Tax Law Update: CARES Act Includes Tax Relief for Businesses and Individuals

President Trump today signed into law the Coronavirus Aid, Relief, and Economic Security Act (Act).  The Act contains a series of provisions designed to provide economic stimulus and tax relief to individuals and businesses impacted by the COVID-19 pandemic.

Following is a summary of some of the key tax provisions in the Act. In addition to the Act, tax authorities have responded to the COVID-19 pandemic by extending certain federal and state tax return filing deadlines and enacting other legislation, including the Families First Coronavirus Response Act.

$1,200 Individual Cash Payments

The Act provides for direct cash payments to eligible individuals, in the form of advances of refundable tax credits of $1,200 per individual ($2,400 married filing jointly), plus $500 per qualifying child under age 17.  The payment is not available to nonresident alien individuals or individuals claimed as dependents on another’s return.  The payment amount phases out for individuals with adjusted gross incomes over $75,000 ($150,000 married filing jointly), by reducing the payment by 5% of the amount in excess of the threshold, such that the payment is completely phased out for taxpayers with no qualifying children and adjusted gross income of $99,000 ($198,000 married filing jointly).  The amount is computed based on the adjusted gross income shown on the taxpayer’s 2019 federal income tax return or, if the taxpayer has not filed a 2019 return at the time the amount is computed, the taxpayer’s 2018 return.  The Secretary of the Treasury is required to provide payments as quickly as possible, and some government sources have indicated that payments may begin within three weeks from the date of enactment.

Employee Retention Credit for Employers Subject to Closure Due to COVID-19

The Act provides for a refundable credit against an employer’s share of social security taxes for up to a maximum of 50% of the first $10,000 in qualified wages paid to each employee by an eligible employer after March 12, 2020 and before January 1, 2021.  Employers receiving a small business interruption loan under other provisions of the Act are not eligible for the credit.

An eligible employer is an employer that

• was carrying on a trade or business in calendar year 2020, and
• with respect to any calendar quarter, either
  • the operation of that trade or business is fully or partially suspended during the quarter due to orders from an appropriate governmental authority due to COVID-19, or
  • the quarter is within a period running from (i) the first calendar quarter beginning after 2019 in which the business has suffered a more than a 50% decrease in gross receipts compared to the same calendar quarter for the prior year until (ii) the first subsequent calendar quarter in which the business’s gross receipts are at least 80% of gross receipts for the same calendar quarter for the prior year. 

Qualified wages means

• for employers with more than 100 full-time equivalent employees (calculated based on 2019 employment), wages paid to employees not providing services due to COVID-19, or
• for employers with 100 or fewer full-time equivalent employees, any wages paid to an employee. 

Qualified wages also include an employer’s qualified health plan expenses (generally the employer’s expenses to maintain a group health plan) allocable to such wages. 
Qualified wages in the case of employers with more than 100 full-time equivalent employees are limited to the amount of wages the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the relevant period.  Furthermore, qualified wages do not include amounts paid to employees pursuant to the paid sick leave and paid family and medical leave credit provisions in the Families First Coronavirus Response Act (discussed in our prior Tax Alert).

The credit is generally not available for government employers, including the U.S. government, the government of any state or political subdivision, or any agency or instrumentality of the any of the foregoing.

Deferral of Employer Social Security Payroll Taxes

The Act permits employers to defer payment of the employer’s share of social security taxes for the period beginning on the date of the enactment of the Act and ending before January 1, 2021.  One half of the deferred taxes must be paid by the employer on or before December 31, 2021, and the remaining half must be paid by the employer on or before December 31, 2022.  Self-employed persons are eligible for a comparable deferral of 50% of the social security portion of self-employment taxes.

For employers eligible for the Families First employment tax credit (summarized in our Tax Alert), that credit would reduce employment tax due and would reduce the amount of tax subject to deferral under this provision of the Act.  The deferral is not allowed with respect to persons receiving loan forgiveness with respect to certain small business loans.

Net Operating Loss Changes

The Tax Cuts and Jobs Act (TCJA), enacted in 2017, limited the deductibility of net operating losses (NOLs) generated after December 31, 2017 to 80% of the taxpayer’s taxable income in the year in which the NOL is claimed.  The Act repeals the limitation for tax years beginning before December 31, 2020, allowing taxpayers to use NOLs to offset 100% of taxable income.

The TCJA also eliminated NOL carrybacks to prior years for NOLs generated after December 31, 2017.  The Act amends the NOL carryback rules to permit NOL carrybacks to each of the five taxable years preceding a loss for losses generated after December 31, 2017 and before January 1, 2021 (i.e., tax years 2018, 2019, and 2020), including tax years when the top marginal tax rate for corporations was 35% instead of 21%.

Business Interest Limitation

The TCJA imposed a limit on the amount of business interest a business may deduct.  Under the TCJA rules, a business interest deduction generally may not exceed business interest income plus 30% of adjusted taxable income for the year.  The Act increases the percentage limitation for tax years 2019 and 2020 to allow a business to claim a business interest deduction up to its business interest income plus 50% of its adjusted taxable income.  In addition, a taxpayer may elect to calculate its 2020 business interest limitation based on its 2019 adjusted taxable income.

The increased limitation does not apply to partnership taxable years beginning in 2019. However, a partner may treat 50% of any such excess business interest expense allocated to such partner as business interest that is paid or accrued by the partner in the partner’s first taxable year beginning in 2020.  The remaining 50% is subject to the normal business interest limitation rules.

Loss Limitation Changes

The TCJA disallowed deductions for excess business losses (generally losses in excess of the taxpayer’s aggregate gross income or gain plus $250,000) of noncorporate taxpayers for tax years beginning after December 31, 2017 and before January 1, 2026.  The Act delays the effective date of this limitation, so that it applies to tax years beginning after December 31, 2020 and before January 1, 2026.  The Act also addresses certain technical issues related to excess business losses.

Charitable Contribution Deduction Changes

Under current law, an individual generally may deduct charitable contributions up to 50% of the individual’s adjusted gross income, and a corporation generally may deduct charitable contributions up to 10% of its taxable income.  The Act modifies these limitations by permitting individuals to deduct cash contributions up to 100% of adjusted gross income and by permitting corporations to deduct cash contributions up to 25% of taxable income.

The Act also provides an “above-the-line” deduction for individuals making cash charitable contributions up to $300 for tax years that begin in 2020.  The deduction is allowed for individual taxpayers who do not itemize deductions.

Exclusions for 2020 Employer Payments of Employee Student Loans

The exclusion under current law for certain educational assistance programs is expanded to allow an individual to exclude from gross income up to $5,250 of payments made by an employer to the individual or directly to a lender of principal or interest on any qualified education loan of the employee.  Only payments made after enactment of the Act and before January 1, 2021 qualify for the exclusion, and the exclusion does not apply to highly compensated employees (generally employees that received more than $125,000 in compensation from the employer in 2019).

AMT Credit Acceleration

The TCJA repealed the corporate alternative minimum tax (AMT) and permitted corporate taxpayers to claim a refundable minimum tax credit for a portion of any excess AMT credit in tax years 2018-2021.  The Act accelerates this AMT credit to allow corporations to claim any remaining AMT credit for the 2019 tax year.  In addition, the Act allows taxpayers to elect to claim the entire amount of the refundable AMT credit in the 2018 tax year.

Qualified Improvement Property Technical Correction

The TCJA inadvertently treated qualified improvement property (certain interior improvements to commercial buildings) as 39-year property rather than 15-year property, which had the effect of excluding that property from eligibility for bonus depreciation.  The Act retroactively corrects this “retail glitch” by treating qualified improvement property as 15-year property eligible for bonus depreciation.

Temporary Exception from Alcohol Excise Tax for Alcohol Used to Produce Hand Sanitizer

The Act provides an exemption from the excise tax imposed on distilled spirits removed during 2020 that are used in or contained in hand sanitizer consistent with Food and Drug Administration guidance related to COVID-19.