Tax Implications of the CARES Act at a Glance

As Michelman & Robinson has reported, the Internal Revenue Service has extended federal tax filing and payment deadlines to July 15, 2020 in response to the coronavirus crisis. Of note, there is no limitation on the amount of tax payments that can be deferred to July, which is a change from early accounts of a $1M limit. Also, federal gift tax and generation skipping transfer tax payments have been similarly (and automatically) postponed to July 15.

For their part, some states have followed suit and extended certain tax obligations too. For instance, the filing deadline for individual, estate, trust, and corporation returns in New York is now July 15, and the time to file sales and use taxes, originally due on March 20, has been advanced 60 days.

While certainly significant, these are not the only tax implications of the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the $2T emergency aid package signed into law on March 27, includes its share of tax benefits as well. M&R provides an overview here.


Employee Retention Tax Credit

Under the CARES Act, employers may be able to receive a refundable tax credit for their share of the 6.2% social security tax. This tax credit would be for 50% of the first $10,000 in qualified wages paid to each employee after March 13 and through December 31, 2020, which qualified wages are subject to limitations and include employee health plan expenses.

To be eligible, an employer must have had its operations entirely or partially interrupted pursuant to a coronavirus-related government order. Likewise, an eligible employer must have realized more than a 50% decline in gross receipts in a calendar quarter when compared to the same quarter in 2019.

It should be mentioned that non-profits also qualify for this tax credit, though it does not apply to wages paid to federal, state, or local government employees. Additionally, businesses can opt out of this provision, and employers that receive Paycheck Protection Program (PPP) loans pursuant to the CARES Act are not eligible.

Delay of Payment of Payroll Taxes

The CARES Act allows eligible employers to defer the payment of applicable employment taxes (read: the 6.2% social security tax on wages paid from March 27 to December 31, 2020). In effect, this lets certain employers (as well as self-employed taxpayers) hold onto some payroll tax money for a time—50% of the deferred taxes are due on December 31, 2021, and the remaining amount must be paid by December 31, 2022. Businesses that receive PPP loan forgiveness as authorized by the CARES Act are not eligible for the deferment.

Net Operating Loss Rule Changes

Pursuant to the CARES Act, taxpayers are allowed to carry back net operating losses arising in taxable years ending after December 31, 2017 and before January 1, 2021 for five years. Moreover, they can offset 100% of taxable income with net operating loss carry backs and carry overs beginning prior to January 1, 2021 (this repeals the old 80% offset rule).

Business Interest Expense Modification

The CARES Act lets businesses deduct business interest up to 50% of their adjusted taxable income for the 2019 and 2020 tax years, which is up from 30% in prior years. Toward that end, taxpayers can elect to apply their 2019 ATI in place of their 2020 ATI, if doing so would serve to increase their business interest expense for 2020.

Charitable Contributions Modification

By way of the CARES Act, the aggregate of any qualified corporate charitable contributions for tax year 2020 can be up to 25% of the taxpayer’s taxable income, which is up from 10% of income under prior rules.

Alternative Minimum Tax Credits

Before enactment of the CARES Act, corporations could claim alternative minimum tax credits over a span of several years, ending in 2021. Now, however, the law has been changed so that corporate taxpayers can recover AMT credits on an accelerated basis. They can do so by amending 2018 and (if already filed) 2019 returns.

Fixes to the Tax Cuts and Jobs Act of 2017

The TCJA did not designate Qualified Improvement Property (QIP) as 15-year Modified Accelerated Cost Recovery Systems (MACRS) property. The CARES Act does so, and, among other things, specifies that QIP has a 20-year life when an Alternative Depreciation System (ADS) is elected or required.


Excess Business Loss Limitation Adjustment

According to the CARES Act, the excess business loss limitation rules are no longer applicable for the 2018, 2019, and 2020 tax years, though they will go back into effect for any tax year beginning January 1, 2021 through December 31, 2025.

Recovery Rebates

The CARES Act provides for direct cash payments to individuals as follows:

A total of $1,200 per qualifying individual ($2,400 for married couples filing jointly) plus an additional $500 for each qualifying child (e.g., a son, daughter, stepchild, adopted child, foster child under the age of 17 by the end of 2020).

Most American taxpayers will receive a recovery rebate, so long as they are a U.S. resident, not listed as a dependent on someone else’s return, and have valid social security numbers.

To qualify for a full recovery rebate, singles must have an adjusted gross income under $75,000 (the rebate is phased out when AGI is between $75,000 and $99,000). Married couples filing jointly must have an AGI under $150,000 (the rebate is phased out when AGI is between $150,000 and $198,000).

Individual taxpayers should be aware that these AGI figures are based on 2019 returns, if filed; otherwise, 2018 returns will form the basis for the recovery rebates (which are supposed to be available by direct deposit within the next three weeks, and are basically an advance payment of a 2020 tax credit).

IRA and Retirement Plan Changes

The CARES Act suspends required minimum IRA distributions for 2020. Further, there will not be a 10% penalty for early retirement plan distributions of up to $100,000 that are coronavirus-related (e.g., account holder or spouse is diagnosed with COVID-19; has experienced adverse financial consequences as a result of being quarantined, furloughed, or laid off as a result of the coronavirus; is otherwise unable to work due to lack of child care because of COVID-19; or whose employer has closed or reduced employee hours by virtue of the pandemic).

Regarding such early distributions, they can be taxed over a three-year period, or the taxpayer can elect to pay all of the taxes due at once.

There is more. The limit for COVID-19-related loans from qualified retirement plans has been increased to $100,000.

Charitable Contributions Modification

The CARES Act allows for a new $300 “above-the-line” deduction for non-itemizers making cash donations. These changes exclude contributions to private foundations, supporting organizations, and donor-advised funds.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.