How will it impact you?
The third phase of relief to American individuals and businesses was enacted through the signing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Like its predecessor passed last week, CARES is meant to assist with individual and more broadly, economic security in response to the spread of COVID-19. The law builds on the already enacted relief measures by targeting specific individual measures and certain general but also industry-specific relief.
Key aspects of the bill for individuals
The law delineates the relief intended for individuals and businesses. The relief to individuals includes:
Direct cash payments
Based on adjusted gross income (AGI) from the most recently filed income tax returns, individual taxpayers with an AGI less than $75,000 will receive $1,200 and married filing joint taxpayers with an AGI less than $150,000 would receive $2,400 of recovery rebate checks. Additionally, for each child under the age of 17, a payment of $500 will be made. Beyond those thresholds, there is a phase out of the relief such that an individual with an AGI of $99,000 or joint filers with an AGI of $198,000 would receive no payments. Recipients should be aware that in current form of the statute, the payment represents income in the year received.
Increased access to retirement funds
Individuals who access their qualified retirement plans through coronavirus-related distributions can take those distributions up to $100,000 free of the 10% early withdrawal penalty. Additionally, any withdrawal can be repaid within three years regardless of the annual cap on contributions and income tax on the distributions would be assessed over three years. A coronavirus-related distribution is defined as made to an individual who is diagnosed with COVID-19, has a spouse or dependent that is diagnosed with COVID-19, or an individual who suffers economic hardships due to temporary or permanent loss of employment due to COVID-19.
Expanded rules for charitable deductions
For individuals that will itemize deductions tor 2020, the Act temporarily suspends the AGI limitation for cash contributions to qualifying organizations (excludes donor-advised funds). In addition, limitations have been increased on contributions of food inventory.
For individuals that do not itemize deductions for 2020, the Act will allow an above-the-line deduction in 2020 for up to $300 for cash contributions to any qualified 501(c)(3) public charity (excluding donor-advised funds).
Additional exclusion of employer-provided education assistance
In addition to the current non-taxable education assistance with tuition, books and fees capped at $5,250 annually, employers can also assist, tax free to the employee, with new student loan repayment also capped at $5,250. This measure is temporary because it applies only to loan payments made from date of enactment through January 1, 2021.
Key aspects of the bill for businesses
For businesses, the bill offers the following relief measures:
Refundable employee retention credit
This credit is calculated on a quarterly basis and allows for the refunding of employer side Social Security payroll taxes for companies that fully or partly suspend operations due to COVID-19 or which sustain a significant decline in gross receipts as a result of the virus. Significant decline is defined as any quarter in which current year gross receipts are 50% less than the corresponding prior-year receipts and ending at the first quarter when current-year quarterly receipts exceed 80% of the prior-year corresponding quarter. Note that the provision is temporary as it applies only for wages paid after March 12, 2020, and before January 1, 2021.
Delay of employer payroll tax payments
Businesses are allowed to defer until at least December 31, 2021, certain payments of employer Social Security taxes related to 2020 wages. In addition, in Notice 2020-18, the IRS has deferred the original April 15 filing and payment deadline to July 15, 2020 for income taxes.
Carryback of net operating losses
The new law allows the carryback of net operating losses (NOL) incurred in 2018, 2019 and 2020 to the previous five years. Additionally, utilization of the NOL would not be limited to 80% of the losses incurred but would allow for full utilization of 2018-2020 losses against previous taxable income.
Enhanced refundability of AMT credits
The new law allows for the recognition in the 2019 tax return the refundable AMT credits generated in previous years. Rather than the spread of credit recognition against regular tax through 2022, as enacted in the Tax Cuts and Jobs Act (TCJA) of 2017, all remaining AMT credits can be used as an offset of 2019 regular taxes to the extent of regular taxes with any excess refunded via the 2019 tax return.
Increased taxable income limit in calculating interest deductibility
The enactment of the TCJA required net interest expense deductibility limited to 30% of adjusted taxable income. CARES for 2019 and 2020 increases the threshold amount from 30% to 50% without a change to the calculation that results in adjusted taxable income.
Technical correction of qualified improvement property
In the passing of the TCJA, Congress erred in not extending the rules related to Modified Accelerated Cost Recovery System (MACRS) of IRC Section 168 to previously included 15-year qualified improvement property. CARES includes the technical correction thus allowing for inclusion of such property into the enhanced depreciation rules enacted under TCJA.
Small business interruption loans
Though not tax-specific, CARES also includes provisions for small business interruption loans including definitional changes in businesses that qualify, collateral requirements and other loan benefits including loan forgiveness. These benefits are available to employers with no more than 500 employees, including nonprofit organizations. The loans may be eligible for loan forgiveness for costs incurred on or after February 15, 2020, through June 30, 2020, due to payroll costs, mortgage interest payments, rent or utility payments.
Effective date
The law became effective when signed by the President with the provisions to commence immediately. The recovery rebate checks will be made first to those individuals who provided their electronic payment transfer information available to the IRS. For checks, payments may take up to four months. Guidance related to the refundable credits will be provided at a future date.
What to do next
CFGI recognizes that the new law affects differently the business enterprise and the individual employees. We are happy to discuss the impacts the CARES Act may present for your organization. Please reach out to Joel Gardosik (617-620-9705, jgardosik@cfgi.com), Chris Booth (508-789-3254, cbooth@cfgi.com) or Mark Gauthier (978-273-8457, mgauthier@cfgi.com) if you have any questions.