| On March 27, 2020, President Trump signed the third coronavirus relief package, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or Act). The much talked about stimulus package is large in terms of the $2 trillion impact, and is quite wordy, at 880 pages. We will attempt to highlight some of the key tax relief provisions for individuals, specifically the individual recovery rebate, and the business tax provisions, explicitly for small businesses (which are characterized as employing 500 or less employees) and retirement plan provisions. For small businesses, the Paycheck Protection Program can be extremely beneficial and needs to be explored by every small business.
Individual recovery rebate
Under the CARES Act, an eligible individual is allowed an income tax credit, which provides for recovery rebates of up to $1,200 for single filers and $2,400 for joint filers. In addition, amounts are increased by $500 for each qualifying child. The rebate is characterized as an advance refundable tax credit and amounts are phased out for an individual taxpayer making more than $75,000 ($150,000 for joint filers and $112,500 for heads of households).
The rebates are available even if the taxpayer has no income, as well as those whose income comes from non-taxable means, such as certain social security income. Most eligible individuals will not have to take any action to receive a rebate from the IRS. If applicable, the IRS will use the taxpayer’s 2019 tax return, if already filed, or in the alternative, their 2018 return. If the individual has not filed a 2018 return, the IRS will use information from the individual’s 2019 Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement. Reports indicate that where possible, rebates will be issued as direct deposits (if, for example, you had a tax refund on your last filed income tax return and the refund was issued by direct deposit). Otherwise, checks will be forthcoming.
Qualifying child
For purposes of the tax credit, “qualifying child” means a qualifying child of the taxpayer who is under the age of 17.
Eligibility for credit
For purposes of the credit, an “eligible individual” is any individual, other than a nonresident alien or an individual who can be claimed as dependent by another taxpayer for the tax year. Estates and trusts are not eligible for the credit. An individual who can be claimed as a dependent, even if they file a return, is not eligible since the deduction is still “allowable” to the taxpayer.
Phase out of credit
The amount of the credit is reduced, but not below zero, as described below, based on the taxpayer’s adjusted gross income (AGI) in excess of:
- $150,000 for a joint return;
- $112,500 for a head of household; and
- $75,000 for all other taxpayers.
The amount of the credit is reduced by $5 for each $100 in income above the applicable threshold. Under the Act, the credit is entirely phased-out for joint filers, with no children, with an AGI above $198,000. For a head of household with one child, the credit is phased-out when AGI surpasses $146,500. For a single filer, the credit is phased-out when AGI surpasses $99,000.
Advance rebate of credit during 2020
Each eligible individual is treated as having made an income tax payment for 2019 equal to the advance refund amount for their 2019 tax return. The “advance refund amount” is the amount that would have been allowed as a credit for 2019 had the provisions been in effect. Even though the credit is an advance for 2020, the law treats it as an overpayment for the filer’s 2019 tax return that the IRS will rebate during the 2020 tax return.
Advance rebate reduces credit allowed for 2020
The amount of allowable credit for the individual’s 2020 tax return must be reduced; but will not go below zero, for the advanced rebate. If the taxpayer receives a rebate amount that is less than what the filer is entitled to, the individual will be able to claim the balance of the credit when filing their 2020 return. On the other hand, if the advanced rebate received is larger than what the taxpayer is entitled to, the taxpayer will not have to pay back any excess amount.
Additional charitable deductions for individuals
Individuals will be allowed a $300 deduction for contributions to certain charities, even for taxpayers that are not itemizing deductions (this is an above-the-line deduction). For those that do itemize deductions, the limit on donations, which is generally 50% of adjusted gross income, is suspended.
Student loan deferral
The Act suspends student loan payments (both principal and interest) through September 30, 2020, and no interest accrues during this period. A special repayment benefit may be provided by employers, and the employee would exclude from income the payment received, up to $5,250.
Unemployment insurance
Record low unemployment rates have been replaced by record numbers of unemployment claims. Under the Act, unemployment claims may be made by those not typically allowed to make such claims: self-employed, independent contractors, if unable to work as a result of the pandemic. Further, an additional $600 per week is provided to each recipient for up to four months. Further, unemployment benefits will be extended an additional 13 weeks after state benefits lapse.
Small businesses
The CARES Act provides tax credits and a $377 billion fund for loans and grants to small businesses – generally categorized as businesses that employ 500 or fewer employees. This aid is meant to help small businesses survive the pandemic while also protecting their employees from lay-offs.
Employee retention tax credits
The Act provides eligible employers with refundable payroll tax credits for up to 50% of the first $10,000 of wages, including health benefits, for each eligible employee. These credits apply to employers whose operations have suspended due to a government order limiting commerce, travel or group meetings, or to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers with more than 100 employees, only the wages of employees who are furloughed or face reduced hours are eligible. The Act also gives the IRS the authority to advance payments to employers and to waive penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving these credits.
Deferral of payroll taxes
The Act allows employers to defer the payment of the employer portion of employment taxes through January 1, 2021. Fifty percent of the deferred taxes will be required to be paid on December 31, 2021, and the other 50% on December 31, 2022.
Repeal of taxable income limitation for NOLs
The Act suspends the 80% limit on net operating losses (NOLs) so they can fully offset income. NOLs from 2018, 2019 or 2020 are eligible to be carried back for five years.
Business interest deduction
The Act changes the limitation on the deductibility of business interest from 30% to 50% of adjusted taxable income. Additionally, an election can be made to use the 2019 adjusted taxable income for the 2020 tax year.
Bonus depreciation on QIP
The Act specifically designates 15-year property as Quality Improvement Property (QIP) for depreciation purposes and permits 100% bonus depreciation on QIP. Businesses can amend their 2018 and 2019 filed returns to provide a source of cash.
Charitable deductions for corporations
Typically, a corporation’s charitable deduction cannot exceed 10% of its taxable income. The Act increases the charitable deduction amount to 25% of a corporation’s taxable income. Donations are eligible for the charitable deduction if they are paid in cash during the 2020 calendar year to a 501(c)(3) organization or certain other charitable organizations.
Paycheck Protection Program
The Act includes $350 billion in funding for the Paycheck Protection Program. This program provides small businesses with zero-fee loans of up to $10 million. Up to eight weeks of average payroll and other costs will be forgiven if the business retains its employees and their salary levels. Additionally, principal and interest is deferred for up to one year and all borrower fees are waived. This can be used in coordination with other assistance established in the Act.
Emergency Economic Injury Grants
The Act allocates $10 billion in funding for Emergency Economic Injury Grants. These grants provide an advance of $10,000 to small businesses and not for profits that apply for an Economic Injury Disaster Loan (EIDL) within three days of applying for the loan. EIDLs are loans that are $2 million or less with interest rates up to 3.75% (or 2.75% for not for profits) as well as principal and interest deferment for up to four years. The loans may be used to pay for expenses that could have been met had the disaster not occurred, such as payroll and other operating expenses.
Debt relief for existing and new SBA borrowers
The Act delineates $17 billion in funding to provide immediate relief to small businesses with standard Small Business Administration (SBA) 7(a), 504, or microloans. Under the Act, SBA will cover all loan payments for existing borrowers, including principal, interest and fees, for six months. SBA payment relief may not be applied to payments on Paycheck Protection Program loans.
Paid leave for government contractors
The Act also allows for paid leave for employees working on small business contracts with the federal government. It allows agencies to modify the terms of a contract to reimburse small business contractors for the cost of providing paid leave to employees or subcontractors who are unable to work due to a facility closure.
Small Business Development Centers
The Act provides $275 million in grants to Small Business Development Centers, Women’s Business Centers and Minority Business Development Agencies. This funding will allow these centers to hire staff and provide programming to help small businesses respond to COVID-19.
Key retirement plan provisions are the following:
2020 Required Minimum Distributions
There are no 2020 RMDs. They are suspended for 2020.
Withdrawals from plans
Generally, early withdrawals from retirement plans not only get taxed at ordinary income tax rates, but also incur a 10% penalty. For withdrawals during 2020 which are related to the COVID-19 pandemic (e.g., loss of job, getting sick, taking care of a family member who has the virus), the penalty is waived, mandatory tax withholding on the withdrawal is not required, and the ordinary income event can be spread out over three years. Further, the withdrawal can be paid back (recontributed) within three years.
Plan loans
The maximum loan amount for loans from qualified plans is increased, from $50,000 or 50% of the vested account balance, up to $100,000 or 100% of the vested account balance. Further, due dates on such loans can be extended for one additional year.
Individual Retirement Account contribution deadline
The normal deadline for making a 2019 deductible contribution is April 15, 2020. Since the tax filing deadline was extended to July 15, 2020, the IRA contribution deadline is also extended to that date.
If you have additional questions about the Act, please contact one of our attorneys for assistance.
Client alert authored by Chuhak & Tecson, P.C. attorneys
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such. |
