Tax Provisions of the CARES Act
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, a $2 trillion disaster relief package aimed at mitigating the economic impact of the COVID-19 pandemic was signed on March 27, 2020. This client advisory summarizes the CARES Act’s important tax provisions.
Business Tax Provisions
1. Employee Retention Credit for Employers Subject to Closure Due to COVID-19
Under the CARES Act, “eligible employers” are allowed a refundable credit against the employer’s 6.2% Social Security (but not the 1.45% Medicare) portion of its employment/railroad retirement tax liability, with the amount of this credit being equal to 50% of the first $10,000 of wages (including the value of health plan benefits “properly allocable” to such wages) paid to certain employees, see below, between March 12, 2020 through the end of 2020.
An “eligible employer” is any employer (not including a governmental employer) carrying on a trade or business during 2020, and with respect to any calendar quarter, either:
- the trade or business or operations of which have been fully or partially suspended because of a government order limiting commerce, travel, or group meetings (for commercial, social, religious or other purposes) due to COVID–19; or
- such calendar quarter is within the period that begins with the first calendar quarter beginning after December 31, 2019 for which the employer has a greater-than-50% reduction in gross receipts from the corresponding calendar quarter of the prior year and ending with the calendar quarter for which the employer’s gross receipts has recovered to greater than 80% of the employer’s gross receipts from the corresponding calendar quarter for the prior year (the “Reduced Gross Receipts Period”).
- That is, generally, this credit is available to an employer that has suffered a more than 50% decline in gross receipts for a calendar quarter in 2020 (as compared to the corresponding prior year’s calendar quarter) and for subsequent calendar quarters, until a calendar quarter when the employer’s gross receipts have recovered to more than 80% of the gross receipts from the corresponding prior year’s calendar quarter.
The activities of a tax-exempt organization are treated as a trade or business for purposes of the credit, allowing an exempt organization to qualify as an eligible employer.
This credit is not available to employers receiving Small Business Interruption Loans under the CARES Act.
For employers with an average of fewer than 100 full-time employees in 2019, the wages of all employees paid during the employer’s closure or Reduced Gross Receipts Period are eligible for this credit, whereas for employers with an average of 100 or more full-time employees during 2019, only the wages of those employees who are furloughed or face reduced hours due to COVID-19 or the Reduced Gross Receipts Period are eligible for this credit.
An employee (and the wages of such employee) for whom an employer is allowed a work opportunity credit under Section 51 of the Internal Revenue Code (“IRC”) for any period is not taken into account for purposes of determining the employer’s credit under this provision, and wages taken into account in determining an employer’s credit under this provision are not taken into account for purposes of determining the employer’s paid family and medical leave credit under IRC Section 45S.
The Internal Revenue Service (“IRS”) is granted authority and directed to issue such forms, instructions, regulations, and guidance as are necessary to (among other things) advance payments to eligible employers and to waive otherwise applicable failure-to-deposit penalties if such failure is due to an employer’s reasonable anticipation of receiving this credit.
2. Delay of Payment of Employer Payroll Taxes
The CARES Act allows employers, the self-employed, and employee representatives to defer paying the 6.2% Social Security (but not the 1.45% Medicare) portion of their employment, self-employment, and railroad retirement tax liability for the period beginning March 27, 2020 and ending before January 1, 2021.
Under the CARES Act, 50% of the deferred tax is not due before December 31, 2021, with the remaining 50% of such deferred tax not being due before December 31, 2022. Deferred self-employment taxes are excluded from estimated taxes.
Taxpayers are not entitled to this deferral if they have had debt forgiven under certain provisions of the CARES Act. If an employer directs a payroll service provider to defer payment of payroll taxes, the employer is solely liable for payment by the extended due date.
3. Suspension of Certain of the Loss Limitations Under the 2017 Tax Cuts and Jobs Act (“2017 Jobs Act”)
In order to allow taxpayers to utilize a greater portion of their losses, including for refunds, the CARES Act suspends certain of the 2017 Jobs Act limitations on a taxpayer’s use of losses, as follows:
- the 2017 Jobs Act’s 80%-of-taxable income limitation on net operating loss carryovers does not apply to tax years beginning in 2018, 2019, and 2020;
- except for the net operating losses of real estate investment trusts, net operating losses arising in 2018, 2019, and 2020 may be carried back five years and offset up to 100% (rather than 80%) of taxable income; and
- the $250,000 limitation (adjusted for inflation and double for joint filers) on the amount of business losses that non-corporate taxpayers may use to offset non-business income does not apply for tax years beginning in 2018, 2019, and 2020.
4. Modification of Credit for Prior Year Minimum Tax Liability of Corporations
The 2017 Jobs Act repealed the corporate alternative minimum tax for tax years beginning after 2017. Outstanding minimum tax credits were partially refundable to corporations for tax years beginning in 2018, 2019, and 2020 and fully refundable for tax years beginning in 2021.
The CARES Act makes corporate minimum tax credits fully refundable for tax years beginning in 2019. Alternatively, corporations may elect to claim their entire minimum tax credit for tax years beginning in 2018 by filing an application for refund before December 31, 2020.
5. Modifications of Limitation on Business Interest
The CARES Act retroactively increases the 2017 Jobs Act’s 30%-of-adjusted taxable income limitation on the deductibility of interest expense to 50% of adjusted taxable income for tax years beginning in 2019 and 2020. This provision also allows taxpayers to elect to calculate their 2020 interest limitation using their 2019 adjusted taxable income. Taxpayers may also elect to forego this increased limitation (from 30% to 50%), although in the case of partnerships only for tax years beginning in 2020.
For taxpayers that are partnerships, the elections under this provision must be made by the partnership (rather than by its partners). Also, as a general matter, for partners of a partnership, this provision is limited and subject to special rules.
6. Technical Amendments Regarding Qualified Improvement Property
In re-defining qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property as “qualified improvement property”, the 2017 Jobs Act failed to specifically provide for this property to be 15-year recovery property, resulting in such property being 39-year recovery property and, thus, ineligible for 100% bonus depreciation.
For property placed in service after December 31, 2017, the CARES Act makes a technical correction to the 2017 Jobs Act to correct this failure. The CARES Act also specifically designates qualified improvement property as having a 20-year class life for alternative depreciation system purposes.
7. Temporary Exemption from Excise Tax for Alcohol Used to Produce Hand Sanitizer
The CARES Act exempts from federal excise tax alcohol for use or contained in hand sanitizer produced and distributed in a manner consistent with Food and Drug Administration COVID-19 guidance.
8. Anti-Duplication Rules
Several of the provisions described above include limitations intended to prevent the duplication of benefits. For example, wages that are deducted by an employer under one tax provision cannot be deducted a second time under another provision. This summary generally does not describe the anti-duplication rules.
Tax Relief for Certain Employer/IRA Plan Distributions and Loans
Exception to the 10% tax on early plan distributions. Distributions from employer-sponsored tax-qualified retirement plans, such as 401(k) plans, are taxed at ordinary income tax rates. IRC Section 72 imposes an additional 10% tax on most plan distributions to a participant before he or she attains age 59 ½. The few exceptions to this 10% tax are familiar to plan administrators and many plan participants, including distributions to a beneficiary upon the plan participant’s death, distributions on account of the plan participant's disability, distributions that are part of a series of substantially equal payments over the plan participant's life.
The CARES Act adds as another exception to IRC Section 72 for up to $100,000 of "coronavirus-related" distributions made in 2020 from the following types of retirement plans: tax-qualified employer plans (including 401(k) plans); individual retirement accounts (IRAs) and annuities; IRC Section 403(a) and (b) annuity plans or contracts; and eligible deferred compensation plans under IRC Section 457(b) maintained for employees of governmental entities (together, "qualified plans"). A “coronavirus-related” distribution (a “CR Distribution”) is a distribution to an individual (a "Qualified Individual") who either
(a) on the basis of testing approved by the Center for Disease Control and Prevention, is diagnosed with either SARS-CoV-2 or COVID-19;
(b) has a spouse or dependent diagnosed with either of the foregoing viruses by such test; or
(c) experienced adverse financial consequences as a result of being quarantined, furloughed or laid off, or having his or her work hours reduced due to the virus, being unable to work due to a lack of child care due to the virus, the closing or reducing of hours of a business owned or operated by the individual due to the virus, or any other factors determined in subsequent Treasury guidance.
A plan administrator need not make an independent determination whether the plan participant is a Qualified Individual and may rely on the plan participant's own certification that he or she has met the conditions for a CR Distribution.
A Qualified Individual who meets the conditions for one of the other exceptions in IRC Section 72 – for example, a disabled Qualified Individual – is not precluded from receiving, in addition to CR Distributions, plan distributions under another applicable exception, so the total plan distributions to a Qualified Individual may well exceed $100,000.
Plan administrators must separately track all CR Distributions.
Plan distribution requirements. Qualified plans are generally prohibited from making in-service distributions prior to a plan participant's attainment of age 59 ½. The CARES Act states that CR Distributions will not violate the prohibitions to the extent the $100,000 aggregate limit is not exceeded.
The $100,000 limit applies to all plans within the employer's controlled group. Consequently, where a Qualified Individual has benefits credited under more than one plan within a controlled group, the employer must monitor CR Distributions from each plan in the group so that the $100,000 limit is not exceeded.
Tax advantages of CR Distributions. A Qualified Individual receiving a CR Distribution from a plan will receive additional tax breaks, as follows:
(a) As a general rule, distributions from a plan are fully includable in income in the year of distribution. However, unless a Qualified Individual elects inclusion of the entire amount of the CR Distribution in his/her 2020 tax year, CR Distributions will be includable in income ratably over a three year period beginning with his/her 2020 tax year.
(b) A Qualified Individual may repay CR Distributions in whole or in part, in one or more repayments, to any plan to which the individual could otherwise make rollover contributions. Repayments, if any, must be completed during the three-year period beginning with the day after the date the CR Distribution was received. The ability to repay affords a Qualified Individual the opportunity to restore retirement savings if his or her financial situation improves in the next three years. Moreover, where a Qualified Individual receives a CR Distribution from the plan of a current employer, then changes jobs during the three-year repayment period, the CARES Act would permit the repayment of the CR Distribution to a new employer's plan or to the Qualified Individual's IRA.
(c) Any distribution from a tax-qualified plan that is otherwise eligible to be rolled over to another plan, is subject to mandatory 20% tax withholding if paid to the plan participant. A tax-qualified plan must afford plan participants the option to avoid this result by opting to transfer the distribution directly to another plan. The CARES Act exempts CR Distributions from these requirements.
Suspension of “minimum distributions” requirement for 2020. When a plan participant in a qualified plan or an IRA owner attains a specified age, the plan or IRA is required to commence minimum distributions to the plan participant or IRA owner for the year in which the participant or owner attains the specified age and annually thereafter. The first such minimum distribution, however, may be paid as late as April 1st of the year following the plan participant's or IRA owner’s attainment of the specified age. The CARES Act waives all minimum distributions required to be made in 2020, although no such waiver is available for plan participants or IRA owners who were due to take their first minimum distribution before April 1, 2020, but chose instead to receive the distribution in 2019.
A minimum distribution is calculated based on the value of the plan participant's or IRA owner’s accrued benefit (e.g., the account balance) as of December 31st of the preceding year. A minimum distribution that is waived for 2020, could, therefore, affect future balances and the amount of future minimum distributions.
Plan loans. Participant loans from certain tax-qualified retirement plans are generally limited in amount to $50,000 (subject to reduction based on other outstanding loans), or, if less, one-half the value of the participant's vested accrued benefit in the plan. The CARES Act modifies the rule for plan loans taken by Qualified Individuals for a limited 180-day period beginning on the date of enactment of the CARES Act (i.e., March 27, 2020). Qualified Individuals in IRC Section 401(a) plans (including 401(k) plans), or IRC Section 403(a) and (b) annuity plans or contracts, may borrow $100,000 instead of $50,000, or, if less, the value of the Qualified Individual's entire vested accrued benefit.
In addition, any plan loan to a Qualified Individual outstanding as of the date of enactment of the CARES Act (i.e., March 27, 2020) that has a due date occurring on before December 31, 2020 will automatically be extended for one year. Plan administrators must, however, adjust subsequent loan repayments to reflect both the delay and interest accruing during this one-year extension period.
Relaxation of charitable deduction limitations
Charitable deductions for non-itemizers. Up to $300 of cash charitable deductions can be deducted by individuals even if they take the standard deduction instead of itemizing deductions as long as the contribution is made to a charity that is neither a “support organization” nor a donor advised fund.
Charitable deduction percentage limitations. Limitations apply to the amount of itemized charitable deductions that individuals and corporations can claim in a particular year. For example, as a general matter, individuals cannot claim deductions for contributions in excess of 60% of their adjusted gross income and corporations cannot claim deductions for contributions in excess of 10% of their taxable income. The CARES Act liberalizes these limitations for 2020 only. Individuals can claim a deduction of cash charitable contributions up to 100% of their adjusted gross income and corporations can deduct up to 25% of their taxable income. As is the case for the new rule for non-itemizers, the relaxed rule does not apply to contributions to support organizations or donor advised funds.
Extension of tax filing/payment deadlines
Although not addressed by the CARES Act, the IRS and New York have extended income tax filing/payment deadlines from April 15, 2020 to July 15, 2020. Many other states, including, locally, New Jersey and Connecticut have followed suit.
The IRS has also announced that the normal April 15 due date for 2019 gift tax returns will be automatically extended to July 15.
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For more information concerning the matters discussed in this publication, please contact the authors Jennifer H. MacDonald (212-238-8751, firstname.lastname@example.org), Marc A. Kushner (212-238-8766, email@example.com), Patricia Matzye (212-238-8730, firstname.lastname@example.org), Jerome J. Caulfield (212-238-8809, email@example.com), or your regular Carter Ledyard attorney.
Carter Ledyard has created a COVID-19 Response Group to monitor the evolving legal landscape, address client questions and ensure client compliance with the laws and regulations issued in response to the COVID-19 pandemic. The Carter Ledyard COVID-19 Response Group consists of Jeffery S. Boxer (212-238-8626, firstname.lastname@example.org), Judith A. Lockhart (212-238-8603, email@example.com), Bryan J. Hall (212-238-8894, firstname.lastname@example.org), Alexander G. Malyshev (212-238-8618, email@example.com), Melissa J. Erwin (212-238-8622, firstname.lastname@example.org), and Leonardo Trivigno (212-238-8724, email@example.com). Clients should contact the attorneys listed above or their regular CLM attorney for any questions concerning legal obligations arising from the COVID-19 pandemic.
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