CARES Act comes to the rescue of taxpayers under economic distress as a result of COVID-19
By Jay Nathanson
COVID-19 and the response to it combined to devastate large segments of the U.S. economy. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was the attempt of Congress to ease the economic burden wrought by this deadly combination, including tax relief aimed at the economically distressed. It is the tax relief portion of the CARES Act that is the subject of the following discussion.
THE EXISTING ARSENAL
Qualified disaster relief payments
Even before the CARES Act, Section 139 of the Internal Revenue Code of 1986, as amended (the “Code”), provided certain tax benefits associated with qualified disaster relief payments. Under that provision, in general, “qualified disaster relief payments” are: a) excludible from gross income; b) not subject to payroll taxes; and c) potentially deductible by the payer.
Qualified disaster relief payments can be for items that include payments for personal, family, living or funeral expenses incurred as a result of a qualified disaster. A qualified disaster includes a federally declared disaster. President’s Trump national emergency declaration invoked the provisions of Code Section 139.
There is no dollar limit to these payments. This opens the door for, among other things, employer assistance to distressed employees on a tax-favored basis.
RELIEF TO BUSINESSES
Payroll tax credits tied to employee retention
The CARES Act affords eligible employers a refundable credit of Social Security payroll taxes equal to 50 percent of the qualified wages paid during the quarter, up to $10,000 per employee for all quarters. This results in a maximum credit of $5,000 per employee.
An eligible employer is one who (a) is required to fully or partially suspend or shut down a trade or business due to a governmental order relative to certain limitations on activity due to COVID-19 during the quarter, or (b) suffers a 50 percent or greater reduction in gross receipts as compared to the same quarter of the prior year. In the latter case, the credit is in effect for the remainder of 2020 or until gross receipts recover to 80 percent of those of the corresponding prior year quarter.
The concept of what are qualified wages varies with the size of the employer. In the case of employers with in excess of 100 employees, the creditable wages must be paid to employees not providing services due to the COVID-19 issues mentioned above. In addition, qualified wages are limited to the amount of wages paid in the previous 30 days.
An employer claiming this credit may not also receive a covered loan offered under the CARES Act.
This section is also subject to rules relating to aggregation, electing out, and denial of double or overlapping tax benefits.
CARES Act, Section 2301
Payroll tax deferral
The CARES Act also affords a payroll tax deferral of the employer portion of Social Security taxes for wages paid in 2020. Fifty percent of such amount is due on Dec. 31, 2021, and 50 percent is due on Dec. 31, 2022. A similar rule is in effect for 50 percent of the Social Security portion of self-employment taxes.
An employer claiming this deferral may not also have indebtedness forgiven under certain sections of the CARES Act.
CARES Act, Section 2302
Easing certain limitations on the deduction of net operating losses
The Tax Cuts and Jobs Act of 2017 (TCJA) limited the allowance of net operating loss carryovers in a single year to 80 percent of taxable income for that year. The CARES Act removes the 80 percent limit for net operating losses used for years ending before Jan. 1, 2021.
The TCJA also eliminated net operating loss carrybacks. The CARES Act, however, permits a five-year carryback for net operating losses incurred in years beginning after Dec. 31, 2017, and ending before Jan. 1, 2021.
CARES Act, Section 2303
Easing certain limitations on deducting business interest
Under TCJA, a provision was enacted limiting the deduction for business interest to 30 percent of adjusted taxable income. For years beginning in 2019 and 2020, the 30 percent limit is increased to 50 percent.
Taxpayers may elect to use the 30 percent rule instead and may also elect to make the calculation based on 2019 adjusted taxable income.
Certain special rules apply to partnerships.
CARES Act, Section 2306
Easing certain limitations on the use of excess business losses
Under the TJCA, a provision was enacted denying non-corporate taxpayers the use of excess business losses for tax years after Dec. 31, 2017, and ending before Jan. 1, 2026. Such losses instead became net operating losses in the following year subject to the 80 percent of taxable income limitation also enacted as part of the TCJA. The CARES Act amended those provisions to apply only to tax years after Dec. 31, 2020, and before Jan. 1, 2026.
CARES Act, Section 2304
Technical correction allowing immediate expensing of qualified improvement property
The drafters of the TCJA intended to provide immediate expensing for certain qualified improvement property. However, the language of the statute fell short of effectuating the intent. The CARES Act provides the needed language for immediate expensing of qualified improvement property, effective as if the technical correction was part of the TCJA.
CARES Act, Section 2307
The corporate alternative minimum tax credit
When TCJA eliminated the corporate alternative minimum tax, credits for prior years alternative minimum tax were recoverable over four years. The CARES Act accelerates the recovery period.
CARES Act, Section 2305
RELIEF TO INDIVIDUALS
Tax credits for certain individuals
The CARES Act provides a 2020 income tax credit for certain individuals with adjusted gross incomes below a certain level. The credit is $1,200 for individual filers, $2,400 for joint filers, and an additional $500 for each qualifying child.
The credit begins to phase out for individuals at $75,000 of adjusted gross income ($150,000 for joint filers) and completely phases out for individuals at $99,000 of adjusted gross income ($198,000 for joint filers).
CARES Act, Section 2201
The CARES Act increases the portions of charitable contributions made in 2020 to certain charities, in cash, that are deductible to: a) 100 percent of 2020 adjusted gross income less non-cash contributions for itemizers; b) 25 percent of taxable income for corporate contributors; and c) a $300 above the line deduction for non-itemizers.
This treatment is elective other than in the case of the $300 deduction.
In the case of pass through entities, the election is made at the owner level.
CARES Act, Sections 2204 and 2205
Exclusion of employer payments of student loans
Under the CARES Act, up to $5,250 of student loans of an employee paid by the employer in 2020 is excludible from the employee’s gross income.
CARES Act, Section 2206
Special rules were enacted liberalizing certain use of retirement funds and waiving certain minimum distribution requirements.
CARES Act, Sections 2202 and 2203