Tax and Employee Benefits Provisions of the CARES Act
Written by David Wheeler Newman
The Coronavirus Aid, Relief, and Economic Security Act (the “Act”) contains numerous provisions, intended to stimulate the economy, which will impact tax liability and compliance for individuals and businesses. Some of the important provisions are highlighted below. There are many additional provisions in this legislation impacting taxpayers and the below summary is subject to change pending final legislation.
General Rebate for U.S. Residents. A rebate in an amount up to $1,200 ($2,400 for a married couple) will be sent to each U.S. resident individual whose adjusted gross income does not exceed $75,000 ($150,000 for a married couple), who is not a dependent of another taxpayer, and who has a work-eligible Social Security Number. In addition, these people are eligible for an additional $500 rebate per child. This rebate is available even if the potential recipient has no income or whose income is attributable to non-taxable sources, such as SSI benefits. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the threshold, so that no rebate will be provided to a single filer whose income exceeds $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children. For most people, no action will be required to receive the rebate: the IRS will issue it using the information on the taxpayer’s 2019 federal income tax return, if filed, or, if not filed, on his or her 2018 return.
Waiver of Early Distribution Penalty From Retirement Plans. The Act waives the 10% early withdrawal penalty for coronavirus-related distributions up to $100,000 from qualified retirement accounts made on or after January 1, 2020. In addition, the income attributable to these distributions will be subject to tax over three years and the withdrawing taxpayer can return the funds to an eligible retirement plan within three years without regard to that year’s limitation on contributions. Moreover, the Act provides flexibility for loans from certain retirement plans for coronavirus-related relief, increasing the maximum dollar amount for loans from $50,000 to $100,000 and loan repayments can be deferred for up to one year. Note that these provisions are not mandatory for employer sponsored retirement plans — each plan sponsor will need to determine in the near future whether to adopt these provisions either to the maximum extent permitted or to a more limited extent.
A coronavirus-related distribution is one made to an individual: (i) who is diagnosed with COVID-19; (ii) whose spouse or dependent is diagnosed with COVID-19; or (iii) 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.
Waiver of Required Minimum Distributions From Certain Retirement Plans. The Act waives the rules that require minimum distributions for certain defined contribution plans and IRAs for calendar year 2020. This will allow individuals who would otherwise be required to withdraw funds from these retirement accounts during the economic slowdown due to COVID-19 to retain the funds in their retirement account. Accordingly, anyone who is currently contemplating taking an RMD may want to hold off until a statute is enacted. This is a particularly time-sensitive issue for individuals who attained age 70-1/2 in 2019 and who would otherwise be required to take the first RMD by April 1, 2020.
Income Exclusion for Employer Repayment of Student Loans. The Act allows employers to provide tax-free student loan repayment benefits to employees. An employer may contribute up to $5,250 annually toward an employee’s student loans, and the payment will be excluded from the employee’s income. The $5,250 limitation applies to both the new student loan repayment benefit as well as other educational assistance (such as tuition, fees, and 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 the effective date of the Act and before January 1, 2021.
Deduction for Charitable Contributions. One outcome of the 2017 tax legislation was to dramatically reduce the number of individuals that itemize deductions, and thereby obtain a tax benefit from charitable giving. The Act provides limited relief by permitting an “above-the-line” charitable deduction in 2020 for cash contributions up to $300. Donors who do itemize deductions are limited to 50% of their adjusted gross income (60% for cash contributions). The Act suspends that limitation for individuals making contributions in 2020 – allowing a charitable contribution to offset up to 100% of AGI, a huge tax benefit for major donors.
Estimated Tax Payments for Corporations. The due date for corporate estimated tax payments due after the date of the Act’s enactment has been postponed until October 15, 2020.
Employee Retention Tax Credit. The Act provides a refundable payroll tax credit for 50% of wages paid to employees during the COVID-19 crisis by employers whose operations are suspended due to a shut-down order or whose gross receipts decline by more than 50% compared to the same quarter in the prior year.
Employer Payroll Taxes. Employer payroll taxes are deferred, with 50% due by December 31, 2021 and the remaining 50% due by December 31, 2022. This deferral does not apply does not apply to businesses that have debt forgiven under the Act.
Net Operating Losses. A net operating loss from 2018, 2019 or 2020 can be carried back up to five years preceding the loss, allowing the taxpayer to apply for a tax refund.
Losses for Pass-through Entities. The Act permits pass-through business entities and sole proprietors to claim excess business losses more currently, rather than carrying them forward as a net operating loss.
Corporate AMT Credits. The Act permits corporations that have alternative minimum tax (“AMT”) credits to claim a refund based on those credits for taxable years beginning in 2018. This revised the Internal Revenue Code which previously permitted the corporation to claim the refundable credit over several taxable years ending in 2021.
Business Interest. Under the Internal Revenue Code prior to this amendment, a taxpayer was permitted to deduct interest expense only to the extent of 30% of the taxpayer’s taxable income (with certain adjustments). The Act increases the ability of a taxpayer to deduct interest expense to an amount up to 50% of the taxpayer’s taxable income (with certain adjustment) for 2019 and 2020.