The “CARES Act” Key Tax Provisions

The Coronavirus Aid, Relief, and Economic Security Act, also known as CARES, aims to provide relief to businesses and individuals affected by the impact of COVID-19. The CARES Act was proposed by the U.S. Senate in March and officially enacted March 27 , 2020.

Provisions Affecting Individuals

Section 2201: 2020 Recovery rebates for individuals

All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer, and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits.

For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as the IRS will use information from a taxpayer’s 2019 tax return, if filed, or in the alternative, their 2018 return. This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.

Section 2202: Special rules for use of retirement funds

Consistent with previous disaster-related relief, the provision waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020, and before December 31, 2020. In addition, income attributable to such distributions would be subject to tax over three years (can elect out and claim income during 2020), and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.

A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

Coronavirus-related purpose distributions are deemed to satisfy the requirements of a hardship distribution.

Loans from qualified retirement account limits are increased from $50,000 to $100,000, not to exceed one-half of the present value of the vested balance.

Loan repayments due from the date of the enactment of the Act through December 31, 2020 will be delayed one year.

Section 2203: Temporary waiver of required minimum distribution rules for certain retirement plans and accounts

The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.

Section 2204: Allowance of partial above the line deduction for charitable contributions

Individuals may receive a deduction up to $300 for cash contributions for those that do not itemize.

Section 2205: Modification of limitations on charitable contributions during 2020

The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50% of adjusted gross income limitation is suspended for 2020, and taxpayers may be able to deduct an amount up to 100% of their adjusted gross income. For corporations, the 10% limitation is increased to 25% of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15% to 25%.

Section 2206: Exclusion for certain employer payments of student loans

The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.

Provisions Affecting Businesses

Section 2301: Employee retention credit for employers subject to closure due to COVID-19

The provision provides a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year.

The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation per employee, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

Wages paid under the Families First Coronavirus Response Act are excluded from eligible wages. Employers receiving Small Business Interruption Loans under the Small Business Act are not eligible for this credit.

Section 2302: Delay of payment of employer payroll taxes

The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2% Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.

Sec. 2303(a): Changes to Net Operating Loss Deductions

The NOL deduction for NOLs arising in taxable years beginning after December 31, 2017 was limited to 80% of taxable income The deduction for NOLs arising in taxable years beginning on or before December 31, 2017 was not limited.

The 80% limitation no longer applies to NOL carryforwards to taxable years beginning after December 31, 2017 and before January 1, 2021. The 80% limitation will also not apply to any NOL carrybacks to taxable years beginning on or before December 31, 2017 when the NOL was generated in taxable years beginning after December 31, 2017. For taxable years beginning after December 31, 2020, rules similar to the pre-Act rules will apply with certain modifications.

Returns for taxable years with beginning dates from January 1, 2018 through December 31, 2020 can use 100% of all NOL carryovers to offset taxable income regardless of the taxable year in which the NOL arose. A taxpayer that has already filed its return for its taxable years beginning in 2018 and/or 2019 on which its NOL deduction was limited due to the 80% rule will need to amend to claim the full NOL deduction.

Sec. 2303(b): Carryback of Net Operating Losses

Prior to the new act, carrybacks of NOLs arising in taxable years ending after December 31, 2017 were disallowed. Under the new act, NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021 can now be carried back to each of the five taxable years preceding the year of loss. The special rules for farming losses and the two year carryback for insurance companies are made inapplicable for such taxable years. NOLs for REIT years (defined as any taxable year for which the provisions of part II of subchapter M apply) are not eligible for carryback. There are also some special rules provided for life insurance companies and with respect to the sec. 965 transition tax.

Section 2305: Modification of credit for prior year minimum tax liability of corporations

The provision accelerates the ability of companies to recover AMT credits.

Section 2306: Modification of limitation on business interest

Pre-Act:

Business interest expense was limited to 30% of taxable income (with adjustments).

Post-Act:

The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30% limitation to 50% of taxable income (with adjustments) for 2019 and 2020.

Section 2307: Technical amendment regarding qualified improvement property

Pre-Act:

The Tax Cuts and Jobs Act of 2017 (TCJA), made a technical drafting error by removing Qualified Improvement Property from eligibility for the additional first year depreciation deduction. This caused the types of property included in this class to revert to straight-line depreciation claimed over 39 years.

Post-Act:

This provision corrects the error in the TCJA and enables businesses to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building.

Section 2308: Temporary exception from excise tax for alcohol used to produce hand sanitizer

The provision waives the federal excise tax on any distilled spirits used for, or contained in, hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration and is effective for calendar year 2020.