On Friday, March 27, the President signed the massive $2 trillion Coronavirus Stimulus Bill (the Coronavirus Aid, Relief and Economic Security [CARES Act) to provide assistance to workplaces and employees. The law provides many benefits intended to deliver cash into the hands of individuals and businesses, as well as many other tax provisions.
BUSINESS TAX PROVISIONS
SBA LOANS – PAYCHECK PROTECTION PROGRAM
Loans are meant to help small businesses (fewer than 500 employees) impacted by the pandemic and economic downturn to make payroll and cover other expenses from February 15 to June 30. Notably, small businesses may take out loans up to $10 million—limited to a formula tied to payroll costs—and can cover employees making up to $100,000 per year. Loans may be forgiven if a firm uses the loan for payroll, interest payments on mortgages, rent, and utilities and would be reduced proportionally by any reduction in employees retained compared to the prior year and a 25 percent or greater reduction in employee compensation. More help click here.
EMPLOYEE RETENTION CREDIT
Eligible employers are allowed a credit against employment taxes for each calendar quarter equal to 50% of qualified wage (including health benefits) paid to employees.
Amount is limited to $10,000 of wages paid to an employee for all calendar quarters.
An eligible employer is a trade or business:
- Whose operation is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19; or
- Who has a “significant decline” in gross receipts (i.e., there is a decrease to less than 50% of the gross receipts for the same quarter in the prior year).
Different rules apply as to the covered wages depending upon the number of employees the employer had in 2019. Under the statute, tax exempt entities are also able to take advantage of this credit.
However, this credit is not available to employers receiving the Work Opportunity Tax Credit.
PAYROLL TAX HOLIDAY
Deferral of the employer’s share of payroll taxes for the period beginning on the date of enactment to January 1, pursuant to an SBA loan 7A or under Act section 1109.
The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. Thus, notwithstanding any other provision of law, the payment for Social Security employment taxes for the period beginning on the date of enactment thru Jan. 1 2021 won’t be due before Dec. 31, 2021
The term ”applicable date” means: (A) Dec. 31, 2021, with respect to 50% of the amounts to which Act, and (B) Dec. 31, 2022, with respect to the remaining 50% of those amounts.
NET OPERATING LOSSES
Law suspends rules relating to Net Operating Losses instituted under the prior law.
Under the TCJA which was signed into law in December 2017, net operating losses were no longer eligible to be carried back, and their usage, when carried forward, was limited to 80% of taxable income.
Under the CARES Act, net operating losses created in the 2018, 2019 and 2020 tax years can be carried back five years with no limitation on their usage.
LIMITATION ON NET BUSINESS LOSSES
Prior loss limitations imposed are suspended.
Under the TCJA, taxpayers (other than C corporations) were limited in utilizing net business losses (i.e., business losses in excess of business income). These taxpayers were limited to using only $250,000 ($500,000 on a married joint return) of net business losses against non-business income. The CARES Act suspends this rule so that net business losses for 2018, 2019 and 2020 can be used without limit.
IMMEDIATE REFUND OF CORPORATE AMT CREDIT
Prior law provided that the alternative minimum tax no longer applied to C corporations.
Those corporations with AMT credits were given the ability to recover these amounts as tax reductions and refunds over a four-year period (2018-2021.) The CARES Act accelerates this period to 2018 – 2019, with an election by the corporation to recover the AMT credit entirely in 2018.
BUSINESS INTEREST EXPENSE LIMIT INCREASED
Prior law provided that net business interest is deductible only to the extent of 30% of Adjusted Taxable Income (unless certain exceptions apply).
The CARES Act increases this limit to 50% for 2019 and 2020. Also, since the current economic problems cause by COVID-19 are expected to produce lower income in 2020 than in 2019, the law provides that a taxpayer can elect to use the 2019 Adjusted Taxable Income in place of 2020.
BONUS DEPRECIATION FOR QUALIFIED IMPROVEMENT PROPERTY (QIP)
The CARES Act corrects a legislative error under the prior law and provides that the costs for Qualified Improvement Property are eligible for bonus depreciation. This provision is retroactive for 2018 QIP costs (potential for amending prior tax returns).
To provide an incentive for contributions during this period:
- The limit on deductible charitable contributions by a C corporation (normally 10% of Taxable Income) is increased to 25%.
- Additionally, for a business making a contribution of food inventory, the limitation is increased from 15% to 25%.
Cash payments of $1,200 to individuals and $2400 to married couples.
An additional $500 may be paid for each qualifying child. These amounts are subject to reduction if the individual’s Adjusted Gross Income (AGI) exceeds $75,000 ($150,000 for a married couple).
Nonresident alien individuals and a person who is the dependent of another is ineligible to receive the payment.
The cash payments will be based on the recent tax information available to the IRS, based on the 2018 or 2019 tax return filed, but is subject to a “true-up” based on 2020 tax return information.
Unemployment insurance provisions now include an additional $600 per week payment to each recipient for up to four months, and extend UI benefits to self-employed workers, independent contractors, and those with limited work history. The federal government will provide temporary full funding of the first week of regular unemployment for states with no waiting period and extend UI benefits for an additional 13 weeks through December 31, 2020 after state UI benefits end.
Significant changes to retirement plan payment and loan rules.
- Required Minimum Distribution rules for qualified plans and individual retirement accounts are suspended for 2020. This will avoid the plan having to sell plan assets when they may be at their lowest values.
- Coronavirus-related distributions of up to $100,000 can be made with the related income tax payable over a three-year period. Also, the amount can be recontributed back to plan over a three-year period without affecting that year’s contribution limits.
- The limits on the amount of loans that can be taken from a qualified plan for coronavirus-related purposes is increased to the lesser of $100,000 or 100% of the individual’s accrued benefit.
EMPLOYER PAYMENT OF STUDENT LOANS
Certain employer payments of employee student loan amounts made before January 1, 2021, whether paid to the employee or the lender, can be excluded from income as an Educational Assistance Benefit.
- Up to $300 of charitable contributions can be taken as a deduction in calculating AGI for the 2020 tax year. This will provide a tax benefit even to those who do not itemize.
- For the 2020 tax year, a taxpayer can elect to disregard the 50% AGI limitation on deductible contributions.
For additional guidance visit the Tax Foundation’s Website.
This is an evolving situation, as such there will be more guidance from the government in the future regarding the implementation of these new provisions. If you have any questions, contact your Iannuzzi Manetta tax professional or contact Chris Iannuzzi at firstname.lastname@example.org or via phone at 248.641.0005.