On March 27, U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and President Donald Trump subsequently signed the bill into law. The bill contains a $2.2 trillion stimulus deal, the largest economic relief package in American history, to provide economic relief.
Much of the CARES Act broadly provides direct checks to households under certain income thresholds, expanded unemployment insurance, loans to small businesses, stabilization of key industries, and investment in medicines and vaccines, as well as the provision of medical equipment. The bill also contains a number of federal tax provisions at the individual and business level.
To tackle all things CARES Act, this will be the first of a series of write-ups addressing the tax-related provisions of the bill. For Part 1, we provide a general overview of the key takeaways.
What are the key takeaways of the CARES Act?
Small Business Loans
Through the CARES Act, small business interruption loans of up to $10 million are available to companies and certain nonprofit organizations with 500 or fewer employees to meet payrolls and other employee-related costs as well as debt, rent and utility payments. Eligible businesses must qualify as a “small business” as defined under the Small Business Act.
Determining the most advantageous use of the many taxpayer-friendly provisions of the CARES Act may require careful planning. For example, taxpayers who participate in the small business loan program (aka payroll interruption loans) are not allowed to use the employee retention credit.
In addition, taxpayers who have part or all of their payroll information loans forgiven are not eligible for the payroll tax deferral. Evaluating the most beneficial way to utilize the CARES Act requires a facts-and-circumstances analysis.
The CARES Act provides eligible taxpayers with a refund check equivalent to $1,200 per taxpayer ($2,400 for joint filers) plus an additional $500 per dependent child. However, there are certain limitations. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers), and completely phases out at $99,000 ($198,000 for joint filers and $136,500 for head of household filers).
Rebate amounts are determined based on earned income, Social Security benefits and retirement income of the taxpayer per their 2019 tax returns (or 2018, if a 2019 return has not yet been filed). This provision does not extend to nonresidents, trusts, estates or anyone who can be claimed as a dependent on someone else’s return.
The federal government will supplement unemployment benefits for furloughed workers for up to four months under the “Keeping American Workers Employed and Paid” program.
Tax Cuts and Jobs Act (TCJA) Revisions
Several provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 are altered, including:
- Net operating losses: The bill temporarily repeals the 80% income limitation for net operating loss deductions established under the TCJA. As a result, net operating losses can now offset 100% of taxable income for 2018, 2019 and 2020 and carry them back five years.
- Excess business loss limitations: The bill defers the effective date of Internal Revenue Code (IRC) Section 461(l) regarding the limitations of “excess business losses.
- Section 163(j) interest limitation: A taxpayer’s adjusted taxable income limit increased to 50% from 30% for the 2019 and 2020 tax years. Also, taxpayers can elect to use 2019 income in place of 2020 for the computation.
- Qualified improvement property: Fixing the “retail glitch,” qualified improvement property is now 15-year property, eligible for bonus depreciation, and is retroactive to 2018.
- Refundable tax credits: The bill provides corporations with the ability to accelerate their utilization of any unused minimum tax credits (MTCs) under the pre-TCJA corporate alternative minimum tax (AMT) regime. Now taxpayers may receive a refund for 2018 and 2019.
Employee Retention Credit
The CARES Act create an employee retention credit for employers that experience a full or partial suspension of operations due to COVID-19, subject to certain restrictions. Eligible employers may receive a refundable payroll tax credit equal to 50% of qualified wages (up to $10,000 in wages) for each employee.
The credit is available to eligible employers carrying on a trade or business in the calendar year of 2020 and either: 1) experienced a full or partial suspension in their operations due to COVID-19, or 2) experienced a gross receipts decline of more than 50% compared to the same quarter in the prior year.
Payroll Tax Deferral
The bill delays payment of the employer (not employee) portion of the FICA 6.2% payroll tax liability. Effectively, the bill defers 50% of 2020 employer payroll taxes until December 31, 2021 and the remaining half will be due December 31, 2022. The deferral applies to 50% of self-employment tax liability as well.
Early Withdrawals from Retirement Plans and Participant Loans
Taxpayers affected by COVID-19 can withdraw up to $100,000 from a qualified retirement plan before the end of the year, without being subject to the 10% early withdrawal penalty.
In addition, a taxpayer can take a participant loan from certain retirement plans for coronavirus-related relief up to the lesser of $100,000 or 100% of the account balance.
Minimum Distributions Waiver
The bill waives the required minimum distribution rules for calendar year 2020 for certain defined contribution plans and IRAs.
Required Minimum Distributions
For 2020, the required minimum distributions retirees must take from 401(k) plans and IRAs are suspended.
How can Squar Milner help?
Our Squar Milner Tax Department is ready to talk all things CARES Act with you. Whether you are seeking answers as an individual taxpayer or looking to ask questions as a business owner, we are here to help.
We are committed to working with you to provide accurate information and helpful insight as you focus on navigating these unprecedented times.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.