As we speak, Congress is putting the finishing touches on what is referred to as the ‘‘Coronavirus Aid, Relief, and Economic Security Act’’ or ‘‘CARES Act’’. This legislation is in addition to the other provisions that have been issued by the Treasury Department and Capitol Hill. These provisions are not final law as of yet, and are therefore subject to change or modification.
There has been a significant amount of activity from Washington DC over the past couple of weeks, leading to an avalanche of information and analysis. So it’s important to understand what each piece is, and more importantly, how does it apply to you and/or your business.
What has happened so far:
First, tax deadlines originally set for April 15 were pushed back to July 15. This was originally designed for smaller businesses and individuals, but was later expanded to apply to everyone. The IRS has released an FAQ page that answers many of the common questions taxpayers are having with respect to this postponement of certain filings and payment of taxes. See https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers for more detailed information. Please note that Taxpayers are not required to file anything to qualify for the extension. This extension only applies to income taxes that were due on April 15. The second quarter ES payments due on June 15 are NOT impacted by this extension, and so those payments must still be made on June 15.
Second, the Families First Coronavirus Response Act (the “FFCRA”) was passed and signed into law on March 18th. This Act requires certain employers to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. In exchange for businesses providing these benefits to workers, businesses are provided tax credits via payroll taxes. The DOL has announced that the effective date of the FFCRA is April 1, 2020. The DOL has also put out some excellent information with regards to the FFCRA, and we encourage a review of the information that has been provided at https://www.dol.gov/agencies/whd/pandemic.
Briggs & Veselka has already provided information with respect to these first two items which can be found on our website.
Third, the CARES Act is likely to become law on March 27, 2020. The rest of this write-up will focus on the expected provisions in this bill, especially the tax related provisions. Please note that the draft bill coming out of the Senate is 883 pages long, so there is clearly an extraordinary amount of information to be digested. Also, this bill, while unanimously passed by the Senate, has not yet been approved by the House nor yet signed into law. So any provisions discussed here are subject to change. We strongly encourage you to discuss with your advisors the details of the law that could apply to you.
Some significant provisions within the CARES Act as it presently is drafted include:
Rebates Paid to Individuals
– Checks are to be mailed out in the coming weeks to qualifying individuals of up to $1,200 each ($2,400 per couple), with an additional $500 per child. The maximum payout is phased out for single taxpayers with $75,000 (married couples with $150,000) in adjusted gross income (“AGI”) on his/her 2018 form 1040. The amount is completely phased-out for single taxpayers with incomes exceeding $99,000 and $198,000 for joint filers.
Delay of payment of employer payroll taxes
– Employers and self-employed individuals will be able to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying with respect to their employees. The deferred portion would 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.
Distributions from Retirement Accounts
– Taxpayers directly affected by Covid-19 would not be subject to the 10% early withdrawal penalty on amounts distributed from a qualified retirement account, up to $100,000. Additionally, these types of disbursements are typically subject to income tax when taken out before age 59 ½. Under the CARES Act, the income tax with respect to these distributions would be spread across the next 3 years. Also, loan provisions would be loosened.
Deduction for Charitable Contributions
– Taxpayers, regardless of whether or not they itemize their deductions, could receive a deduction of up to $300 for donations to churches and other charitable organizations for donations made during 2020.
Currently, charitable contributions have limitations on the amount that can be deducted in a given year (50% of AGI for individuals, 10% of taxable income for corporations. These limitations would be increased to 100% for individuals, and 25% for corporations. Limitations on food inventory donations is increased from 15% to 25%.
Carryback of Net Operating Losses
– The Tax Cuts and Jobs Act (“TCJA”) that was passed in December of 2017 limited taxpayers’ ability to utilize Net Operating Losses (“NOLs”). Taxpayers could no longer carry NOLs back to obtain refunds of prior year taxes, and could only offset 80% of current year income by NOLs that were being carried forward. The CARES Act relaxes these limitations to allow for losses in tax years 2018 through 2020 to be carried back up to five years.
Qualified Improvement Property
– The TCJA made a mistake and didn’t include qualified improvement property (“QIP”) as 15 year property, thus taxpayers were forced to depreciate these items straight-line over 39 years. The CARES Act corrects for this and allows 100% bonus depreciation for QIP and is retroactive to tax years beginning on or after January 1, 2018.
Interest Expense Limitations
– The TCJA also provided for certain limitations on deductibility of interest expense at 30% of adjusted taxable income. This limitation would be increased to 50% for years beginning in 2019 or 2020. For tax years beginning in 2020, businesses may elect to compute the interest expense limitation based on their 2019 ATI, which will likely be higher because of the economic downturn.
Loans to Small Businesses
– Loans to be made (100% federally guaranteed) to businesses who maintain their payroll. The Small Business Administration would provide loans up to a maximum amount to eligible businesses to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, and other direct business costs. The loan amounts could be forgiven under certain circumstances. These loans are to be processed on an expedited basis and would be made available to businesses with generally 500 employees or less. Certain exceptions for the employee numbers are allowed for businesses in the hospitality and dining industries. Indebtedness under this program could be forgiven (and excluded from gross income) in an amount equal to certain costs incurred and payments made (payroll, interest payments on mortgages, rent payments, utilities) during the covered period. Forgiveness amounts will be reduced for any employee cuts or reductions in wages.
As stated above, these provisions are not final law as of yet, and are therefore subject to change or modification. The discussion here is only a portion of the provisions and benefits within the law, and we strongly suggest a deeper discussion with your tax and legal advisors regarding how these new laws impact you.