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On March 27, 2020, President Trump signed the third – and most comprehensive – coronavirus relief package into law. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed by both the House of Representatives and the Senate with broad bipartisan support. The CARES Act, along with prior relief measures addressing the severe financial impact of the COVID-19 pandemic, includes key tax provisions benefitting individual as well as business taxpayers. Over the next several days, we expect to engage in deeper dives into some of the most notable changes. In the meantime, many material tax provisions are outlined below.

Business Tax Provisions

Employee Retention Credit for Employers Impacted by COVID-19 

    • Employers that (i) fully or partially suspend operations because of a COVID-19-related governmental order limiting commerce, travel or group meetings or (ii) have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter may be eligible for a refundable payroll tax credit of 50% of “qualified wages” for wages paid or incurred between March 13, 2020 and December 31, 2020. Employers with more than 100 employees in 2019 are generally only eligible for the credit for wages paid to employees who have been furloughed due to the crisis. For smaller employers (with 100 or fewer full-time employees in 2019), all wages are eligible for the credit, even if workers haven’t been prevented from providing services (although the amount of “qualified wages” for each employee for all quarters may not exceed $10,000).
    • Trap for the unwary: note that this credit isn’t available to employers who receive a small business interruption loan.

Delay of Payment of Employer Payroll Taxes

    • Under the CARES Act, employers (and self-employed individuals) may delay paying the employer portion of Social Security tax payments, with 50% now due by December 31, 2021, and the remaining 50% by December 31, 2022.
    • Note, however, that this relief isn’t available for employers who have had debt forgiveness under the CARES Act for loans under the Small Business Act.

Increase in Business Interest Expense Deduction

    • Before the CARES Act, business could generally only deduct interest up to 30% of their adjusted taxable income. For corporations, this limit has been temporarily increased to 50% for 2019 and 2020. For partnerships, the increase to 50% of adjusted taxable income doesn’t apply until 2020. For 2019, unless a partner elects otherwise, 50% of any business interest allocated to the partner for the year is deductible in 2020 and not subject to the adjusted taxable income limitation.

Acceleration of Corporate AMT Credits

    • The corporate AMT (alternative minimum tax) was repealed as part of sweeping tax reforms in 2017, but existing corporate AMT credits were made available as refundable credits spread over several years. Under the CARES Act, companies can claim these credits on an accelerated timeline – any unused credits are fully refundable in 2019.

Corporate Net Operating Losses – Limitations and Carrybacks

    • Prior to the CARES Act, NOLs were subject to a taxable-income limitation, and could not be carried back to reduce income for prior tax years. Now, companies are permitted to carry back NOLs from 2018, 2019 or 2020 for up to five years, and for 2020 and prior years, can use available NOLs to offset 100% (rather than 80%) of their taxable income.
    • Note that a corporation with NOLs from 2018, 2019 or 2020 that paid tax in one (or more) of the five preceding tax years can immediately file amended return to obtain a refund for the relevant year.

Technical Amendment Addressing Qualified Improvement Property 

    • The legislation also includes a technical correction to the 2017 tax reform legislation relating to “qualified improvement property” (this generally includes interior improvements to nonresidential buildings), retroactively reducing the recovery period to 15 years beginning in 2018 (instead of the 39-year life of the building – which also had the effect of making qualified improvement property ineligible for bonus depreciation).

Individual Tax Provisions

2020 Recovery Rebates for Individuals

    • Most U.S. residents with an adjusted gross income up to $75,000 ($150,000 for married individuals, and $112,500 for head of household filers) are eligible for a rebate payment of $1,200 ($2,400 for married filers), plus $500 per child.
    • To qualify for the rebate, you cannot be a dependent of another taxpayer, and you must have a work-eligible social security number.
    • For taxpayers with adjusted gross income exceeding these thresholds, the rebate amount is reduced by $5 for each $100 of income over the applicable limit.

Special Rules for Withdrawals From Retirement Funds

    • Individuals who have been impacted by COVID-19 can withdraw funds up to $100,000 from retirement plans (IRAs, 401Ks, and certain other specified plans) without incurring the early withdrawal penalty (10%). The withdrawn amounts would still be subject to income tax, but over a three-year time period – and the taxpayer can recontribute up to the withdrawn amount to an eligible retirement plan within that three year period without regard to the annual cap on contributions.

Increased Limits on Deductions for Charitable Contributions

    • The limits on itemized deductions for charitable contributions for both individual and corporations have been substantially relaxed for 2020. Also, taxpayers who do not itemize deductions can deduct up to $300 in cash contributions to public charities in 2020.

Exclusion for Certain Employer Payments of Student Loans

    • Employers can make tax-free student loan repayments for employees (up to $5,250 per employee) until December 31, 2020.

What Else?

The CARES Act is the latest legislation enacted as part of the federal government’s historic response to COVID-19. For a detailed summary of how prior relief packages impact employees and employers, click here.  IRS Notice 2020-18 (superseding IRS Notice 2020-17) postponed the April 15, 2020 federal income tax payment and tax return deadline (the initial IRS notice postponed the deadline for tax payments, but not tax return filings) to July 15, 2020. The postponement, which applies to any taxpayer (not just individuals, but also trusts, estates, partnerships, and corporations) subject to a federal tax payment or filing deadline of April 15, 2020, covers federal income tax returns, federal income tax payments (including payments of tax on self-employment income), and federal estimated income tax payments (including payments of tax on self-employment income). A couple of notable points:

    • Taxpayers do not have to demonstrate any hardship or direct impact of COVID-19 to qualify for the extension.
    • Taxpayers do not need to file any forms (such as Forms 4568 or 7004) in order to receive the extension.
    • There is no limit on the amount of tax payments that may be postponed (although the extension only applies to tax payments in respect of the taxpayer’s 2019 (or 2020, in the case of estimated tax payments) taxable year).

As a note of caution, however, keep in mind that the extension only applies to federal income taxes (so deadlines for other types of taxes would not be impacted), and does not apply to the filing of any information return.

Taxpayers should also make sure to check with state and local tax authorities – many states have extended deadlines to conform with the federal guidance, but there isn’t a uniform approach across the board. For example, Colorado has extended the income tax payment deadline for taxpayers until July 15, 2020 and provided an automatic six-month extension for income tax returns required to be filed by April 15th (to October 15, 2020). California has postponed filing and payment deadlines until July 15, as has Utah.

COVID-19 has had a devasting impact on public health in the United States and across the world. It also poses tremendous challenges to financial systems, including hardships for individuals and businesses of every size. The provisions outlined above reflect steps taken to date to mitigate the substantial economic damage related to the COVID-19 pandemic, and Congress is already considering additional relief options for taxpayers.  

Mike Baker frequently advises with respect to changes in the tax law. She possesses a breadth and depth of experience in tax law that spans multiple decades. For additional information, please contact mike@mbakertaxlaw.com.