CARES Act Provides Coronavirus-related Aid to Individuals and Businesses
The Coronavirus Aid, Relief and Economic Security (CARES) Act
Signed into law on March 27, 2020, the CARES Act provides $2.2 trillion in financial aid to help American businesses and individuals through the coronavirus (COVID-19) crisis. Key provisions of the law include cash payments to most individual taxpayers and $350 billion in aid to small businesses.
The CARES Act is the largest relief bill in U.S. history, and its small business aid is designed to support businesses for keeping workers on the payroll throughout the crisis – the “Payroll Protection Program.” The legislation also provides $500 billion in loans and other assistance to large companies, states, and municipalities.
The CARES Act is the third of three spending bills enacted so far that are aimed at supporting American workers, families, and businesses through the COVID-19 crisis. The Families First Coronavirus Response Act providing financial aid for worker paid sick leave was enacted a week earlier, and an $8.3 billion emergency spending bill was enacted in early March.
Below are highlights of the CARES Act that impact businesses and individuals with some common questions and answers.
‘Recovery Rebates’ for Individuals
Depending on income level, taxpayers will receive a one-time “recovery rebate,” which is an advance refund of a 2020 tax credit. Individuals will receive $1,200 ($2,400 for joint filers) plus $500 for each qualifying child age 16 or under. The recovery rebate payments will be reduced and phased out for taxpayers with adjusted gross income of more than $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals.
The recovery rebate checks will be based on the adjusted gross income shown on 2019 tax returns, or 2018 tax returns if you have not yet filed for 2019. For Social Security recipients who did not file tax returns, the IRS will determine eligibility for a recovery rebate based on your Form SSA-1099, Social Security Benefit Statement.
The credit is not available to individuals who can be claimed as a dependent by another taxpayer, or estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.
Small Business Interruption Loans – ‘Paycheck Protection Program’
Under a section of the CARES Act known as the Paycheck Protection Program, businesses and nonprofits with fewer than 500 employees may be eligible for loans to cover payroll, mortgage or rent, utilities, and interest expense on outstanding debt. To qualify, an applicant must have been in operation on February 15, 2020, and had employees to whom they paid salaries and payroll taxes or have been self-employed. The loans under the CARES Act are an additional resource for aid over and above the Small Business Administration Economic Injury Disaster Loans.
Employee Retention Credit
The CARES Act creates an employee retention credit for employers that close because of COVID-19. Employers who were operating a trade or business during 2020 that is fully or partially suspended because of orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 are allowed a credit against employment taxes equal to 50 percent of qualified wages (up to $10,000 in wages) for each employee.
Important note: The Employee Retention Credit is not available to employers receiving assistance through the Paycheck Protection Program.
Taxpayers can take up to $100,000 in distributions from retirement plans without being subject to the 10 percent additional tax for early distributions if they have been diagnosed with COVID-19, are caring for a spouse or dependent with COVID-19, or have been financially impacted by the pandemic such as by layoff or furlough. You may take eligible distributions up to December 31, 2020, and you may repay the money back into your plan tax-free within the following three years.
In addition, the CARES Act suspends required minimum distributions from retirement plans for 2020.
A new above-the-line charitable deduction allowed for 2020 (not to exceed $300) is available to itemizer and non-itemizer 1040 filers alike. In addition, the AGI limitation on charitable contributions for individuals has been increased to 100 percent (from 50/60 percent). The taxable income limitation for C Corporations has been raised to 25 percent (from 10 percent). The bill also increases the food contribution limits to 25 percent.
The rules for high-deductible health plans (HDHPs) are amended to allow them to cover telehealth and other remote care services without charging a deductible.
Estimated Tax Payments for Corporations
Estimated tax payments due between March 26, 2020, and October 15, 2020, are not due until the latter date and can be paid at once.
Payroll Tax Delay
Payment of 50 percent of 2020 employer payroll taxes is delayed until December 31, 2021. The other 50 percent will be due December 31, 2022. For self-employment taxes, 50 percent will not be due until those same dates.
Payroll tax payments may not be delayed if you receive a small business loan, as explained above.
Payroll Tax Credit Refunds
Employers can receive an advance for payroll tax credits available under the Families First Coronavirus Response Act. The IRS, which will provide those forms soon, is instructed to waive any penalties for failure to deposit payroll taxes if the failure was because of an anticipated payroll tax credit.
Net Operating Losses
For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback). The 2017 Tax Cuts and Jobs Act (TCJA) has eliminated carrybacks for tax years beginning after 2017 and allowed for indefinite carryforwards. Before TCJA, carrybacks were allowed up to two years, or longer for certain losses arising from casualty, declared disasters, or farming losses.
The CARES Act also eliminates loss limitation rules applied to sole proprietors and pass-through entities to allow them to take advantage of the carryback rules.
Additionally, the Act temporarily repeals the 80 percent income limitation for net operating loss deductions for years beginning before 2021. NOLs arising before January 1, 2021, may fully offset income.
Business Interest Limitation
For tax years beginning in 2019 and/or 2020, the adjusted taxable income percentage is increased to 50 percent from 30 percent. Taxpayers also can choose to use 2019 income in place of 2020 for the computation.
Qualified Improvement Property Fix
As part of the TCJA, Congress intended to shorten the depreciation time on “qualified improvement property” (QIP); generally defined as any improvement made to the interior portion of a nonresidential building any time after the building was placed in service. The depreciable life of QIP was to be reduced from 39 to 15 years. However, the language was never added to the legislation before it was passed. Congress used the CARES Act to correct this technical error, shortening the depreciation lifetime of a QIP to 15 years and making the change retroactive to January 1, 2018. Taxpayers who made qualified improvements during that time can receive the benefits of accelerated depreciation for 2018 and 2019 by filing amended tax returns.
Excess Loss Limitations
The bill repeals a section of the tax code that disallowed excess business losses of noncorporate taxpayers if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly).
Corporate Alternative Minimum Tax (AMT)
With this provision, corporations can claim 100 percent of AMT credits in 2019 as fully-refundable. Additionally, this provision provides an election to accelerate claims to 2018 with the possibility for accelerating refunds.