COVID-19: US government signs CARES Act into law
On Friday March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. The CARES Act includes several tax changes relevant to our clients including the following:
- Suspension of the 80% taxable income limitation on net operating loss (NOL) deductions for tax years 2018 through 2020 put into effect under the 2017 Tax Cuts and Jobs Act (TCJA). The 100% NOL deduction once again applies. Carry over periods are now indefinite.
- Allowance of carry backs of NOLs from 2018 through 2020 tax years to the five tax years preceding the loss year. Taxpayers can also elect to forgo the carry back.
- Increase to the Internal Revenue Code Section 163(j) limitation on business interest expense deductions from 30% to 50% of adjusted taxable income (ATI) for tax years beginning in 2019 and 2020. Partners may treat 50% of allocated excess business interest expense from a partnership during 2019 as fully deductible in tax year 2020. For tax years beginning in 2020, taxpayers can elect to calculate interest limitations using ATI from the last tax year beginning in 2019 rather than the current year. This election is made at the partnership level must be made by a partnership.
- Deferral of the effective date of the TCJA’s disallowance of deduction for excess business losses by non-corporate taxpayers, generally losses over $500,000 for married filing joint taxpayers and $250,000 for others to tax years beginning after December 31, 2020. Deductions for such losses for the 2018, 2019 and 2020 tax years are permitted. Amended 2018 returns may be in order.
- Classification of qualified improvement property (QIP) such as improvements to the interior of a non-residential building as 15-year property. Taxpayers may now claim 100% bonus depreciation for such property, retroactive for property placed in service after December 31, 2017. Amended tax returns may be in order.
- Provision for employers to provide student loan repayment benefits to employees on a tax-free basis for the remainder of 2020. This change does not increase the existing cap of $5,250 which applies to both the new student loan repayment benefit as well as other educational assistance provided by employers under existing law.
- Refundable payroll tax credit for 50 percent of qualified wages paid or incurred from March 13, 2020 through December 31, 2020 limited to the first $10,000 of compensation, including health benefits, paid during this period. The credit is generally available to employers whose operations were suspended in full or in part due to a COVID-19-related shut-down order, or whose gross receipts declined by more than 50 percent compared to the same quarter in the prior year. For employers with an average of more than 100 full-time employees in 2019, qualified wages are those paid to employees not working due to COVID-19 related shut-down orders. For smaller employers, all wages qualify for the credit regardless of whether the employer was open or closed during the COVID-19 crisis.
- Deferral of payment of the employer’s share of Social Security taxes for the remainder of 2020 with half to be paid in calendar year 2021 and the remainder in 2022.
- Advance payment of “recovery rebate” refundable tax credits to individual taxpayers within applicable income thresholds. Single individuals with adjusted gross income (AGI) of $75,000 or less (determined by the last filed tax return for 2018 or 2019) and individuals filing jointly making $150,000 or less of AGI receive a full benefit or $1,200 or $2,400, respectively. Qualifying individuals will also receive a $500 payment for each child under the age of 17. Payments to taxpayers with AGI above these levels is reduced by $5 for every $100 of AGI in excess of the applicable threshold.
- Elimination of the 10% penalty on distributions from qualified retirement plans paid before a taxpayer reaches 59 ½ years of age for distributions in 2020 related to COVID-19, up to $100,000. This provision applies to individuals diagnosed with COVID-19 or have a spouse or dependent diagnosed with COVID-19 or who have experienced financial consequences from being quarantined, laid off, furloughed, or having work hours reduced due to COVID-19. Qualifying distributions remain taxable. The tax liability can be paid over a three-year period starting from the year of the distribution. Distributions can also be repaid to avoid tax. An individual can borrow from a qualified plan up to $100,000 for 180-days following enactment of the CARES Act.
- Waiving of the minimum distribution requirements for certain retirement plans and accounts (such as IRAs) only for the 2020 calendar year.
- Allowance for taxpayers who itemize deductions to deduct charitable contributions made in 2020 up to 100% of AGI for 2020. Any excess amounts can be carried forward for up to five years. The charitable deduction for corporate taxpayers increases from 10% to 25% of taxable income.
- Allowance for non-itemizing individuals to make deductible cash charitable contributions of up to $300.
Reminder to our clients: these are the following administrative relief measures previously announced by IRS:
- Notice 2020-20 extends until July 15, 2020 from April 15, 2020, the tax return filing and payment due dates for federal gift and/or generation-skipping transfer tax return filings
- Notice 2020-18 extends until July 15, 2020 from April 15, 2020, the tax return filing and payment due dates for all federal income tax payments.
Extended due dates do not apply to information returns such as Form 3520, estate tax returns, or Form 990 series returns for certain not-for-profit organizations.