Coronavirus Aid, Relief, and Economic Security (CARES) Act: Tax considerations for individuals and businesses
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P.L. 116-136), which is intended to help Americans deal with the economic impact and health crisis brought on by the outbreak of COVID-19, includes a litany of provisions to bolster various sectors of the economy, businesses large and small, as well as individuals.
Our overview of the CARES Act’s employment-related provisions discusses topics including unemployment assistance and compensation, tax-favored withdrawals from IRAs and certain retirement plans, temporary waiver of required minimum distributions, additional time for funding tax-qualified single-employer defined benefit pension plans, employee retention credits, and changes to Social Security payroll taxes.
Below are the provisions of the Act that pertain specifically to individuals and businesses.
Recovery checks to individual taxpayers: To provide immediate cash assistance to Americans and their families, the Act provides checks of up to $1,200 ($2,400 for those married filing jointly) to many U.S. taxpayers.
- The amount paid is increased by $500 for each of the taxpayer’s qualifying children.
- The payments are reduced for higher-income taxpayers, phasing out for taxpayers with adjusted gross income (AGI) of $75,000 for single, $112,500 for head-of-household filers, and $150,000 for those married filing jointly. The payment is reduced by 5 percent of the amount of AGI exceeding these thresholds.
- The IRS will base the recovery payments on the taxpayer’s 2019 tax return, or 2018 tax returns if 2019 has not yet been filed.
- Note: These payments are technically advanced refunds of a refundable credit for tax year 2020. As such, these amounts are not subject to income tax.
There has not yet been definitive guidance regarding when individuals can expect these payments, although Treasury Secretary Steven Mnuchin has indicated that payments should begin being issued within two or three weeks. Additionally, there is no guidance provided as to when 2019 returns must be filed for the IRS to use 2019 rather than 2018 AGI to compute benefits. We will provide guidance as it becomes available.
Charitable contributions: The 60 percent of AGI deduction limitation for individuals who itemize is suspended for cash contributions in 2020. Additionally, taxpayers who do not itemize are able to deduct up to $300 of cash contributions to charitable organizations as “above the line” deductions in taxable years beginning in taxable year 2020.
Exclusion of certain employer payments of student loans: Employers may contribute up to $5,250 toward an employee’s student loans in 2020, and those contributions are excluded from the employee’s income. The $5,250 cap applies both to the new student loan repayment benefit and to other educational assistance (tuition, fees, books etc.) provided by the employer. These payments may be made through Dec. 31, 2020.
Businesses: Changes to certain provisions of the TCJA
1. Modifications of net operating losses (NOLs):
Under the TCJA, NOLs are limited to 80 percent of current year taxable income, and may not be carried back to prior tax years (i.e., to generate refunds).
- The Act removes the 80 percent taxable income limitation to allow NOLs to fully offset income for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021.
- Additionally, the Act permits a loss from taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021, to be carried back five years from the year the loss arose.
- Additionally, the Act postpones the application of the excess business loss limitation of Section 461(l), applicable to pass-through business owners and sole proprietors, to tax years beginning after Dec. 31, 2020.
- The Act clarifies that when the provision becomes effective again, that wages will not qualify as business income for these purposes.
- Special REIT rules: NOLs from a REIT year cannot be carried back. A loss generated in a non-REIT year cannot be carried back to a REIT year.
- There are also special rules for life insurance companies and carryback years to which Section 965 applies.
Special rule for fiscal returns with years beginning in 2017: TCJA prevented corporations with fiscal years beginning in 2017 from carrying back NOLs.
- These NOLs can now be carried back two years
- Any election to forego the carryback or to file a carryback claim on Form 1139 will be considered timely if filed within 120 days of enactment of the CARES Act. A taxpayer that does not meet the time-frame for filing Form 1139, can still amend but that is a longer process. There is no current guidance on how effected taxpayers will elect out.
Clarification of interaction of pre-TCJA NOLs with TCJA NOLs: For taxable years beginning after Dec. 31, 2020, the Act clarifies that pre-TCJA NOLS are applied, which can offset 100 percent of taxable income. The 80% NOLs are then applied to offset the remainder.
Example: Corporation has a pre-TCJA NOL of $50,000 and a TCJA NOL of $50,000 carried to tax year 2022, a year the corporation has $100,000 of income. Total NOL usage equals $90,000: $50,000 of pre-TCJA NOL (100%) and $40,000 of TCJA NOL ($100,000 minus $50,0000, the net of $50,000 being multiplied by 80% which equals $40,000).
2. Accelerated recovery of corporate alternative minimum tax (AMT) credits:
The TCJA repealed the corporate AMT, and made corporations wait several years before recovering their AMT credits.
- The Act allows corporations to recover any remaining AMT credits fully in tax years beginning in 2019.
- Alternatively, an election may be made to take the AMT credits fully in tax years beginning in 2018.
3. Increase in interest deductions permitted under IRC Section 163(j):
The TCJA generally limited interest deductions to a portion of an entity’s adjusted taxable income (ATI). The Act generally raises the limit on interest deductions from 30 percent of ATI to 50 percent for taxable years beginning in 2019 and 2020 (with special partnership rules discussed below).
- Taxpayers may elect out of this provision, which may be beneficial if they are subject to Base Erosion and Anti-Abuse Tax (BEAT).
- Taxpayers may elect to use their 2019 ATI in calculating their 2020 limitation.
Special rules for partnerships
- For partnerships (and partnerships only), the limitation for tax years beginning in 2019 remains at 30 percent.
- For excess business interest expense (EBIE) created in 2019 and carried to 2020:
- 50% of this EBIE will be deductible by partners in 2020, without regard to 2020 ETI.
- The remaining 50% will be subject to ETI limitations in 2020.
- Partners can elect out of this treatment
- The ATI limitation for partnerships for taxable years beginning in 2020 is 50% of partnership ATI (unless the partnership elects to use the 30% limitation).
For example, say a calendar year partnership has $100,000 of ATI in 2019 and $100,000 of interest expense. The deduction allowable by the partnership will be $30,000 (30% of ATI), and $70,000 of excess business interest expense (EBIE) allocated to the partners is carried forward to 2020. In 2020 the partners in aggregate could deduct $35,000 of the excess amount (50% of the EBIE), but the remaining $35,000 would be subject to the carryforward rules as usual. This means the partners in aggregate would need an allocation of ETI from the partnership in an amount of $35,000 in tax year 2020 or later. The determination of ETI for tax year 2020 is based on a 50% limitation at the partnership level unless the partnership elects out of the 50% limitation.
Procedural issue: There is no current guidance on whether any relief will be given to taxpayers who elected out of section 163(j) in 2018 or 2019 and may now wish to revoke.
Businesses: Technical correction to a provision in the TCJA
- Qualified improvement property (QIP): A drafting error in the TCJA required a 39-year depreciable life for qualified improvement property (generally, certain improvements to a building’s interior). The Act corrects this error, and makes it 15-year depreciable property (20-year for Alternative Depreciation System (ADS)), as intended. This will allow businesses to deduct the expense of these improvements immediately because they will be eligible for 100% bonus depreciation. They will also be able to potentially amend prior-year tax returns to adjust for this correction and potentially claim refunds.
- Procedural issue: There is no current guidance as to how 2018 and 2019 already filed can be “corrected” to adjust QIP to 15 years and take bonus.
Update: On April 17, the IRS published Revenue Procedure 2020-25, which provides procedural guidance allowing taxpayers to change depreciation for certain QIP or to make or revoke or withdraw certain elections. Read our overview.
Businesses: Miscellaneous provisions
- Charitable contributions: The Act increases the 10 percent limitation for corporations to 25 percent of taxable income.
- Temporary exception from excise tax for alcohol used to produce hand sanitizer: Taxpayers are excepted from excise tax for distilled spirits removed in 2020 and used for hand sanitizer produced and distributed in response to COVID-19.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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