Summary of Key Tax Provisions for Individuals and Businesses under the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act ( the “CARES Act”) was signed into law on Friday, March 27, 2020. The CARES Act contains a number of tax provisions which modify the Internal Revenue Code of 1986, as amended (the “Code”). The provisions are designed to provide relief and assistance to both individuals and businesses adversely affected by the coronavirus and are summarized below. The rules are discussed at a high level and may apply differently based on each taxpayer’s circumstances and/or additional guidance provided by the Internal Revenue Service.
Tax provisions targeting individuals can be found in Sections 2201 – 2206 of the CARES Act. The provisions generally provide relief by (a) increasing the deductibility of certain charitable contributions, (b) modifying rules related to retirement plan distributions, (c) allowing certain student loan payments by employers to be excluded from income, and (d) providing tax rebates and credits to certain individuals.
The most significant individual provisions for high-net-worth individuals are likely those related to charitable contributions and retirement plans. The rules providing for tax rebates and credits are phased out at relatively low levels of income. Tax-excluded payments to employees are generally deductible by employers, but the provision may be limited in applicability. Those provisions are discussed in more detail below.
- Certain “qualified contributions” by individuals are not subject to the 60% of adjusted gross income limitation (“AGI”) for charitable contributions under the Code; that is, they can be deductible up to 100% of AGI. A qualified contribution is defined as a contribution (1) that qualifies as a charitable contribution under the Code, (2) paid in cash during calendar year 2020, (3) made to a church or other charitable organization, and (4) for which the taxpayer elects to apply this rule. Importantly, the rules do not apply to contributions made to private foundations, supporting organizations and donor advised funds. The amount of qualified contributions for the year cannot exceed a taxpayer’s AGI minus other charitable contributions allowed as a deduction for the year. Amounts in excess of the preceding sentence are subject to the standard carry forward rules under Section 170.
- Qualified contributions made by corporations are deductible to the extent the contribution does not exceed 25% of the corporation’s taxable income (up from 10%).
- Certain charitable contributions of food inventory in 2020 are deductible to the extent the contribution does not exceed 25% of a corporation’s income or an individual’s aggregate net income (up from 15%).
- For individuals that do not itemize their deductions, (i.e., they take the standard deduction) certain charitable contributions up to $300 will be allowed as “above the line” deductions against gross income. In order to qualify, the charitable contribution has to meet requirements (1) – (3) for qualified contributions, defined above. Similarly, the contributions cannot be made to private foundations, supporting organizations and donor advised funds.
- Early distributions of up to $100,000 from certain retirement plans are not subject to the 10% early withdrawal penalty if the withdrawal is considered a “Coronavirus-related distribution.” A Coronavirus-related distribution is a distribution made between January 1, 2020, – December 31, 2020, to an individual, their spouse or dependent, (1) who is diagnosed with the coronavirus by a test approved by the CDC, or (2) who experiences adverse financial consequences as a result of the coronavirus (e.g., due to being quarantined, due to job loss or due to an inability to work). Amounts distributed can be repaid to the retirement plan over the course of three years from the date of the distribution regardless of the yearly cap on contributions. Income attributable to the distributions can be taxed over the three-year period.
- The CARES Act waives the minimum distribution requirements for retirement plan and IRA owners over age 72 for calendar year 2020.
Tax-Excluded Payments on Student Loans by Employer
- Payments made before January 1, 2021, of up to $5,250 by employers related to an employee’s qualified student loans are excluded from the employee’s income. The employee does not receive a deduction for the interest paid on the loan. The payment can be made to the employee or the lender. The payment should generally be considered deductible by the employer.
Individual Recovery Refundable Tax Credits
- Certain individuals are entitled to a refundable income tax credit 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. The refundable tax credit phases out for individuals with AGI above $75,000 for single filers ($150,000 for joint filers). The credit phases out entirely for single filers with no children with AGI in excess of $99,000 and for joint filers with no children with an AGI exceeding $198,000.
Tax provisions targeting businesses can be found in Sections 2301 – 2308 of the CARES Act. The provisions generally provide relief by allowing (a) an employee retention credit against payroll taxes, (b) deferring certain employer payroll taxes, (c) modifying the rules relating to net operating losses and excess business losses, (d) temporarily increasing the deductibility of business interest, and (e) accelerating the corporate minimum tax credit. The CARES Act also contains a technical correction to the Tax Cuts and Jobs Act of 2017 (the “TCJA”), allowing for 100% bonus depreciation for qualified improvement property. The provisions related to payroll taxes may not be available if a taxpayer receives a Small Business Interruption Loan or has their indebtedness on such loan forgiven. A number of the provisions apply to 2018 and previous years and, therefore, amended returns may need to be filed to receive the full benefits of these provisions. The provisions are discussed in more detail below.
Employee Retention Credit and Deferral of Employer Payroll Taxes
- Eligible employers are entitled to an employment tax credit for 50% of the wages paid to qualified employees. The credit is for the first $10,000 of wages (including health benefits) paid to a qualified employee. Wages do not include wages taken into account for payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus Act. An eligible employer is an employer with operations in 2020 who (i) for any quarter had their business fully or partially suspended by an appropriate governmental authority limiting commerce, travel, or group meeting due to the coronavirus; or (ii) experienced a significant decline in gross receipts due to the coronavirus. If an employer has less than 100 employees, wages paid to qualified employees include all wages paid to employees. If the employer has more than 100 employees, wages paid to qualified employees include wages paid to employees who are not providing services due to (i) and (ii) above (i.e., furloughed employees). The credit is available for wages paid between March 13, 2020, through December 31, 2020. The credit is not available for any employer receiving a Small Business Interruption Loan under the CARES Act.
- The payment of Social Security taxes required to be paid by employers and self-employed persons between March 27, 2020, through December 31, 2020, is deferred such that 50% of the taxes is due on December 31, 2021, and the remaining 50% is due on December 31, 2022. This rule does not apply to taxpayers that had indebtedness forgiven with respect to a Small Business Interruption Loan under the CARES Act.
Net Operating Losses
- For tax years before 2021, net operating losses can fully offset income rather than being limited 80% of taxable income (as revised by the TCJA). Net operating losses generated in 2018, 2019, and 2020 can now be carried back five years (as opposed to no carry back under the TCJA). Notably the corporate tax rate was 35% prior to 2018; Thus, net operating losses that are carried back can be worth 35% rather than 21%.
Suspension of Excess Business Loss Rules
- The rules disallowing the deduction for excess business losses derived by a non-corporate taxpayers do not apply for tax years 2018, 2019 and 2020 (i.e., taxpayers are allowed to deduct their excess business losses (“EBLs”) for 2018 – 2020.) The TCJA enacted limitations on the use of EBLs which now cease to apply to 2018 through 2020.
Temporary Increase in Business Interest Deductions
- The amount of business interest that can be deducted is increased to 50% (from 30% as enacted by the TCJA) for 2019 and 2020. For partnerships, this rule only applies for 2020. However, certain excess business interest allocated to a partner in 2019 may be treated as excess business interest paid or accrued by that partner in 2020. For example, assume a partnership has $200 of adjusted taxable income (all business income) in 2019 and $200 of business interest expense. For 2019, the deduction is limited to $60, and $140 is carried forward to 2020 as excess business interest. In 2020, the partner could deduct $70 of the excess amount (assuming the partner has enough income in 2020 to deduct this amount), but the remaining $70 would be subject to the partner excess interest income rules as usual. A taxpayer can elect out of these rules and an election can be made to use adjusted taxable income from 2019 for 2020.
Acceleration of the Corporate Minimum Tax Credit
- Corporations that were previously subject to the corporate alternative minimum tax (“AMT”) and who were entitled to a refundable tax credit after its repeal are entitled to receive all of the tax credit in 2018 and 2019 (previously, under the TCJA, the credit allowed was spread out over 2018 through 2021). Taxpayers can elect to take 100% of the credit in 2018.
Technical Correction to the Bonus Depreciation Rules
- The CARES Act makes a technical correction the TCJA to include “qualified improvement property” as 15-year year property for depreciation purposes. This allows qualified improvement property to be eligible for bonus depreciation under the Code. The technical correct applies as if it was part of the TCJA (i.e., applicable for qualified improvement property placed into service after December 31, 2017).
We understand that these are challenging times for our clients and friends. Kleinberg Kaplan has been diligently monitoring the updates and developments pertaining to COVID-19 and the potential impact for our clients. We will continue to provide updates as the situation develops.