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CARES Act – Tax Related Benefits

April 02, 2020

CARES Act – Tax Related Benefits

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law on March 27, 2020. Below we have outlined many of the significant income tax provisions we expect will impact you. While we focus on a continued review of the CARES Act with plans to provide additional updates, as warranted, our communications are intended to inform. We assure you we are available to provide any assistance you may need during this time of uncertainty and change. 

Note that several provisions of the CARES Act provide technical corrections to the Tax Cuts and Jobs Act (TCJA) that was signed into law on December 22, 2017. We have noted such corrections in the summary below. 

General Income Tax Provisions 

Net Operating Losses (NOLs) 

TCJA Technical Correction:

  • Fiscal year taxpayers may now carryback NOLs generated in their 2017 tax year. 
  • Fiscal year taxpayers generally have 120 days from CARES enactment (3/27/2020) to file a carryback claim.

NOLs generated in tax years 2018, 2019 and 2020 may be carried back 5 years. 

Corporate Prior Year Minimum Tax Credit Refunds 

  • Accelerates full refund to 2019 (previously for tax year 2021).
  • Corporations may elect under new Section 53(e)(5) to take total credit in 2018. Refund application must be filed before 12/31/2020 in the form and manner prescribed by Treasury. 

Interest Expense Limitation 

  • For 2019 and 2020, the business interest expense limitation is adjusted to 50% of Adjusted Taxable Income (from 30% previously).
  • Special rules for partnerships –
  • 50% limit does not apply to 2019; 30% applies.
  • Any 2019 excess business interest expense (EBIE) is bifurcated – 50% deductible in 2020 with no regard to 163(j); 50% follows existing rules.
  • Taxpayers can make irrevocable election out of the 50% limitation.
  • Partners can elect not to apply the special rule of EBIE received from partnerships in 2019. 

Qualified Improvement Property (QIP) 

TCJA Technical Correction, retroactive to the date of enactment:

  • QIP is now 15-year property, eligible for bonus depreciation.
  • QIP is assigned a 20-year ADS class life, important if making a real property trade or business election.
  • Adjustment for assets place in service in prior year may be accomplished through an amended return or automatic method change. Additional guidance from Treasury is expected. 

Employer Education Payments 

  • The CARES Act amends IRC Section 127 to allow employer payments made before January 1, 2021 for student loans to be treated as educational assistance. An employer may provide educational assistance to employees on a tax-free basis up to a maximum exclusion amount of $5,250 annually. 

Access to Retirement 

  • Penalty free access to retirement up to $100,000.
  • Increased limit on loans retirement plans – now up to $100,000 and up to 100% of vested balance.
  • Early distributions from qualified employer plans will not impact the plan’s tax favored status.
  • Required Minimum Distributions (RMDs) are suspended for 2020. 

Excess Business Losses 

  • The $500,000 excess business loss limitation under Section 461(l) is deferred until 2021.
  • TCJA Correction – wage income will not be includible as business income for purposes of the excess business loss limitation. 
  • Certain impacted taxpayers may need to file amended 2018 and/or 2019 tax returns. 

Charitable Contributions 

  • Generally, corporations may make cash and wholesome food donations up to 25% of taxable income.
  • Generally, individuals itemizing can deduct cash donation to public charities (excluding private foundations, supporting organizations, or donor advised funds) up to 100% of AGI.
  • All individuals who do not itemize deductions are now afforded a $300 “above the line” deduction for cash donations to public charities (excluding private foundations, supporting organizations, or donor advised funds). 

Recovery Rebates 

  • Eligible individuals are entitled to a refundable credit in the amount of $1,200 for a single individual or $2,400 for married individuals filing jointly to be paid in the 2020 tax year. Qualifying children will generate an additional $500 each.
  • The amount of the credit will be reduced by 5 percent of of the taxpayer’s adjusted gross income (AGI) which exceeds $150,000 for married individuals filing jointly, $112,500 for an individual filing as a head of household, and $75,000 for single individual or a married individual filing separately. The credit phases out completely when a taxpayer’s AGI exceeds $99,000 (for single filers), $146,500 (for heads of households), or $198,000 (for joint returns).
  • No action is required to claim the rebate with the IRS using the 2018 or 2019 tax return data to issue such rebates. 

Employee Retention Credit 

  • Credit for 50% of qualified wages (on up to $10,000 of qualified wages per employee) paid by qualified employer.
  • Credit is allowable against payroll tax and is refundable (as on overpayment) if in excess of quarterly taxes due.
  • Tax Exempt employers can qualify.
  • Eligible Employer –
  • Carried on business in 2020 and with respect to any calendar quarter during 2020,
  • Such business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority due to COVID-19 or,
  • Such business suffered a significant decline in business during a calendar quarter in 2020 defined as
  • Gross receipts are less than 50% of gross receipts in the same prior year quarter.
  • Once eligible, a taxpayer remains eligible until the first calendar quarter gross receipts are greater than 80% of gross receipts in the same calendar quarter for the prior year.
  • Credit period covers wages earned/paid March 13, 2020 through December 31, 2020.
  • Eligible Wages –
  • If the full-time employee average in 2019 was 100 or less, all wages paid (up to the $10K cap).
  • If the full-time employee average in 2019 was greater than 100 – all wages paid (up to the $10K cap) when the employee is not working.
  • Single employer aggregation rules apply – (Sections 52 and 414).
  • Wages do include amounts paid to a group health plan.
  • Wages do not include amount paid by an employer that qualify for the credit under the Families First Coronavirus Response Act (i.e. paid sick leave and paid family medical leave). 

The credit is not available for taxpayers participating in the Paycheck Protection Program. 

Payroll Tax Deferral 

  • Includes employer payroll taxes and 50% of self-employment taxes.
  • Deferral period begins on date of enactment, March 27, 2020, and continues through December 31, 2020.
  • Deferred payments are due in two equal installments on December 31, 2021 December 31, 2022. 

Deferral is not available for taxpayers with debt forgiven under the Paycheck Protection Program. 

RBG will continue to monitor guidance which may impact your business. We will continue to keep you apprised of new developments and available resources. Please contact your RBG advisor at 901.682.2431 for any needs.