On March 27, 2020, Congress passed, and the President signed the “Coronavirus Aid, Relief, and Economic Security Act” — the “CARES Act.”  The Act aims to boost the economy with over $2 trillion in relief. This relief ranges from individual tax rebates, expanded access to 7(a) loans with forgiveness, expanded unemployment benefits and a variety of tax breaks and incentives. 

Individual Stimulus Payments 

Individual taxpayers will receive advance refunds of credits against 2020 taxes equal to $1,200 for individuals, or $2,400 for joint filers, plus $500 for each qualifying child. Generally, income tax credits reduce a taxpayer’s income tax liability and are claimed on the tax return for the year they arise. However, the government will make advance payments of the credit as soon as possible, with eligibility and credit amounts based on information from 2019 or 2018 tax returns.   

The amount of each recovery rebate credit is phased out by $5 for every $100 in excess of a threshold amount. This threshold amount is based upon 2018 adjusted gross income (unless a 2019 return has already been filed). The phaseout begins at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. Thus, the rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of household with $136,500, and joint filers with $198,000. The credit for each qualifying child phases out with each additional $10,000 in AGI over the threshold. 

Our friends at Kiplinger tax have created a free calculator which allows you to compute your projected stimulus payment. Kiplinger Stimulus Check Calculator  

Small Business Loans 

To provide American small businesses with payroll support the CARES act provides forgivable loans to businesses with fewer than 500 employees (including sole-proprietorships and nonprofits) with access to nearly $350 billion in 7(a) loans administer by Small Business Administration. Visit our website at CARES Act: Paycheck Protection Program to see an in-depth look at the Paycheck Protection Program. 

Qualified Improvement Property Technical Error Correction 

The CARES Act has corrected an error in drafting the Tax Cuts and Jobs Act which disallowed 100% bonus depreciation on qualified improvement property. As a result of the CARES Act, the QIP drafting error has been corrected retroactively allowing for bonus depreciation for these expenditures. Taxpayers may have an opportunity to amend their 2018 tax filing to claim bonus on these assets and receive a refund of taxes paid. 

Temporary Modification of the Business Interest Expense Limitation. 

For taxable years beginning in either 2019 or 2020, the taxable income limitation for purposes of applying the business interest expense limitation has been raised to 50% up from the 30% limitation created by the Tax Cuts and Jobs Act. Additionally, a new provision allows for taxpayers to choose between 2019 and 2020 taxable income for purposes of the 2020 interest expense limitation calculation. 

Changes to the Net Operating Loss Rules 

Suspension of the 80% taxable income limitation 

The Tax Cuts and Jobs Act (the “TCJA”) imposed a limitation on the amount of NOLs that a taxpayer may deduct in a tax year equal to the lesser of the available NOL carryovers or 80% of a taxpayer’s pre-NOL deduction taxable income.  The CARES Act temporarily suspends, for tax years 2018 through 2020, the taxable income limitation to allow a taxpayer’s NOLs to fully offset taxable income.  

Temporary reinstatement of NOL carrybacks 

For NOLs arising in tax years after December 31, 2017, the TCJA eliminated a taxpayer’s ability to carryback an NOL to reduce taxable income in a prior tax year.  The CARES Act provides for a modified NOL carryback.  Specifically, the CARES Act allows NOLs arising in tax years 2018 through 2020 to be carried back to each of the five tax years preceding the loss year.  A taxpayer may elect to forgo the carryback, and instead treat losses arising in those years as NOL carryovers. 

Delays of Payment of Employer Payroll Taxes 

Employers will be able to defer the employer portion of Social Security taxes beginning with the enactment date of the law through the end of 2020. Fifty percent of the deferred taxes become payable on December 31, 2021 with the balance payable on December 31, 2022.  

Similarly, a self-employed taxpayer can defer paying fifty percent of his or her self-employment tax that would be due. 

The IRS is expected to revise Form 941, Employer’s Quarterly Federal Tax Return, to track the employer’s decision to defer tax deposits. 

Note that this deferral is not available to those who receive benefit from forgivable loans. 

Removal of Early Retirement Plan Distribution Penalty for COVID-19 Related Payments 

Normally, distributions from a qualified retirement plan are subject to a 10% penalty if they occur before the taxpayer reaches the age of 59 1/2.  The CARES Act eliminates this penalty when taxpayers take a 2020 distribution from the retirement plan that is “related” to the Coronavirus, up to an amount of $100,000.  A distribution is a “Coronavirus-related distribution” if it is to an individual that either (a) is diagnosed with COVID-19, (b) has a spouse or dependent diagnosed with COVID-19, or (c) experiences adverse financial consequences as a result of being quarantined, laid off, furloughed, or having their work hours reduced due to COVID-19.  

Please be aware, while qualifying distributions avoid a penalty, they remain taxable to the individual.  This tax liability can be paid over a three-year period starting from the year of the distribution, and the individual may repay the amount to the plan to avoid this tax liability.  Finally, the CARES Act also increases the amount an individual can borrow from their retirement plan to $100,000 for the 180-days following the date that the CARES Act is enacted. 

New Above-the-Line Charitable Contribution Deduction for Non-Itemizers 

The CARES Act amends how charitable deductions function for non-itemizers.  Normally, charitable contributions are itemized deductions, which can only be utilized by taxpayers who do not utilize the standard deduction.  Typically, only a very small percentage of taxpayers itemize.  The CARES Act provides that individuals can make charitable contributions and get a deduction for this contribution, even if the individual does not itemize.  While there are certain restrictions (the contribution must be made in cash, the new deduction cannot exceed $300 and is only available to taxpayers who do not itemize, etc.), this new law represents a change from the previous rules. 

Increased Charitable Contribution Deduction for Individual Itemizers and Corporations  

Although those individuals who do itemize are not able to take advantage of Section 2204, the CARES Act also provides a charitable benefit to those taxpayers.  Previously, individual taxpayers who itemized could only utilize charitable deductions in the amount of 60% of their adjusted gross income.  The CARES Act provides that for individual taxpayers, 2020 charitable contributions may be deducted in the amount of 100% of the taxpayer’s adjusted gross income for 2020 (with any excess amount eligible for a carry forward of 5 years).  For corporate taxpayers, Section 2205 increases the 2020 charitable deduction limit to 25% of taxable income, as opposed to the previously applicable 10% limit. 

Exclusion from Income of Employer Payment of Employee Student Loan Debt 

The CARES Act provides for an exclusion of up to $5,250 from income for payments of an employee’s education loans. In order for the exclusion to apply, the loan must have been incurred by the employee for the education of the employee. The payment can be made to the employee or directly to the lender. The exclusion only applies for payments made by an employer after the date of enactment and before January 1, 2021. 

Employee Retention Credit 

The CARES Act grants eligible employers a credit against employment taxes equal to 50 percent of qualified wages paid to employees who are not working due to the employer’s full or partial suspension of business or a significant decline in gross receipts. The credit can be claimed on a quarterly basis, but the amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters.   

An eligible employer is defined as:   

• An employer whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease (COVID-19); or   

• An employer that experiences a 50% decline in gross receipts for the calendar quarter compared to the same quarter in the prior year.   

Qualified Wages. The credit applies to qualified wages paid after March 12, 2020 and before January 1, 2021. If the employer has more than 100 full-time employees, qualified wages are wages paid to employees who cannot work during the COVID-19-related circumstances described above. If the employer has 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.   

HRKCPA Comment   

This is very similar to the paid leave credits granted to employers under the Families First Coronavirus Response Act signed into law on March 18, 2020, with some changes to the requirements. Most significantly, neither the employee nor the employer must be directly impacted by the infection. 

Excess Business Losses Temporary (and Retroactive) Removal 

Recently enacted section 461(l) provides that the amount of net business loss an individual may use in a year to offset other sources of income is capped at $250,000 if single and $500,000 if married filing jointly. Any excess loss was converted into a net operating loss which was subject to additional limitations pre-CARES act. The CARES act temporarily halts the limitation enacted by Section 461(l) not only for 2020, but retroactive to January 1, 2019. As a result, any taxpayers who were limited by this provision in 2018 or 2019 can file an amended return to claim a refund.