The Act is an unprecedented $2.2 trillion aid package designed to help the public and the economy to rebound from the coronavirus pandemic.
On March 27, the massive stimulus package negotiated between the Trump administration and congressional leaders, known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), was signed by President Trump. The Act is an unprecedented $2.2 trillion aid package designed to help the public and the economy to rebound from the coronavirus pandemic.
The Act provides for direct payments to most Americans and includes provisions of massive amounts of money to businesses, hospitals, state and local governments, the airline and manufacturing industries, and others.
A few key highlights include:
- Big Businesses: The U.S. Treasury will provide $500 billion, with certain restrictions, (including but not limited to no dividend payouts for a year after loan satisfaction and a ban on stock buybacks) in loans (up to five years), loan guarantees and investment capital. Funds will also be used to assist state and local governments. There will also be limits on executive bonuses and requirements to take steps to protect workers.
- Airlines: $25 billion in strings-attached grants and $25 billion in loans to passenger carriers, $3 billion to airline contractors providing ground staff such as caterers baggage handlers and ticketing agents, while cargo haulers would see $4 billion in grants. Carriers who receive funding may not furlough employees, institute pay cuts, stock buy backs or issue dividends.
- Small Businesses: More than $350 billion to aid small businesses through federally guaranteed loans with opportunities for loan forgiveness if they maintain their current levels of employees through the pandemic crisis. The Small Business Administration will permit businesses with multiple locations with 500 or less employees per location, in certain industries who are below certain annual receipts thresholds to be eligible. The rules are complex.
- Hospitals: A $150 billion boost for hospitals and other healthcare providers for equipment and supplies.
- Individuals: Direct payments to single Americans of $1,200, ($2,400 for couples) as well as $500 for each child under age 17. Payments would phase out for individuals with adjusted gross incomes of more than $75,000, ($150,000 for couples) with payments completely phased out at $99,000 ($198,000 for couples). IRS will determine eligibility by using taxpayers’ 2019 tax returns, or, if no 2019 tax returns were filed, the 2018 tax return. However, the amounts for which recipients are eligible will be grossed up and included with the filing of the recipient’s 2020 tax return. Certain individuals are ineligible for the payments, namely individuals who are claimed as dependents of another, nonresident alien individuals, and estates and trusts.
- Unemployed: Unemployment insurance extension to four months, bolstered by $600 weekly. As more employees lose their jobs during the pandemic crisis, eligibility would be expanded to cover more workers. The temporary Pandemic Unemployment Assistance program runs through December 31, 2020, and will provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of COVID-19.
- Transparency: The Treasury Department would have to disclose the terms of loans or other aid to companies, and a new Treasury inspector general would oversee the lending and forgiveness (to the extent applicable) programs.
- Elections: States get $400 million in election assistance for 2020 voting amid the coronavirus pandemic, allowing them to increase the ability to vote by mail, expand early voting and online registration.
Select Individual Provisions
As noted above, immediate recovery rebates of up to $1,200 ($2,400 for couples) and an additional $500 per child to qualifying individuals.
Favorable Treatment for COVID-19 Payments from Health Savings Accounts
Historically, a qualifying HSA may not reimburse an account beneficiary for medical expenses until those expenses exceed the required deductible levels. Now, payments from an HSA that are made to test for or treat COVID-19 don't affect the status of the account as an HSA (and don't create a tax liability for the account holder) even if the HSA deductible hasn't been met.
Taxpayers can now take up to $100,000 in COVID-19 related distributions without being subject to the 10 percent penalty for early distributions, which can be taken through December 31, 2020. Tax on these distributions will be payable over three years and are available to those (including spouses or dependents) diagnosed with COVID-19 and have been unable to work due to quarantine, layoff or reduced work hours. In addition, for 2020, required minimum distributions are waived. Any distributions made pursuant to the Act may be placed back in the plan within three years without affecting the required cap on contributions. Loan rules have also been relaxed, providing for increased maximum loan amounts (up to $100,000) or the full amount of the accrued plan benefit, while repayments are delayed.
Individuals will be permitted to deduct up to $300 of cash contributions without regard to whether or not they itemize in an effort to encourage more Americans to contribute to charitable organizations in 2020. Additionally, the “50% of adjusted gross income” charitable contribution deduction limitation is suspended for 2020. So, donations for those who itemize now uncapped for 2020.
Income Tax Sick Leave Credit for the Self-Employed (Self-Employed Sick Leave Credit)
The Act provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave to a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee.
Income Tax Family Leave Credit for the Self-Employed (Self-Employed Family Leave Credit)
The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed above. Thus, a self-employed person is treated as both an employer and an employee for purposes of the credit and is eligible for the credit to the extent that an employer would earn the payroll family leave credit if the self-employed person were an employee.
Employer-provided education assistance is now nontaxable to employees if payments are made prior to January 1, 2021. Additionally, federal student loan payments are suspended through September 30, with no interest charges.
A Hidden Benefit
For high net worth taxpayers, particularly real estate investors with large depreciation deductions, losses exceeding $500,000 may be used to offset income, such as capital gains, for 2019, and may now be carried back two years. Previously, unused losses beyond $500,000 could only be carried forward.
Select Business Provisions
Payroll Tax Credit for Required Paid Sick Leave (The Payroll Sick Leave Credit)
The Emergency Paid Sick Leave Act (EPSLA) division of the Act generally requires private employers with fewer than 500 employees to provide 80 hours of paid sick time to employees who are unable to work for virus-related reasons (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The pay is up to $511 per day with a $5,110 overall limit for an employee directly affected by the virus and up to $200 per day with a $2,000 overall limit for an employee who is a caregiver.
Payroll Tax Credit For Required Paid Family Leave (The Payroll Family Leave Credit)
The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid and unpaid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The leave generally is available when an employee must take off to care for the employee's child under age 18 because of a COVID-19 emergency declared by a federal, state or local authority that either (1) closes a school or child care place or (2) makes a childcare provider unavailable. Generally, the first 10 days of leave can be unpaid and then paid leave is required, pegged to the employee's pay rate and pay hours. However, the paid leave cannot exceed $200 per day and $10,000 in the aggregate per employee.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
A refundable payroll tax credit is available equal to 50 percent of wages paid to employees during the pandemic if the employers operations were fully or partially suspended due to a COVID-19 shut down order or if gross receipts declined by more than 50 percent when compared to the comparable quarter of the prior year.
Delay of Payment of Employer Payroll Taxes
Employers and self-employed individuals may defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. The provision requires that the deferred employment 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.
The Tax Cuts and Jobs Act (TCJA) intended to allow immediate write-off of costs related to Qualified Improvement Property (QIP). Due to a technical error, this provision was omitted from the law upon drafting in 2017, causing QIP only to be eligible for depreciation over 39 years. The Stimulus legislation corrects this error and permits bonus depreciation to be claimed on qualified costs on a retroactive basis. This creates deduction opportunities for 2020 as well as amended return and cash infusion opportunities for 2018 and 2019.
Net Operating Loss Deductions
The 80 percent income limitation for net operating loss deductions for years beginning before 2021 has been temporarily repealed. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
Corporate Alternate Minimum Tax Credit Refund
Under the TCJA, noncorporate taxpayers’ net business losses were limited to $250,000 ($500,000 for a joint filer). The stimulus relief legislation allows the use of net business losses without limit for tax years 2018 through 2020. If you were limited in the use of carryover used in 2018, this may produce a refund opportunity.
Modification of Limitation on Business Interest
The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.
Corporate Alternate Minimum Tax Credit Refund
Under prior law C corporations with alternative minimum tax credits were entitled to a refund of these credits over a four-year period starting in 2018. Under the Stimulus Bill, refunds are now available over a two-year period commencing in 2018. Additionally, C corporation’s 2019 tax returns are filed late, an election can be made to include the entire refundable amount in 2018.
Individuals may use business losses with no limitations for tax years 2018 through 2020. Previously, individuals’ use of business losses were limited to $250,000 ($500,000 for joint filers. Previous years unused carryovers of business losses could produce refund opportunities.
Select Filing and Payment Developments
Filing and Payment Deadlines Deferred
After briefly offering more limited relief, the IRS almost immediately pivoted to a policy that provides the following to all taxpayers-meaning all individuals, trusts, estates, partnerships, associations, companies or corporations regardless of the impact of COVID-19 on operations:
- For a taxpayer with a federal income tax return or a federal income tax payment due on April 15, 2020, the due date for filing and paying is automatically postponed to July 15, 2020, regardless of the size of the payment owed.
- The taxpayer does not have to file Form 4868 (automatic extensions for individuals) or Form 7004 (certain other automatic extensions) to get the extension.
- The relief is for (a) federal income tax payments (including tax payments on self-employment income) and federal income tax returns due on April 15, 2020, for the person's 2019 tax year, and (b) federal estimated income tax payments (including tax payments on self-employment income) due on April 15, 2020, for the person’s 2020 tax year.
- No extension is provided for the payment or deposit of any other type of federal tax (e.g., estate or gift taxes) or the filing of any federal information return.
- As a result of the return filing and tax payment postponement from April 15, 2020, to July 15, 2020, that period is disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the postponed income tax returns or pay the postponed income taxes. Interest, penalties and additions to tax will begin to accrue again on July 16, 2020.
Challenges continue during this COVID-19 environment, including safety, health and rapidly changing deadlines and federal economic stimulus activities. However, the CARES Act provides additional, and much needed, individual and business economic relief. We anticipate further COVID-19 related changes at the state and local levels and envision additional COVID-19 relief legislation.
For Further Information
If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen, Steven M. Packer, any of the practitioners in the Tax Accounting Group or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.