On March 27, 2020, Congress passed and the president signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
As with most legislation, there are a number of areas where additional guidance will be needed.
Following is a brief summary of our initial understanding of key tax provisions of the CARES Act, along with some of Wipfli’s analysis.
The Act allows employers and self-employed individuals to defer payment of the employer share of FICA taxes. Payments of such taxes for 2020 that are otherwise due through the end of 2020 would be payable over two years (50% by 12/31/2021 and 50% by 12/31/2022). Although this is not a change, the law clearly states that the delayed payment remains a primary obligation of the employer even if there is a contractual arrangement with a third party (payroll service or certified PEO, for example) to remit the payments.
Student loan payments by employers
Up to $5,250 of certain employer payments made before 2021, whether to the employee or to a lender, of principal or interest on any qualified education loan incurred by the employee for the employee’s own education, can be tax free to the employee.
The Act allows non-itemizing individuals an above-the-line deduction for up to $300 of cash charitable contributions made during the year, starting with the 2020 tax return.
In addition, individuals that itemize in 2020 may elect a 100% of AGI limitation (rather than 60%) cash charitable contributions.
Contributions to supporting organizations or donor advised funds are not eligible for either of the above enhanced deductions.
The C Corporation charitable deduction limit for cash contributions in 2020 is increased to 25% of taxable income rather than 10%. The 25% limit also applies to contributions of food inventory.
The Act allows individuals to withdraw as much as $100,000 from their qualified retirement plan accounts through the end of 2020 and treat them as non-taxable rollover contributions as long as the funds are repaid to the plan in the next three years. This provision only applies if the taxpayer, his/her spouse or his/her dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention, or if they suffer adverse financial consequences as a result of being quarantined, furloughed, laid off, having reduced work hours due to the virus or disease, being unable to work due to lack of child care, etc.
Adverse financial consequences in taxpayer’s portfolio does not appear to count for this purpose. The employee may self-certify that the employee satisfies these conditions.
We do not know yet what alternatives may be available to the estate of an individual who dies during the three-year period prior to fully repaying those funds to the plan.
If the distribution is not repaid within three years, the withdrawal is taxed ratably over three years starting in 2020 but will not be subject to early withdrawal penalty. Since one-third of the distribution would be taxed in each year and that the repayment may not be made until 2022, amended returns for 2020 and 2021 may be required.
For a 180-day-period beginning on the date of enactment, affected individuals can also receive loans from retirement plans up to the lesser of $100,000 or the present value of their vested benefits. This is double the regular loan limitation.
The Act waives the required minimum distribution rules (RMD) for IRAs and defined contribution plans for 2020, including the first RMD for individuals that reached age 70½ during 2019.
Net operating losses
The Tax Cut and Jobs Act eliminated NOL carrybacks starting with 2018. The CARES Act reinstates and expands the NOL carryback provision by allowing NOLs incurred in 2018, 2019 and 2020 to be carried back five years. The Act also temporarily removes the 80% of taxable income limitation on the use of NOLs incurred in those years, so they can once again fully offset income.
Taxpayers who would prefer not to carry back these losses must affirmatively elect to forego the carryback period. The election for 2018 or 2019 must be made by the due date (including extensions) of the taxpayer’s return for the first taxable year ending after the date of enactment. An election for 2020 is due by the due date (including extensions) for that year.
Special rules apply for NOLs from fiscal years that started in 2017 and ended in 2018.
Excess business losses
The TCJA generally limited business losses on an individual’s income tax return to $500,000. For 2018, 2019 and 2020 the excess business loss limitation has been suspended. Taxpayers do not have the option of suspending or not, so this provision will result in affected taxpayers either amending their 2018 return to claim a higher loss or foregoing the loss carryforward to 2019.
Interest expense deduction limits
The Tax Cuts and Jobs Act imposed limitations on deductibility of business interest expense.
Taxpayers have been awaiting additional guidance on many nuances of the calculation, and about 600 pages of explanatory regulations to further interpret that provision are just about ready to be released by the IRS. Fortunately, the changes made by this Act are unlikely to have a material impact on those regulations.
The CARES Act modified that limitation to generally allow business interest expense deductions of up to 50% of adjusted taxable income rather than 30%, for tax years beginning in 2019 and 2020. Additionally, for years beginning in 2020, the taxpayer may elect to apply the limitation based on adjusted taxable income for the last taxable year beginning in 2019. Special rules apply if the 2020 year is a short taxable year.
This change would require amended returns by corporations and individuals that were subject to the limitation. A special rule would allow partners in partnerships to treat 50% of the 2019 excess business interest as a 2020 deduction that is not subject to the limits, with the balance subject to the applicable limitations.
This is welcome relief to many highly leverage businesses and for the real estate industry – but businesses that would prefer to continue with the 30% limitation, an election is available to do so.
Retail ‘glitch’ fix
The Act finally fixes a drafting error in the Tax Cuts and Jobs Act. Qualified Improvement Property (certain costs associated with improving the interior portion of existing buildings) is now classified as 15-year property and is eligible for 100% bonus depreciation, rather than 39-year property as previously classified under TCJA.
This change is effective retroactively, so 2018 returns can be amended to take advantage of the shorter life. If 2018 and 2019 returns have already been filed using the 39-year life, presumably the only way to take advantage of this provision would be to request an automatic change in accounting method on taxpayer’s 2020 or subsequent return.
Other business provisions modifying the impact of TCJA
Corporations can utilize any remaining alternative minimum tax credit carryovers, in full, in the first taxable year beginning after 2018.
Modified rules that had the unintended consequence of subjecting some foreign entities to excessive tax and reporting requirements.
Addressed an error that resulted in some companies overpaying 2017 taxes in connection with a one-time repatriation tax on foreign earnings without the ability to claim a refund.
Modifications to the Emergency Sick Leave and Paid Family Medical Leave Act
The ink hasn’t dried on this law yet, and the CARES Act is already making modifications.
Paid sick leave requirements now expire after a worker has been paid for 80 hours leave or returned to work, whichever occurs first.
Certain workers laid off on or after March 1, 2020 would be eligible to receive family leave benefits if they are rehired. The 30-days of employment test would be met if the rehired employee worked for the employer for at least 30 of the last 60 calendar days prior to the layoff.
Employee retention credit
Employee retention credit for employers that had to fully or partially suspend operations because of an order by the government or had a significant reduction in gross receipts, and for all small employers:
- The credit is only available if (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 through the earlier of the fourth quarter of 2020 or the end of the quarter during which gross receipts are at least 80% of gross receipts for the same quarter of the prior year.
- The maximum refundable credit is 50% of up to $10,000 of eligible wages.
- Businesses with over 100 employees are eligible only with respect to wages paid for employees that were not providing services to the employer due to the reasons stated above.
- A trade or business with 100 or less employees is eligible for the credit regardless of whether the employee is providing services to the employer or not.