During these challenging and unprecedented times, your highest priority is certainly the health of yourself and your loved ones.
However, to assist taxpayers with the economic pains caused by COVID-19 (commonly referred to as Coronavirus), the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27th. This Act contains a massive amount of relief and with it, a complexity that may be difficult to unravel. We have included the most salient points for each aspect of the law and separated them into categories (business and individuals) to assist with categorization. Please note there is some overlap of these provisions, therefore you might want to read each section below to determine what might apply to you. This tax legislation is very complicated, therefore you should contact our office to discuss how any particular provision will impact your specific situation.
Under the CARES Act, a recipient is potentially eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period: (1) pay-roll costs; (2) any interest payments on any covered mortgage obligation; (3) any payment for any covered rent obligation; (4) covered utility payments. The amount which would normally be includible in gross income of the eligible recipient by reason of forgiveness shall be excluded from gross income.
An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered lease obligation or to make covered utility payments.
The above applies to covered loans made during the period beginning on February 15, 2020 and ending on June 30, 2020.
This provision provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to employers, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. However, the credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act.
For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers’ closure or reduced gross receipts are eligible for the credit. No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee. The term “wages” includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee. Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus Act, nor for wages taken into account for the employer credit for paid family and medical leave. The IRS is granted authority to advance payments to eligible employers and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
Effective for property placed in service after Dec. 31, 2017, The CARES Act provides a technical correction to the TCJA and specifically designates Qualified Improvement Property (QI) as 15-year property for depreciation pur-poses. This makes QI Property a category eligible for 100% Bonus Depreciation. Interior leasehold improvements that previously had to be depreciated over 39 years can now qualify for first year bonus depreciation. Since this is a retroactive correction, 2018 tax returns can be amended to reflect this change.
The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. The payroll tax deferral period is the period beginning on the date of enactment of the Act and ending before January 1, 2021. These rules will not apply to any taxpayer who has had indebtedness forgiven under Act Sec. 1106 with respect to a loan under Small Business Act Sec. 7(a)(36), as added by Act Sec. 1102, or indebtedness forgiven under Act Sec. 1109. Self-employed individuals required to make estimated tax payments to any tax year which includes any part of the payroll tax deferral period, can defer paying 50% of the self-employment taxes imposed for the payroll tax deferral period.
The CARES Act temporarily removes the taxable income limitation to allow an NOL to fully offset income. The amendments made apply to tax years beginning after December 31, 2017, and to tax years beginning on or before December 31, 2017, to which NOLs arising in tax years beginning after December 31, 2017 are carried.
The CARES Act provides that NOLs arising in a tax year beginning after December 31, 2018 and before January 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. This applies to NOLs arising in tax years beginning after December 31, 2017 and to tax years beginning before, on or after such date to which such NOLs are carried.
The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020. This applies to tax years beginning after December 31, 2017.
Corporations can claim 100% of alternative minimum tax credits in 2019, or make an election to take the entire refundable credit amount in 2018. A claim for credit or refund where a corporation elects to take the entire re-fundable credit amount in 2018 must be treated as a tentative carryback refund claim. Taxpayers must file this application for a tentative refund before December 31, 2020.
The Tax Cuts and Jobs Act of 2017 (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income for taxpayers with gross receipts in excess of $25 million. The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020.
Health savings accounts (HSAs) have both advantages and disadvantages relative to Flexible Spending Accounts as a way to pay for health expenses with untaxed dollars. One disadvantage is that a qualifying HSA may not reimburse an account beneficiary for medical expenses until those expenses exceed the required deductible levels. However the IRS has announced that payments from an HSA that are made to test for or treat COVID-19 don’t affect the status of the account as an HSA (and don’t cause a tax for the account holder) even if the HSA deductible has not been met. Vaccinations continue to be treated as preventative measures that can be paid for without regard to the deductible amount.
The Emergency Paid Sick Leave Act (EPSLA) division of the Act generally requires private employers with fewer than 500 employees to provide 80 hours of paid sick time to employees who are unable to work for virus-related reasons (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The pay is up to $511 per day with a $5,110 overall limit for an employee directly affected by the virus and up to $200 per day with a $2,000 overall limit for an employee that is a caregiver.
The tax credit corresponding with the EPSLA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit amount generally tracks the $511/$5,110 and $200/$2,000 per-employee limits described above. The credit can be increased by (1) the amount of certain expenses in connection with a qualified health plan if the expenses are excludible from employee income and (2) the employer’s share of the payroll Medicare hospital tax imposed on any payments required under the EPSLA. Credit amounts earned in excess of the employer’s 6.2% Social Security (OASDI) tax (or in excess of the Railroad Retirement tax) are refundable. The credit is electable and includes provisions that prevent double tax benefits (for example, using the same wages to get the benefit of the credit and of the current law employer credit for paid family and medical leave). The credit applies to wages paid in a period (1) beginning on a date determined by IRS that is no later than April 2 and (2) ending on December 31, 2020.
The Act provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave to a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee. Accordingly, the self-employed person can receive an income tax credit with a maximum value of $5,110 or $2,000 as per the payroll sick leave credit. However, those amounts are decreased to the extent that the self-employed person has insufficient self-employment income determined under a formula or to the extent that the self-employed person has received paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2 and (2) ending on December 31, 2020.
The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid and unpaid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The leave generally is available when an employee must take off to care for the employee’s child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either (1) closes a school or child care place or (2) makes a childcare provider unavailable. Generally, the first 10 days of leave can be unpaid and then paid leave is required, pegged to the employee’s pay rate and pay hours. However, the paid leave can’t exceed $200 per day and $10,000 in the aggregate per employee.
The tax credit corresponding with the EFMLEA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit generally tracks the $200/$10,000 per employee limits described above. The other important rules for the credit, including its effective period, are the same as those described above for the payroll sick leave credit.
The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed above. Thus, a self-employed person is treated as both an employer and an employee for purposes of the credit and is eligible for the credit to the extent that an employer would earn the payroll family leave credit if the self-employed person were an employee. Accordingly, the self-employed person can receive an income tax credit with a maximum value of $10,000 as per the payroll family leave credit. However, under rules similar to those for the self-employed sick leave credit, that amount is decreased to the extent that the self-employed person has insufficient self-employment income determined under a formula or to the extent that the self-employed person has received paid family leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by IRS that is no later than April 2 and (2) ending on December 31, 2020.
Background. Under the recently-enacted Families First Coronavirus Response Act (P.L. 116-127, 3/18/2020, FFCRA), small employers (500 or fewer employees) whose employees receive paid sick or family leave required by the FFRCA are entitled to credits.
New law. The CARES Act provides for advance refunding of the credits for paid sick leave and paid family that were established under the FFRCA.
In anticipation of the credits, including the refundable portion, the credit may be advanced, according to forms and instructions provided by IRS, up to an amount calculated under Sec. 7001(a) and Sec. 7003(a) of the FFCRA (i.e., 100% of qualified sick leave wages paid by the employer each calendar quarter), subject to the limits under FFRCA Sec. 7001(b) and Sec. 7003(b), both calculated through the end of the most recent payroll period in the quarter.
IRS is given broad authority to issue regs or other guidance to permit the advancement of the credits. IRS will waive any penalty under Code Sec. 6656 for any failure to make a deposit of the tax imposed by Code Sec. 3111(a) or Code Sec. 3221(a) if IRS determines that the failure was due to the anticipation of the credit allowed.
Effective date. Under 7001(g) and 7003(g) of the FFCRA, respectively, the credits apply only to qualified sick and family leave wages paid for the period beginning on a date selected by IRS (which may be no later than April 2, 2020), and ending on December 31, 2020.
Wages paid as required sick leave payments because of EPSLA or as required family leave payments under EFMLEA are not considered wages for purposes of the employer’s 6.2% portion of the Social Security (OASDI) payroll tax or for purposes of the Railroad Retirement tax.
Eligible individuals are allowed an income tax credit for 2020 equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return) plus (2) $500 for each qualifying child of the taxpayer. This credit is refundable.
For purposes of the child tax credit, the term “qualifying child” means a qualifying child of the taxpayer, as de-fined for purposes of the dependency exemption, who hasn’t attained age 17. Children who are (or can be) claimed as dependents by their parents are not eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent.
An individual who was not an eligible individual for 2019 may become one for 2020, e.g., where the individual was a dependent for 2019 but not for 2020. IRS will not send an advance rebate to such an individual, because advance rebates are generally based on information on the 2019 return. However, the individual will be able to claim the credit when filing their 2020 individual income tax return.
Phaseout of credit. The amount of the credit is reduced (but not below zero) by 5% of the taxpayer’s adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers. Under these rules, the credit is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500.
The 10% early withdrawal penalty does not apply to any coronavirus-related distribution, up to $100,000, made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan made to a qualified individual.
A qualified individual is an individual (1) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (2) whose spouse or dependent is diagnosed with such virus or disease by such a test, or (3) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours re-duced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
In addition, the income from coronavirus-related distributions can be included in income ratably over three years unless the taxpayer elects to pick up the full distribution in the year the distribution is received. Also, the dis-tributions can be contributed back to the retirement plan at any time during the 3-year period beginning on the day after the date such distribution was received.
The CARES Act also provides flexibility for loans from certain retirement plans for coronavirus-related relief.
RMD (Required Minimum Distributions) requirements from most qualified retirement plans do not apply for calendar year 2020, including those which would be required to be made for the first time in calendar year 2020, and such distribution not having been made before January 1, 2020. (Does not apply to defined benefit plans.)
The CARES Act adds a deduction for tax years beginning in 2020, the CARES Act allows for a deduction for the amount (not to exceed $300) of qualified charitable contributions made by an eligible individual during the tax year. This applies for any individual who elects not to itemize deductions.
For the calendar year 2020, individuals are allowed a deduction for cash contributions to certain charitable or-ganizations (such as churches, educational organizations, hospitals, and medical research organizations) up to 100% (prior law was 60%) of their contribution base (generally, adjusted gross income). Any excess is carried forward and is treated as a deductible charitable contribution in each of the five succeeding tax years.
However, contributions to a Code Sec. 509(a)(3) supporting organization or a donor advised fund are not qual-ified contributions.
For tax years beginning after December 31, 2019, a corporation’s qualified contributions are allowed to the extent that the aggregate of those contributions does not exceed 25% of the corporation’s taxable income. Any excess is carried over and deducted for each of the five succeeding years in order of time, subject to the limitations.
For tax years beginning after December 31,2019, donations of food inventory to charitable organizations that use the food for the care of the ill, the needy, or infants, can be made to the extent that the deduction does not exceed, in the case of a C corporation, 15% of the corporation’s income, and, in the case of a taxpayer other than a C corporation, the deduction cannot exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer’s charitable deductions for the year.
An employee may exclude from gross income up to $5,250 per year of employer payments made under an ed-ucational assistance program for the employee’s education (but not the education of spouses or dependents), which will include eligible student loan repayments made before January 2, 2021.
Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principal or interest on any qualified higher education loan for the education of the employee (but not of a spouse or dependent).
As previously mentioned, the information above are the key provisions of the 880-page CARES Act. As always, we are dedicated to our client’s wellbeing, especially during these difficult and unprecedented times. Please do not hesitate to reach out to us if you would like any additional information as it relates to you or your business.