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Many employers and individuals are understandably concerned about how to navigate the difficult business environment created by the COVID-19 Pandemic and resulting state and federal mitigation measures.
Below is a brief guide to the tax provisions in the CARES Actapplicable to either businesses or individuals.
Business Provisions:
Refundable Payroll Tax Credit (CARE Act §2301):
Allows a business to take a tax credit against payroll and other employment related taxes for each calendar quarter equal to 50% of the qualified wages with respect to each employee to a maximum of $10,000. Qualified wages include amounts paid to provide and maintain a group health plan.
Credit is limited to the maximum of the employment taxes actually paid and credits granted under Internal Revenue Code (IRC) §3111 (e) and (f). The program is available to all employers with a trade or business that was operational during the 2020 year and (1) was fully or partially suspended from operations during the quarter due to COVID-19 related government orders limiting commerce, travel, or group meetings, (2) or whose gross receipts declined by more than 50% compared with the same quarter in 2019.
Note: this program is not available to employers who take advantage of the PPP loan or other COVID-19 special loan programs.
Payroll Tax Payment Deferral (CARES Act §2302):
Allows employers affected by the COVID-19 Pandemic to defer payments of qualified payroll taxes without penalty. Payroll taxes that qualify are taxes due under IRC §3211(a) and §3221(a) from the date of the enactment through the end of 2020. The Act allows for payment of 50% of the taxes due from the qualifying period on or before December 31, 2021 and the remaining 50% on or before December 31, 2022.
Note: this program is not available to employers who take advantage of the PPP loan or other COVID-19 special loan programs.
Net Operating Loss Modification (CARES Act §2303):
A modification of IRC §172 to allow taxpayers to carry back net operating losses occurring in 2018, 2019 or 2020, up to five years. The provision also removes the taxable income limitation through the 2020 tax year. This will allow a net operating loss to fully offset taxable income for the applicable years.
Note: this change does not apply to REITs.
Non-Corporation Taxpayers Excess Business Losses (CARES Act §2304):
The Tax Cuts and Jobs Act (TCJA) had enacted IRC §461(l) which limited the ability of non-corporation taxpayers to claim excess business losses through 2026. This provision modifies IRC §461(l)(1) to allow non-corporation taxpayers to claim those excess business losses through 2020. The prohibition is still in place for 2021-2025.
Modification of Credits for Corporate Prior Year Minimum Tax Liability (CARES Act §2305):
The TCJA eliminated the corporate minimum tax but allowed unused credits to offset tax or be refunded through 2021. The CARES Act accelerates the usability of those credits so they all may be taken or refunded in 2018 and 2019.
Modification of Limitation on Business Interest (CARES Act §2306):
Raises the limitation placed on the business interest expense deduction by the TCJA from 30% to 50% of adjusted taxable income. This provision does not apply to partnerships except under certain circumstances at the partners election.
Technical Correction to Qualified Improvement Property Deduction (CARES Act §2307):
This provision makes a technical correction to the amount of an allowed Improvement Property deduction and makes it retroactive to the passage of the TCJA in 2017. Businesses can now fully deduct the cost of certain property improvements.
Charitable Contributions (CARES Act §2205):
This provision allows corporations to take charitable deduction of up to 25% of their taxable income.
Individual Provisions:
Recovery Rebates for Individuals (CARES Act §2201):
Provides for an immediately available refundable credit against 2020 taxes of $1,200 per individual ($2,400 for couples filing jointly) plus an additional $500 per qualified dependent.
The credit phases out based on AGI beginning at:
- $150,000 in the case of couples filing a joint return
- $112,500 in the case of a head of household; and
- $75,000 for individuals.
Phase out of the credit based on AGI is complete at:
- $198,000 in the case of couples filing a joint return
- $146,500 in the case of a head of household; and
- $99,000 for individuals.
Use of Retirement Funds (CARES Act §2202):
To qualify for the benefits of this provision an individual must have (1) contracted COVID-19, (2) had a spouse or dependent contract COVID-19, or (3) suffered adverse financial impacts directly related to COVID-19. The provision temporarily suspends the early distribution penalty for retirement funds for distributions of up to $100,000. This cap applies to all early distributions, not from an individual account or plan. The provision allows a taxpayer to repay the amounts taken our early, without respect to the normal contribution caps. It also, allows the taxpayer to spread the tax burden of the distribution over three years. Qualified distributions must be made during the 2020 calendar year.
Finally, it modifies the retirement account loan provisions increasing the allowed loan amount to 100% of the account’s assets to a maximum of $100,000. For individuals who previously took out loans that are due prior to the end of 2020 it delays repayment for one year.
Waiver of minimum distribution Rules for Certain Retirement Accounts (CARES Act §2203):
This provision waives any minimum distributions required from defined contribution plans, including 401(k)s and IRAs during the 2020 calendar year.
Charitable Contributions (CARES Act §2204 and §2205):
Section 2204 allows for an above the line deduction of $300 for charitable contributions for those who take the standard deduction. Section 2205 allows individuals who itemize their deductions to claim 100% of the deduction up to their contribution base (AGI less NOL carrybacks). The provision did not modify the standard carry forward provisions related to charitable contributions.
Employer Payments of Student Loans (CARES Act §2206):
This provision allows an employee to exclude certain student loan payments made by its employer, whether to the employee or loan program directly, from the employee’s gross income. This benefit is subject to the same overall cap of $5,250 per employee per calendar year placed on educational assistance benefits described in IRC §127. It also only applies to payments made during the 2020 calendar year.
