CARES Act – Signed into Law: A Summary of Tax Relief Provisions during the COVID-19 Crisis

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “Bill”), a “Phase III” coronavirus economic stimulus package, was passed by the House and quickly signed by the President. The CARES Act was introduced on March 19, 2020, by Senate Majority Leader McConnell. On March 25, 2020, the Senate passed an amended version of the Bill—no additional amendments were made to the Bill before enactment.

The tax provisions contained in the CARES Act are summarized below. Along with tax provisions, the CARES Act also provides for a variety of relief, including small business loans, healthcare shortages, relief for education, and more.

Tax Provision Highlights

• Creates an employee retention tax credit for wages paid by certain eligible employers adversely affected by the COVID-19 crisis;
• Postpones employer payroll tax payments, to December 31, 2021, and December 31, 2022;
• Expands NOL carrybacks and carryforwards: 2018, 2019, 2020 NOLs to be carried back five tax years, and removes the 80% limitation to fully offset taxable income;
• Increases the amount of interest expense businesses are allowed to deduct, to 50 percent of taxable income, for 2019 and 2020;
• “Qualified improvement property” classified as 15-year property under MACRS, which accelerates cost recovery and makes it eligible for bonus depreciation;
• Provides immediate cash "recovery rebates" of up to $1,200 ($2,400 for joint filers and an additional $500 per child) to U.S. residents; and
• Provides for special use distributions of retirement funds, as well as temporary waiver of mandatory minimum distributions on certain retirement plans.

BUSINESS TAX PROVISIONS

Creation of a Refundable Employee Retention Credit for Distressed Employers
This provision creates an employee retention credit, equal to 50 percent of up to $10,000 in qualified wages (including properly allocable qualified health plan expenses) paid per employee, during the COVID-19 crisis by eligible employers. Eligible employers are those employers whose (1) operations were fully or partially suspended, due to shut­down orders related to COVID-19, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

Qualified wages are wages paid by eligible employers with greater than 100 full-time employees paid to employees when they are not providing services for the period that the employer qualifies as an eligible employer, as defined above. Qualified wages are also wages paid by eligible employers with 100 or fewer full-time employees  paid to all employees, whether the employee is providing services or not, for the period that the employer qualifies as an eligible employer, as defined above.

This credit is available through December 31, 2020. This credit is not available to employers with Small Business Interruption Loans.

Delay of payment of employer payroll taxes
This provision allows employers (and self-employed individuals) to defer payment of the employer's share of the Federal Social Security tax (6.2 percent) (or 50 percent self-employment tax) on employee's wages paid, as of the date of enactment through December 31, 2020. This provision requires that the deferred 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.

Modifications to net operating loss (NOL) limitations
This provision relaxes the limitations on a taxpayer's use of losses from prior years. Currently, as a result of the 2017 Tax Cuts and Jobs Act (TCJA, P.L. 115-97), NOLs are subject to an 80 percent taxable income limitation, and cannot be carried back to reduce income in a prior tax year. This provision provides that an NOL generated in 2018, 2019, or 2020 may be carried back to the preceding five tax years. It also temporarily removes the taxable income limitation to allow an NOL to fully offset income.

“Excess Business Loss” limitation temporarily suspended
This provision temporarily suspends the "excess business loss" limitation that limits current losses attributable to trades or businesses for non-corporate taxpayers to $250,000 ($500,000 in the case of joint filers), so they can benefit from the NOL carryback rules described above.

Modification to credit for prior year minimum tax liability of corporations
The corporate AMT was repealed as part of the TCJA, but corporate AMT credits were made available as refundable credits over several years. This provision accelerates the ability of companies to recover those AMT credits.

Modification to limitation on business interest deduction
After the TCJA, business interest expense deductions were limited to the sum of business interest income and an amount equal to 30 percent of "adjusted taxable income". This provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30 percent of taxable income (computed without any reduction for amortization, depreciation, or depletion) limitation to 50 percent of taxable income for 2019 and 2020. Additionally, this provision allows businesses to apply their 2019 taxable income (and limitation) to their 2020 tax year.

Modification to charitable contribution limitation for 2020
This provision increases the limitation on charitable contribution deductions. For corporations, the "10 percent of taxable income" limitation is increased to "25 percent of taxable income" for the 2020 tax year. Additionally, the limitation on deductions for contributions of food inventory is increased, from a 15 percent limitation to a 25 percent limitation.

Technical amendment regarding qualified improvement property
This provision classifies "qualified improvement property" as 15-year MACRS property, enabling businesses to immediately expense, through bonus depreciation, costs associated with improving nonresidential real property, instead of having to use straight-line depreciation over the 39-year life of the building.

Temporary repeal of Federal Aviation Excise Tax
This provision temporarily repeals, as of the date of enactment through December 31, 2020, Federal excise taxes collected in commercial aviation with respect to the transportation of persons, the transportation of property, and aviation fuel.

Temporary exception from excise tax for alcohol used to produce hand sanitizer
This 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 COVID-19 guidance issued by the Food and Drug Administration, and is effective for calendar year 2020.

RECOVERY CHECKS FOR INDIVIDUALS & OTHER INDIVIDUAL TAX PROVISIONS

2020 cash recovery rebates for individuals
Each U.S. resident (with a valid identification number) with adjusted gross income up to $75,000 ($150,000 for married persons), who is not dependent on another taxpayer, and has a work-eligible social security number, is eligible for the $1,200 ($2,400 married) rebate. The recovery rebate amount is eligible to be increased by $500 for each child. The recovery rebate is available to those with no income, and those whose income is derived from non-taxable means-tested benefit programs (i.e., SSI).

Generally, Americans will need to take no action to receive a rebate check. The IRS will use a taxpayer's 2019 tax return, if filed, or alternatively, a 2018 tax return (or alternatively still, a Social Security Benefit Statement or Equivalent Benefit Statement, in the case of 2018 first-year filers). The recovery rebate includes many low-income individuals who file a tax return to claim 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, and for joint filers with incomes exceeding $198,000.

Within 15 days of the recovery rebate distribution, the Secretary will send notice to a taxpayer's last known address to confirm receipt and include an IRS point of contact in case the payment was not received.

Special rules for use of retirement funds
Consistent with previous disaster-related relief, this proposal waives the 10 percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year's cap on contributions. Further, this provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.

A coronavirus-related distribution is a distribution made to an individual: (1) who is diagnosed with the virus SARS-CoV-2 or with the coronavirus disease COVID-19, (2) whose spouse or dependent is diagnosed with SARS-CoV-2 or 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 SARS-CoV-2 or COVID-19, closing or reducing hours of a business owned or operated by the individual due to SARS-CoV-2 or COVID-19, or other factors as determined by the Treasury Secretary.

Temporary waiver of required minimum distribution rules for certain retirement plans and accounts
This provision temporarily waives, for the 2020 calendar year, the required minimum distribution rules for certain defined contribution plans and IRAs, and also provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the COVID-19-related economic slowdown.

Allowance of partial above the line deduction for charitable contributions and modification to limitations on charitable contribution during 2020
This provision encourages Americans to contribute to charitable organizations during 2020 by permitting an “above-the-line” deduction of up to $300 for cash contributions, whether an individual itemizes their deductions or claims the standard deduction.

This provision also increases the limitation on charitable contribution deductions by individuals who itemize deductions. Additionally, the “50-percent of adjusted gross income” charitable contribution deduction limitation is suspended for 2020.

Temporary exclusion for certain employer payments of student loans
This provision temporarily expands the tax exclusion for employer-provided educational assistance to include payments of qualified education loans by employers to either an employee or lender. It enables an employer to contribute up to $5,250 annually toward an employee's student loan while excluding such payment from the employee's income. The annual cap of $5,250 applies to both student loan repayment (new law) and educational assistance (existing law that covers, e.g., tuition, fees,