The CARES Act – Tax Provisions Affecting Individuals and Businesses

The Coronavirus Aid, Relief, and Economic Security Act (CARES,) (H.R.748),contains a host of tax measures as part of a $2 trillion aid package designed to help the economy as it suffers from the effects of the COVID-19 pandemic. While the focus of the legislation is not tax, a large number of tax provisions are included in the over-600-page bill. CARES was signed by President Trump on Friday, 3/27/2020.

Recovery rebates

CARES provides payments to taxpayers — “recovery rebates” — which will be treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The credit is phased out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals. The credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.

Payroll tax credit refunds

CARES provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Response Act, P.L. 116-127. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using forms and instructions the IRS will provide. The IRS is instructed to waive any penalties for failure to deposit payroll taxes under Sec. 3111(a) or 3221(a) if the failure was due to an anticipated payroll tax credit.

Employee retention credit

CARES creates an employee retention credit for employers that close due to COVID-19. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are employers who:

  • were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak.
  • have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year.
  • have more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts.
  • have 100 or fewer employees, all wages paid qualify for the credit.

Retirement plans

Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the Sec. 72(t) 10% additional tax for early distributions. Eligible distributions can be taken up to Dec. 31, 2020. Coronavirus-related distributions may be repaid within three years. For these purposes, an eligible taxpayer is one who

  • has been diagnosed with SARS-CoV-2 virus or COVID-19 disease, or
  • has a spouse or dependent has been diagnosed with SARS-CoV-2 virus or COVID-19 disease, or
  • experiences adverse financial consequences from being quarantined, furloughed, or laid off, or
  • has had his or her work hours reduced, or
  • is unable to work due to lack of child care

Any resulting income inclusion can be taken over three years. CARES also allows loans of up to $100,000 from qualified plans, and repayment can be delayed.

CARES temporarily suspends the required minimum distribution rules in Sec. 401 for 2020.

CARES delays 2020 minimum required contributions for single-employer plans until 2021.

Charitable deductions

CARES creates an above-the-line charitable deduction for 2020 (not to exceed $300). It also modifies the AGI limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. CARES also increases the food contribution limits to 25%.

Payroll tax delay

CARES delays payment of 50% of 2020 employer payroll taxes until Dec. 31, 2021; the other 50% will be due Dec. 31, 2022. For self-employment taxes, 50% will not be due until those same dates.

Net operating losses

CARES temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).

Excess loss limitations

CARES repeals the Sec. 461(l) excess loss limitation. Sec. 461(l) was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and it disallows excess business losses of non-corporate taxpayers, if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly).

Corporate alternative minimum tax (AMT)

CARES modifies the AMT credit for corporations to make it a refundable credit for 2018 tax years.

Interest limitation

For tax years beginning in 2019 and 2020, Sec. 163(j) is amended to increase the adjusted taxable income percentage from 30% to 50%. Also, taxpayers can elect to use 2019 income in place of 2020 for the computation.

Qualified improvement property

CARES also makes technical corrections regarding qualified improvement property under Sec. 168, by making it 15-year property.

Aviation taxes

Various aviation excise taxes are suspended until 2021.

Health plans

The rules for high-deductible health plans (HDHPs) are amended to allow them to cover telehealth and other remote care services without charging a deductible.

Over-the-counter menstrual care products are added to the list of items that can be reimbursed out of a health savings account, Archer medical savings account, or health reimbursement arrangement.

We are continually monitoring changes and pronouncements as they come from the federal and state governments.  Please contact your HW&Co. professional with any questions you may have.

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