
Under the CARES Act, the amount of interest expense that business are allowed to deduct on their tax returns will be temporarily increased from 30 percent to 50 percent of their taxable income (with certain adjustments). This temporary increase will apply for the taxable years 2019 and 2020. This provision will allow businesses to increase liquidity with a reduced cost of capital, so that they can continue operations and keep employees on payroll. Further, the CARES Act permits a taxpayer to elect to use its 2019 adjusted taxable income to determine its limitation for 2020, which will potentially allow a taxpayer to deduct additional interest expense in the event that the taxpayer’s adjusted taxable income during 2019 exceeds its adjusted taxable income for 2020.
The rules are different for partnerships. Partnerships will be able to utilize the 50 percent limitation for 2020 only. This means that any 2019 interest disallowed at the partnership level is passed out to the partners, and is suspended at the partner level under the normal rules. However, partners will be able to deduct 50 percent of the disallowed interest expense in 2020 without regard to the other limitation rules. The remaining 50 percent will be subject to the normal suspension rules. Any election to use the partnership’s 2019 adjusted taxable income to determine the limitation amount must be made by the partnership and not its partners.
Qualified Improvement Property Glitch Fixed
The CARES Act retroactively fixes a drafting error in the 2017 Act, which neglected to include the category of “qualified improvement property” as part of the list of properties which are eligible for the 100 percent deduction. The CARES Act adds “qualified improvement property” to list of items that qualify for the 100 percent bonus depreciation. Therefore, real estate owners, as well as restaurant and retail businesses, who previously would have qualified for the 50 percent bonus depreciation provisions applicable before the 2017 Act, may now possibly qualify for the 100 percent bonus depreciation for qualified improvement property placed in service after December 31, 2017. Moreover, the revised definition of “qualified improvement property” has been expanded to allow certain types of improvements which previously did not qualify for the benefits. You should consult with your tax professional to determine if you should file amended returns to take advantage of this retroactive benefit.
As detailed in our other alerts, the CARES Act includes substantial benefits to businesses and provides assistance to state and local governments, airlines and health care providers.
If you have any questions about the CARES Act, please contact your CSG advisor.
For additional information pertaining to the coronavirus outbreak, please visit CSG’s COVID-19 Resource Center.
This publication contains general information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Attorney Advertising. Prior results do not guarantee a similar outcome.