March 27, 2020
Pertinent Tax Provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)
The President has signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “the Act”). The following summarizes key tax provisions.
Business Tax Provisions
Employee Retention Tax Credit
The Act provides a refundable credit against payroll tax for 50 percent of wages paid to certain employees during the COVID-19 crisis, through December 31, 2020. To qualify for the credit, the employer must have (i) fully or partially suspended its operations as a result of a government order limiting commerce, travel or group meetings, or (ii) suffered a reduction in quarterly receipts of greater than 50 percent on a year-over-year basis. These requirements apply to non-profit organizations as well.
The credit applies to the wages of employees who have been furloughed or had their hours reduced. For employers with 100 or fewer full-time employees, all employees’ wages are eligible, regardless of whether such employees have been furloughed. For eligible employees, the credit is available for wages and other compensation (including health benefits) of up to $10,000 paid to each eligible employee, with a few exceptions.
Employer Payroll Tax Deferral
The Act allows employers to defer their payments (employer portion) of certain payroll taxes through December 31, 2020. The covered taxes include the employer portion of FICA taxes, 50 percent of SECA tax liability, and the employer and employee representative portions of Railroad Retirement taxes. Deferred employer payroll tax amounts are due in two installments of 50 percent each – one by December 31, 2021 and the other by December 31, 2022. Note This deferral provision does not apply to employers that take advantage of SBA 7(a) loans designated for payroll.
Modification of Net Operating Loss Rules
The Tax Cuts and Jobs Act of 2017 (the “TCJA”) limited net operating losses (“NOLs”) arising after 2017 to 80 percent of taxable income and eliminated the ability to carry NOLs back to prior taxable years. The Act allows taxpayers to carry back NOLs for tax periods beginning before January 1, 2021 to the prior 5 tax years. For taxable years beginning after December 31, 2020, taxpayers are entitled to (i) a 100% deduction of NOLs arising in tax years prior to 2018, and (ii) a deduction of up to 80 percent of modified taxable income for NOLs arising in tax years after 2017.
Modification of Limitation on Losses for Noncorporate Business Entities
The Act retroactively defers the TCJA’s excess active business loss limitation rule and applies it to tax years beginning after December 31, 2020, instead of December 31, 2017. The Act similarly defers the active farming loss rules until tax years beginning after December 31, 2020. For these purposes, an excess business loss means deductions in an amount equal to the excess (if any) of deductions attributable to a trade or business in which the taxpayer actively participates, over gross income and gain from such trade or business, plus $250,000 ($500,000 for joint filers).
What this means: This provision should prove beneficial for real estate developers, among others, who generate significant tax losses and expenses in the early stages of a project but are generally required to limit how much they can recognize each year. Before the CARES Act, the $250,000 ($500,000 for joint filers) limitation forced many businesses (and business owners) to defer their tax benefits (depreciation of a hotel, for example). This provision effectively defers the limitation enacted by the TCJA for 3 years – retroactively for 2018 and 2019, plus the current 2020 tax year.
Modification of Credit for Corporations for Minimum Tax Liability
The TCJA repealed the corporate alternative minimum tax (“AMT”) and allowed corporations to claim outstanding AMT credits for tax years through 2020, at which time any remaining AMT credit would be fully refundable. The Act accelerates that provision to allow corporations to claim 100% of their AMT credits as fully refundable in 2019. Corporations can elect to further accelerate such claims to 2018.
Modification of Limit to Business Interest Deduction
The TCJA limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income (“ATI”). The Act increases this limitation from 30% of ATI to 50% of ATI for 2019 and 2020 and allows businesses to elect to use 2019 ATI to determine their 2020 limitations. The Act allows 50% of any excess business interest allocated to a partner in 2019 to be deductible in 2020, with the remaining 50% of excess business interest from 2019 being subject to the 50% ATI limitation. However, the 2019 ATI limitation remains at 30% of partnership ATI, instead of 50% of ATI. The ATI limitation for 2020 is 50% of partnership ATI and partnerships may elect to use 2019 partnership ATI to determine their 2020 limitations.
Bonus Depreciation for Certain Internal Improvements to Hotels and Certain Retail Facilities
The Act includes a technical correction to the TCJA that allows interior improvements to buildings to be deducted immediately (bonus depreciation) for hotels, restaurants, retail buildings, and most other property (classified as 15-year property for MACRS).
Loan Forgiveness under the Paycheck Protection Program
The Act provides that loan forgiveness in connection with amounts borrowed under the Act’s Paycheck Protection Program are not subject to federal income tax.
Individual Tax Provisions
Special Rules for Use of Retirement Funds
The Act provides a waiver of the 10% tax on early distributions from defined-contribution plans (such as 401(k) plans) and IRAs for coronavirus-related amounts. For these purposes, a coronavirus-related distribution of up to $100,000 may be made between January 1 and December 31, 2020, for an individual who is (or whose family) is infected with the coronavirus or who is economically harmed by the coronavirus. Individuals receiving such distributions may re-contribute such amounts to the IRA or plan. Defined contribution plans may allow plan loans of up to $100,000 and repayments for existing plan loans for employees who are affected by the coronavirus are extended.
Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts
The Act provides a waiver of the required minimum distributions from defined-contribution plans (such as 401(k) plans) and IRAs for 2020. The waiver includes required minimum distributions that are due by April 1, 2020 as a result of the account owner having turned 70 ½ in 2019.
Partial Above-the-line Deduction for Charitable Contributions During 2020
The Act provides for a $300 above-the-line deduction for cash contributions to public charities in 2020.
Modification of Limitations on Charitable Contributions During 2020
The Act increases the limitation on charitable deductions from 60% to 100% of modified income for cash contributions to public charities in 2020. The Act also increases the limitation for food contributions by corporations from 15% to 25% of modified income.
Exclusion for Certain Employer Payments of Student Loans
An employee generally may exclude $5,250 from income for an employer-sponsored educational assistance program. The Act revises the definition of expenses to also include an employer repaying student loan debt. This provision applies to student loan payments made on or before December 31, 2020.
- The Act provides for recovery rebates of $1,200 for individuals ($2,400 for joint filers) and $500 per dependent child. These rebates are treated as refundable tax credits (i.e., refunded to taxpayers without offsetting tax liability) and are not treated as taxable income.
- Unemployment benefits generally result in taxable income and the Act does not provide an exception to this treatment for such benefits provided under the Act.
- Note that IRS Notice 2020-18 has extended the due date for April 15, 2020 estimated tax payments to July 15, 2020. In IRS Notice 2020-23, the IRS also extended until July 15, 2020 the due date for the estimated tax payments originally due on June 15, 2020.
- IRS Notice 2020-21 provides that employment tax credits for paid qualified sicko leave wages and paid qualified family leave wages required by the Families First Coronavirus Response Act (the “FFCRA”) apply to such wages and compensation paid from April 1, 2020 through December 31, 2020. Similarly, the days April 1, 2020 through December 31, 2020 will be taken into account for credits for paid qualified sick leave equivalents and paid qualified family leave equivalents for certain self-employed individuals provided by the FFCRA.
RMG will continue to monitor the status of the CARES Act and any relevant guidance from the IRS relating to the CARES Act or other items referenced above. Please contact us with any questions and continue checking our website for periodic updates.