The Coronavirus Aid, Relief, and Economic Security Act, P.L. No. 116-136 (“CARES Act”), was signed into law by the President of the United States on March 27, 2020. The CARES Act includes tax provisions affecting both individuals and businesses.
Pre-CARES Act Changes to Tax Deadlines
Prior to passage of the CARES Act, the Treasury Department and I.R.S. announced on March 21, 2020, that:
- The federal income tax filing due date was automatically extended from April 15, 2020, to July 15, 2020, without penalties or interest, regardless of the amount owed. This extension includes an extension to July 15 of the first quarter estimated income tax payments that would have been due April 15, but does not extend the second quarter estimated income tax due date of June 15.
- This extension applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers, and those who pay self-employment tax.
- Taxpayers are entitled to this extension without taking any additional actions.
- This extension applies only to federal income tax payments (including payments of tax on self-employment income) and income tax returns due on April 15, 2020, in respect to a taxpayer’s 2019 taxable year and not for the payment or
deposit of any other type of federal tax, or filing of any federal information return. See Internal Revenue Service, Notice 2020-18, Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic. However, any person with a federal gift tax or generation-skipping transfer tax payment (Form 709) due or the required to be filed Form 709 on April 15, 2020, is automatically postponed to July 15, 2020. See Internal Revenue Service, Notice 2020-20, Update to Notice 2020-18, Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic, Related to Gift and Generation-Skipping Transfer Tax Filing and Payment Deadlines.
The Oklahoma Tax Commission also extended the due date for Oklahomans to file and pay their 2019 Oklahoma income tax returns to July 15, 2020. See Okla. Tax Comm’n, Oklahoma Tax Commission extends Oklahoma income tax filing date to July 15, 2020, https://www.ok.gov/tax/COVID-19_Information_and_Updates.html (last visited Mar. 30, 2020).
Tax-Related Provisions of the CARES Act for Individuals
Cash Payments to Taxpayer
2020 Recovery Rebates for Individuals – § 2201
- Section 2201 of the CARES Act provides for direct payments to “eligible individuals,” meaning individuals who are U.S. residents with a valid social security number who are not a dependent of another taxpayer. Specifically, individuals who, according to either their 2019 tax return or 2018 return if they have not filed a 2019 return, had up to $75,000 in adjusted gross income are entitled to receive a credit in the form of a one-time payment of $1,200, while eligible individuals filing joint returns who had an adjusted gross income of up to $150,000 are entitled to a credit in the amount of $2,400.
- In addition, both single and joint filers are entitled to a $500 credit for each qualifying child.
- For individuals with adjusted gross income exceeding $75,000, heads of household exceeding $112,500, and joint filers exceeding $150,000, the total credit will be
reduced (but not below zero) by 5% of the amount that the taxpayer’s adjusted gross income exceeds the respective threshold.
- Taxpayers are not required to take any action to claim this rebate.
Penalty Free Withdrawals from Retirement Accounts
Special Rules for Use of Retirement Funds – § 2202
- Section 2202 of the CARES Act provides a conditional waiver of the 10% penalty set forth in I.R.C. § 72(t) for early withdrawals for distributions up to $100,000 which were made for reasons related to the coronavirus, including distributions made during 2020 by a person: (1) who has been diagnosed with COVID-19; (2) whose spouse or dependent has been diagnosed with COVID-19; or (3) who has experienced “adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).”
- Income attributable to a distribution
made under this conditional waiver is subject to payment of income tax over three years, although the taxpayer may recontribute the funds to an eligible retirement plan within three years (without regard to the contributions cap which would otherwise apply that year) and avoid paying the income tax.
No RMDs in 2020
Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts – § 2203
- Section 2203 of the CARES Act waives required minimum distribution rules which typically apply to certain specified defined contribution plans, including 403(a) and 403(b) plans, and individual retirement plans. This waiver applies to any distribution which was required to be made in calendar year 2020 on account of either: (1) a required, beginning date occurring in such calendar year; or (2) such distribution not having been made before January 1, 2020.
New Above the Line Charitable Deduction
Allowance of Partial Above the Line Deduction for Charitable Contributions – § 2204
- Section 2204 of the CARES Act amends I.R.C. § 62(a) to allow non-itemizing taxpayers to deduct up to $300 for charitable contributions made in cash to qualifying charitable organizations (as defined in I.R.C. § 170(c)) other than supporting organizations (as defined in I.R.C. § 509(a)(3)) or donor advised funds (as defined in I.R.C. § 4966(d)(2)). This change is effective for all “taxable years beginning after December 31, 2019.”
Increased Charitable Contributions for Individuals and Corporations
Modification of Limitations on Charitable Contributions During 2020 – § 2205
- In addition to allowing qualifying $300 charitable contribution deductions for non-itemizing taxpayers, § 2205 of the CARES Act increases the limits for qualified charitable contributions made by itemizing individuals and corporations (but not those contributions made to supporting organizations under I.R.C. § 509(a)(3) or donor advised funds under I.R.C. § 4966(d)(2)), as well as food inventory contributions.
- The 50% of adjusted gross income limitation for individuals (previously raised to 60% by the Tax Cuts and Jobs Act of 2017, P.L. No. 115-97 (“TCJA”)) is now 100% of adjusted gross income, and an individual can carryforward contributions which exceed 100% for five years.
- The 10% limit previously applicable to corporations is increased to 25% of taxable income, and corporations may carryforward contributions made in excess of the 25% limitation for five
- Finally, the limitation on deductions for contributions of food inventory is raised from 15% to 25%. Although § 2205 is entitled “Modification of Limitations on Charitable Contributions During 2020,” this change purports to be effective for all “taxable years beginning after December 31, 2019.”
Employer Student Loan Benefit
Exclusions for Certain Employer Payments of Student Loans – § 2206
- Section 2206 of the CARES Act amends I.R.C. § 127(c) to allow employers to provide employees with a student loan repayment benefit of up to $5,250 during 2020, which is excluded from an employee’s income. Employers may provide this benefit to employees any time after the date of enactment but before January 1, 2021.
- The $5,250 cap, however, applies to both additional loan repayment programs instituted by employers as allowed under I.R.C. § 127(c) as amended, as well as existing educational assistance programs for the payment of current educational expenses and coursework which were already allowed under I.R.C. § 127(c), prior to amendment. beginning after December 31, 2019.”
Over the Counter Medications
Inclusion of Certain Over-the-Counter Medical Products as Qualified Medical Expenses – § 3702
- Section 3702 of the CARES Act redefines “qualified medical expenses” for purposes of Health Savings Accounts, Archer Medical Savings Accounts, and Healthcare Flexible Spending Accounts, to include over-the-counter medications and menstrual care products.
Tax-Related Provisions of the CARES Act for Businesses
Payroll Tax Credit
Employee Retention Credit for Employers Subject to Closure Due to COVID-19 – § 2301
Section 2301 of the CARES Act creates a payroll tax credit for any eligible employer. This tax credit provides eligible employers with a credit against employment taxes in an amount equal to 50% of the “qualified wages” for each employee, that are paid or incurred between March 13, 2020 and
December 31, 2020, not to exceed $10,000 per employee.
- In order to qualify as an “eligible employer,” a business must have carried on a trade or business during 2020 and meet either of two qualifications with respect to a calendar quarter: (1) the operation of the trade or business was fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purpose) due to COVID-19; or (2) such calendar quarter beginning with the first calendar quarter following December 31, 2019, for which gross receipts (within the meaning of I.R.C. § 448(c)) for the calendar quarter are less than 50% of gross receipts for the same calendar quarter in the prior year, and ending with the calendar quarter for which gross receipts are greater than 80% of the same calendar quarter in the prior year
wages” is defined differently for business with less than 100 full-time employees in 2019.
- If an eligible employer had greater than 100 full-time employees during 2019, qualified wages include those wages paid by an employer with respect to services which the employee is not providing due to suspension (as described in (1), above), or decline in gross receipts (as described in (2), above).
- If an eligible employer employed less than 100 full-time employees during 2019, qualified wages include any wages paid during a suspension or decline in gross receipts, as described in (1) and (2) above, including circumstances where the employee has continued to provide services.
- Regardless of an employer’s size, “qualified health plan expenses” constitute “qualified wages,” at least to the extent those expenses are properly allocable to such wages. Further,
qualified wages do not include wages taken into account under the Families First Coronavirus Response Act, P.L. No. 116-127 (“FFCRA”), for required paid sick leave (§ 7701) or required paid family leave (§ 7703).
Two additional limitations apply:
- Employers that receive a covered loan under the Small Business Act, as amended by the CARES Act, are not entitled to the credit.
- An employer is not entitled to the § 2301 credit for employees for which the employer is allowed a credit under I.R.C. § 51.
Deferred Payroll Tax Payments
Delay of Payment of Employer Payroll Taxes – § 2302
Section 2302 of the CARES Act allows employers and individuals who are self-employed, subject to certain exceptions, to defer the employer’s share of social security taxes through the end of the year, until the end of 2021 and 2022. Employers or individuals taking advantage of this delay must pay the deferred employment tax over the following two years, with 50% due by December 31 of each subsequent year.
- This provision does not apply to employers which receive a loan under the Small Business Act, which is forgiven by the CARES Act.
- Further, § 2302 contains special rules relating to liability of payroll processors and certified professional employer organizations for delaying payment of the employer’s share of social security taxes under an employer’s direction.
The CARES Act Reverses the TCJA NOL Carryback Elimination and Limitations on Carryforwards.
Modifications for Net Operating Losses – § 2303
Section 2302 of the CARES Act amends I.R.C. § 172 to allow corporations carryback net operating losses (“NOL”) arising in tax years 2018, 2019, or 2020, for five years. In addition, this provision temporarily waives the 80% of taxable income deduction limitation for NOL for tax years beginning before January 1, 2021.
unallowed losses due to 461(1) limitation may file an immediate claim for refund.
Modification of Limitation on Losses for Taxpayers Other than Corporations – § 2304
Section 2304 of the CARES Act modifies limitations for taxpayers other than corporations, thus making the NOL carryback rules applicable to corporations apply to businesses which are not corporations. In other words, § 2304 suspends the TCJA’s limitation on non-corporate entities’ allowance to deduct excess business losses for tax years 2018, 2019, and 2020. This provision also contains technical amendments relating to certain language in the TCJA.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations – § 2305
Section 2305 of the CARES Act accelerates corporations’ entitlement to recover alternative minimum tax (“AMT”) credits.
- Prior to the CARES Act, a corporation would only receive a refund of 50% of the remainder of its AMT credit at the end of 2018, 2019, and 2020 with the final amount refundable at end of 2021. Now, corporations can file for a refund with the IRS, which the IRS is in turn required to review, and if approved, pay within 90 days.
Modifications of Limitation on Business Interest – § 2306
Section 2306 of the CARES Act temporarily increases the interest limit deduction under Section 163(j) from 30% to 50% of a business’ adjusted taxable income for tax years 2019 and 2020. This provision further allows businesses to use their adjusted taxable income for 2019 in the adjusted taxable income calculation for 2020, thus allowing a larger interest deduction for corporations with lower adjusted taxable income in 2020. An election to use the partnership 2019 taxable income will be a partnership level deduction.
Amendments Regarding Qualified Improvement Property – § 2307
Section 2307 of the CARES Act amends I.R.C. § 168, which was previously amended by the TCJA, to correct a prior drafting error in order to allow 100% bonus depreciation deductions for “qualified improvement property.” This provision applies retroactively to property placed in service in 2018.
Advance Refunding of Credits – § 3606
The FFCRA extended tax credits for required paid sick leave and required paid family leave. § 3606 of the CARES Act provides an advance refund for those tax credits.
Temporary Exception from Excise Tax for Alcohol Used to Produce Hand Sanitizer – § 2308
Section 2308 of the CARES Act provides a temporary waiver of the excise tax, beginning December 31, 2019 and ending December 31, 2020, for distilled spirits removed within the applicable timeframe for use in or contained in hand sanitizer produced and distributed in accordance with FDA guidance which is related to the outbreak of COVID-19.
Suspension of Certain Aviation Excise Taxes – § 4007
4007 of the CARES Act temporarily suspends certain federal aviation excise taxes through December 31, 2020. These taxes are typically collected in connection with commercial aviation and include ticket taxes, cargo taxes, and fuel taxes.