March 28 Update
Please note that the original post has been updated in its entirety to provide a more comprehensive and final review of the CARES Act tax-related provisions.
On March 25, the Senate unanimously passed a $2 trillion stimulus package to help individuals, states and businesses devastated by the coronavirus pandemic. On March 27, the House passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act” or the “Act”), and later that day, the President signed it into law.
Below are some of the notable tax-related impacts the CARES Act will provide:
- Tax-Favored Withdrawals from Retirement Plans. Waives 10% early withdrawal penalty for distributions up to $100k from qualified retirement accounts (i.e., IRAs, 401Ks, certain deferred compensation plans) for coronavirus related purposes. Distributions must be made on or after January 1, 2020 and before December 31, 2020 to an individual who is diagnosed with SARS-CoV-2 or COVID-19, whose spouse or dependent is so diagnosed, or who experiences financial hardship because of quarantine or other factors. Coronavirus-related distributions may not exceed $100,000 in the aggregate for any taxable year. Taxpayers may elect to spread the income over a 3-year period beginning with taxable year 2020. Taxpayers may also avoid income recognition by repaying the distribution to the retirement plan within three years of receipt.
- Small Business Loans. SBA loans are available with a max interest rate of 4%. Loan forgiveness is provided, subject to certain limitations, for amounts equal to payroll costs, mortgage interest payments (not payments to principal), rent, and utilities during an 8 week period beginning on the date of the origination of the loan. Employer size limitations may apply (generally max of 500 employees, but authority is provided to the SBA to provide a higher standard by industry, and also additional standards for businesses in the hospitality and accommodation industry). The amount forgiven of such loans will be excluded from the gross income of the taxpayer.
- Temporary Waiver of Required Minimum Distribution Rules. Waives required minimum distribution rules for certain retirement plans (i.e., certain defined contribution plans and IRAs) for 2020.
- Business Losses. Net operating loss (“NOL”) allowance loosened to allow carryback of losses arising in taxable years ending after December 31, 2017 and before January 1, 2021 to each of the five taxable years preceding the taxable year of such loss (however, real estate investment trusts (REITs) are not permitted such carrybacks). The CARES Act does not alter the indefinite carryforward of NOLs arising in those years. The NOL limitation is also suspended, to allow for a complete offset of taxable income. The amendment applies to tax years beginning before January 1, 2021.
- Business Interest Limitations. For tax years beginning in 2019 and 2020, the deduction for business interest expense is limited to the sum of (i) business interest income, (ii) 50% of adjusted taxable income (ATI) (increased from 30% of ATI), and (iii) floorplan financing interest expense. Taxpayers may elect not to use the increased limitation. Given that many taxpayers may have significantly reduced income in 2020, taxpayers may elect to substitute 2019 ATI for 2020 ATI. Special rules apply for short tax years. Partnership rules vary slightly.
- Employee Retention Credit for Employers Subject to Closure. Employers receive a refundable quarterly payroll tax credit for an amount equal to 50% of qualified wages (including certain health plan expenses), with respect to each employee of such employer, paid during a quarter, up to $10k. Applies to wages paid after March 12, 2020 and before January 1, 2021. Eligible employers include employers (1) whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or (2) who have a 50% decrease in gross receipts for the same calendar quarter in the prior year. This credit does not apply to governmental employers.
- Limitation on Business Losses. Removes the limitation on excess business losses for taxpayers other than corporations for tax years beginning after December 31, 2017, and before January 1, 2021.
- Delay of Payment of Employer Payroll Taxes. Deferral of payments of the employer-side of payroll taxes, wherein tax will be paid over the following 2 years (½ by 12/31/21 and ½ by 12/31/22).
- Charitable Contribution Deductions. For the 2020 tax year, the deduction percentage limitation for charitable contributions of cash has been removed for individual taxpayers. The CARES Act also increases the limitation on the corporate charitable contribution deduction from 10% of taxable income to 25% of taxable income. In addition, the limitation on contributions of food inventory is increased from 15% to 25%. The Act creates a $300 above-the-line charitable deduction for taxpayers that do not itemize deductions, and a suspension of certain charitable deduction limitations for those that do itemize.
- Loans from Retirement Plans. Loans from qualified employer plans up to $100,000 (increased from $50,000) are permitted in the 180 days beginning on the date of enactment. The full present value of the nonforfeitable accrued benefit of the employee under the plan, as opposed to one-half thereof, is used in applying the IRC §72(p)(2)(A)(ii) exception to treatment of the loan as a taxable deemed distribution. For outstanding loans, repayment dates between the date of enactment of the CARES Act and December 31, 2020 are delayed for one year, and subsequent payments as well as interest accrual are adjusted accordingly. A plan will not be disqualified as a result of plan amendments in accordance with the CARES Act provisions.
- Single-Employer Plan Funding Rules. The due date for calendar year 2020 minimum required contributions is extended to January 1, 2021. However, delayed contributions must be increased by interest accruing for the period between the original due date for the contribution and the actual payment date, at the effective rate of interest for the plan for the plan year that includes the payment date. Plans under benefit restrictions as outlined in IRC §436 and ERISA §206(g) may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020, as the adjusted funding attainment target for plan years that include the 2020 calendar year.
- Suspension from Excise Tax. Temporary suspension from excise tax for alcohol used to produce hand sanitizer during 2020 tax year.
Please contact us if you should need assistance working through any aspects of the CARES Act.