Coronavirus Economic Stimulus Package Signed Into Law
Read an overview of major provisions in the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020.
President Trump signed the much-anticipated U.S. $2 trillion emergency economic stimulus package on Friday, March 27, 2020. It is known as the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act), H.R. 748.
Our team is going to be monitoring all IRS pronouncements and clarifications as they relate to this important legislation. We will be updating our website when additional information is received. For now, here are some key business tax and individual tax provisions for your consideration.
CARES Act Business Tax Provisions
2301 – Employee Retention Credit
This is a refundable payroll tax credit. There is eligibility for employers, including non-profits, whose operations have been suspended. It includes employers with less than 100 employees in 2019; all wages are eligible, regardless of whether the employee is actually furloughed:
- 50% of qualified wages, which includes health benefits, for each employee, capped at $10,000 per employee
- Business must be ordered closed or gross receipts fall to less than 50% of the same quarter in the prior year
Note: The credit is not available to employers receiving Small Business Interruption Loans (ask your CPA for more detail). Wages do not include amounts taken into account for the earlier passed required paid sick leave or paid family leave in the Families First Coronavirus Response Act.
2302 – Employer Payroll Tax Deferral
This is a deferral of the employer portion of Social Security taxes and applies to all taxes due on 2020 wages, beginning on the date of enactment.
- The taxes will be due on December 31 of each year of 2021 and 2022.
- 50% in 2021, 50% in 2022 for payroll taxes between enactment date and 1/1/2021
- Self-employment taxes get this same deferral.
Note: The deferral will not be available to employers receiving forgiveness of their Small Business Interruption Loans (ask your CPA for more details).
2307 – 100% Bonus Depreciation for Qualified Improvement Property (QIP)
This is the long-awaited technical correction to the 2017 Tax Act for Qualified Restaurant, Qualified Retail and Qualified Leasehold Improvement Property for Bonus Depreciation, now making this property eligible for the 100% Bonus Depreciation.
- Applicable to all such property put into service after December 31, 2017
- QIP is 15-year property, therefore eligible for bonus depreciation
- 20-year ADS life
Note: We expect further guidance to help us implement amended returns, where applicable.
2306 – Deductible Interest Expense
This provision relates to the limitation that some Corporations and Partnerships found themselves hitting with regards to the deduction of interest expense on their returns for 2019 and 2018.
- 163(j) limit calculated with 50% of adjusted taxable income (ATI) instead of 30% for taxable years beginning in 2019 or 2020
- Can elect to use 2019 adjusted taxable income for the 2020 calculation
- Increased limitation does not apply to partnerships for 2019, but will apply in 2020
Note: This temporarily changes the limitation of deductible interest in a given year from 30% of ATI to 50% of ATI for 2019 and 2020.
2303 – Net Operating Losses (NOLs)
This section changes the rules for Net Operating Losses that occur in tax years beginning after December 31, 2017.
- Pre-2021 years have no taxable income limit
- Post-2020 years have the 80% limit
- 5-year carrybacks for NOLs arising in years beginning in 2018-2020
2304 – Noncorporate Loss Limitation of § 461(l)
This section applies to excess business losses for non-corporate taxpayers (limited to $250,000; $500,000 married filing jointly) that would have applied to all tax years beginning after December 31, 2017, and ending before January 1, 2026.
- Limitations only apply to taxable years beginning after 2020
- Excess business losses are no longer subject to the loss limitations for years 2018, 2019 and 2020
Note: That means that the limitations will apply in 2021 to 2025.
2305 – Minimum Tax Credit
This section changes the 50% of the excess Minimum Tax Credit that would have
applied in 2018, 2019 and 2020 to not apply for these tax years, but not be allowed
at a full 100% for Corporate taxpayers.
- Corporate credit for prior year AMT fully refundable in 2019
- Can elect to take refund in 2018
CARES Act Individual Tax Provisions
2201 – 2020 Recovery Rebates
This section is the key provision as it relates to individuals. Children who can be claimed as dependents by their parents are not eligible for the credit, even if they have enough income to have to file a return. Estates and trusts are not eligible for the refund. An individual who was not eligible in 2019 might still be determined to be eligible in the year 2020 (dependent in 2019, but not one in 2020).
- Technically a 2020 tax credit, eligible for “Advance Refund”
- $1,200 per individual and spouse, $500 per qualifying child who has not reached age 17
- Income phase out – 5% of amount over $75,000 Single, $112,500 head of household, $150,000 Married Filing Jointly
- Based on Adjusted Gross Income of 2019 return (if filed – if not, then 2018)
Note: Since this is a rebate of 2020 taxes, it is ultimately based upon 2020 income. If an advance payment has occurred, it will reduce the amount that would be actually allowed in 2020. If one is eligible for a greater amount in 2020, that excess amount will be claimed on the 2020 return as an additional credit. If a person got more than they would normally be entitled to, there is no required repayment.
The rebate will be determined by reference to a filed 2019 return. If the filed 2019 return has not occurred yet, the 2018 filed return will be used to determine eligible amounts. Most individuals won’t have to take any action to receive the rebate if they are eligible. Individuals who have elected for direct deposit may expedite receipt of the rebate.
No more than 15 days after making the rebate, the IRS must mail a notice to the taxpayer’s last known address indicating how the payment was made, the amount of the payment, and a phone number to report any failure of receipt of the payment.
Note: The IRS is required to issue guidance and regulations in carrying out this action.
2203 – Required Minimum Distributions (RMDs) for 2020 waived
In this section, RMDs are suspended for certain defined contribution plans and IRAs to assist these accounts to recover from stock market losses. This includes the first RMD, which some individuals had delayed from 2019 to April 1, 2020. Effectively, these affected plans and IRAs are waived from taking a distribution in 2020.
2202 – Coronavirus-related distributions up to $100,000
This section applies in the case where an individual, their spouse or child suffers adverse financial consequences as a result of the quarantine. If a distribution from certain retirement plans is needed to cover expenses, it may be withdrawn without the normal 10% penalty applied to it.
- Distribution included as income over three years, unless an election is made not to do so
- Eligible to be paid back within three years, or income picked up over three years
- No penalty if the individual is under age 59-½
THE ABOVE DESCRIPTIONS ARE BASED UPON THE EARLY ANALYSIS AND OBSERVATIONS OF THE CARES Act H.R.748. THEY ARE SUBJECT TO FURTHER ANALYSIS AND POTENTIAL REGULATIONS AND GUIDANCE FROM THE INTERNAL REVENUE SERVICE. THEY SHOULD NOT BE CONSIDERED ADVICE, BUT SIMPLY INFORMATION.
Contact your CPA at DS+B with any questions on this or other sections of the CARES Act. We will be adding a related blog in the coming days on the “Paycheck Protection Program,” which deals with loans to small businesses administered by the SBA that can be received and potentially forgiven from being paid back.
You may also be interested in this related blog post on SBA loans.