As of Friday, March 27, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) (H.R. 748), providing a $2 trillion stimulus package that provides a broad range of economic relief measures for individuals, businesses and industries affected by the COVID-19 pandemic. President Trump is expected to quickly sign the CARES Act into law. The following is a brief summary of the key tax relief measures:
Recovery rebates for individuals. The act provides for issuing recovery checks of up to $1,200 for individuals, $2,400 for married couples and $500 per child (phasing out after income threshold of $75,000 for single filers and $150,000 for joint filers). The rebate amount is reduced by $5.00 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, and $198,000 for joint filers.
Special rules for use of retirement funds. The act eliminates the 10% early withdrawal penalty for distributions of up to $100,000 from qualified retirement accounts for coronavirus-related purposes. Income attributable to such distributions is subject to tax over three years.
Temporary waiver of required distributions from certain retirement plans. The act waives the required minimum distribution rules for certain defined contribution plans and IRAs for the calendar year 2020.
Charitable contributions. The act permits individuals to deduct up to $300 of cash contributions made to charitable organizations, whether they itemize deductions or not. For individuals that do itemize, the 50% of adjusted gross income limitation on deductions for charitable contributions is suspended and for corporations, the 10% limitation on deductions for charitable contributions is increased to 25% of taxable income.
Exclusion for certain employer payments of student loans. The act permits an employer to contribute up to $5,250 annually toward an employee’s student loans without such payment in the employee’s taxable income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance provided by the employer under Internal Revenue Code Section 127.
Employee retention credit for employers subject to full or partial closure due to COVID-19. The act provides a refundable payroll tax credit for 50% of wages paid by affected employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee from March 13, 2020, through Dec. 31, 2020.
Delay of payment of employer payroll taxes. The act delays payment of the employer’s share of Social Security taxes on employee wages by providing for payment proportionately over the following two years.
Modifications for net operating losses (NOLs). The act permits an NOL arising in a tax year beginning in 2018, 2019 or 2020 to be carried back five years. The provision also temporarily removes the 80% taxable income limitation to allow an NOL to fully offset income. The CARES Act similarly modifies the loss limitation applicable to pass-through businesses and sole proprietors so they can benefit from these NOL carryback rules.
Suspension of excess business loss limitation. The act provides that the limitation on a taxpayer’s ability to utilize excess business losses under Internal Revenue Code §461(l) is temporarily repealed retroactive to 2018, and does not take effect until 2021. Section 461(l) was initially enacted as part of the Tax Cuts and Jobs Act and disallows excess business losses of noncorporate taxpayers if the amount of the loss is in excess of $250,000 ($500,000 in the case of a joint return). The disallowed amount is carried forward as a net operating loss to the following tax year under §461(l)(2). The act additionally clarifies some technical uncertainties, providing that NOLs themselves are not considered excess business losses and that employee wages are not used in the calculation. The act also provides that business capital losses are not included in the calculation so they will no longer be converted into future NOLs.
Modification of credit for prior year minimum tax liability of corporations. The act accelerates the ability of companies to recover corporate alternative minimum tax (AMT) credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency. The corporate AMT was previously repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits only over several years, ending in 2021.
Modification of limitation on business interest. The act increases the amount of interest expense businesses are allowed to deduct under Internal Revenue Code §163(j) from 30% to 50% of taxable income (with adjustments) for 2019 and 2020.
Technical amendment regarding qualified improvement property. The act makes a technical correction to the Tax Cuts and Jobs Act to enable businesses, especially in the hospitality and retail industry, to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building.
Temporary exception from excise tax for alcohol used to produce hand sanitizer. The act waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration, effective for the calendar year 2020.
Suspension of certain aviation excise taxes. The act suspends federal excise taxes collected in relation to commercial aviation through Dec. 31, 2020. Excise taxes are applied to the transportation of persons (i.e., ticket tax), the transportation of property (i.e., cargo tax) and aviation fuel.
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