What You Need to Know About the CARES Act – Part 2

Below is a summary of key points covered by the Coronavirus Aid, Relief and Economic Security (CARES) Act

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act.  The Act contains several provisions affecting taxes.  Below is a brief summary of these provisions.  If you have questions or require additional information on any of these items, please contact us at 302-656-6632 or by email coverrossiter@coverrossiter.com.

Individual Provisions:
  • Recovery rebates – checks up to $1,200 for individuals and $2,400 for married couples filing joint returns.  The amounts are phased out at a rate of 5% of adjusted gross income over $75,000 (single), $112,500 (head of household) and $150,000 (joint).  An additional $500 will be sent to taxpayers with qualifying dependent children under age 17.  The rebates will be based on 2019 returns, or 2018 returns if the 2019 return has not yet been filed.
  • Use of retirement funds – the additional 10% penalty on early distributions from IRAs and defined contribution plans, such as 401k plans, is waived for distributions during 2020 by a person (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus.  Distributions up to $100,000 are permitted under this provision.  Income arising from such a distribution may also be spread out over three years.
  • Required minimum distributions – RMDs from IRAs and defined contribution plans are waived for 2020.
  • Charitable contributions
    • Individuals who do not itemize will be able to claim up to $300 as a deduction for cash contributions.
    • The limitation on overall charitable contributions is increased from 60% of modified adjusted gross income to 100% for cash contributions.
  • Employer payments of student loans – employees may exclude from income $5,250 for benefits under an employer-sponsored educational assistance program.  Employer payments of student loan debt made before January 1, 2021 qualify for this benefit.
Business Provisions:
  • Employee retention credit for employers – a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.  The credit is not available to employers receiving Small Business Interruption Loans.
  • Delayed payment of employer payroll taxes – the 6.2% employer portion of the Social Security payroll tax can be deferred through the end of 2020.  The deferred amounts will be due in two equal installments at the end of 2021 and 2022.  This relief isn’t available if the taxpayer has had debt forgiveness under the Small Business Act.
  • Modification of limitations on corporate cash charitable contributions – qualified contributions are allowed as a deduction as long as the contributions don’t exceed 25% of the corporation’s taxable income
  • Net operating losses – for tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income, as opposed to the current law limitation of 80%.  In addition, NOLs arising in a tax year beginning after December 31, 2017 and before January 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss.
  • Modification of limitation on losses for noncorporate taxpayers – under Code Section 461(l), active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the 2017 TCJA.  The CARES Act modifies the effective date of this provision to tax years beginning after December 31, 2020.
  • Corporate minimum tax credit is accelerated – corporations with alternative minimum tax credits may claim 100% of credits in 2019 that would have otherwise been claimed in 2020 and 2021.  There is also a special election that enables corporations to take the entire refundable credit in 2018 by filing a tentative refund claim no later than December 31, 2020.
  • Deductibility of interest expense temporarily increased – the TCJA of 2017 generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.  The CARES Act temporarily and retroactively increases the limitation from 30% to 50%.  For partnerships, the 30% of adjusted taxable income remains in place for 2019, but is 20% for 2020.
  • Technical correction for qualified improvement property – under the TCJA, qualified improvement property falls into the 39-year recovery period for nonresidential rental property, making it ineligible for 100% bonus depreciation.  The CARES Act specifically designates qualified improvement property as 15-year property for depreciation purposes, allowing it to be eligible for bonus depreciation.
  • Forgiveness for certain SBA-guaranteed loans – the reduction or cancellation of indebtedness generally results in cancellation of debt income to the debtor.  Under the CARES Act, amounts of SBA Section 7(a)(36) guaranteed loans that are forgiven aren’t taxable as cancellation of indebtedness income if the forgiven amounts are used for (1) payroll costs; (2) any interest payments on any covered mortgage obligation; (3) any payment for any covered rent obligation; (4) covered utility payments.  The loans have to be made from the period beginning on February 15, 2020 and ending on June 30, 2020.
  • Advance refunding of credits for paid sick leave and paid family leave – the recently enacted Families First Coronavirus Response Act provides that small employers (500 or fewer employees) whose employees receive paid sick or family leave are entitled to credits.  The CARES Act provides for advance refunding of these credits.