Debate over incentivizing workers with unemployment benefits that could be higher than their paid job, and concerns over corporate welfare, are stalling the Coronavirus Aid, Relief and Economic Security Act stimulus bill, known as the CARES Act. This is the largest funding for disaster aid in U.S. history. The White House coronavirus task force briefing on COVID-19 on evening of March 25, 2020 relayed highlights of the bill, and the President is determined to sign the bill as soon as it is delivered to him by the House. The task force expects the aid to help families and businesses for up to three months. The White House expects payments to families to be issued within three weeks, and banks to be able to issue loans close to the same day the legislation is passed.
The notable items of tax aid in the pending CARES Act are listed below (this is proposed at this time):
DIVISION B – RELIEF FOR INDIVIDUALS, FAMILIES, AND BUSINESSES
Title I – Recovery Checks & Other Individual Provisions
Section 2101. 2020 recovery rebates for individuals
Recovery checks of up to $1,200 will be put into the hands of most taxpayers, providing cash immediately to individuals and families. Married couples who file a joint return are eligible for up to $2,400. Those amounts increase by $500 for every child. These checks are reduced for higher income taxpayers and begin phasing out after a single taxpayer has $75,000 in adjusted gross income and $150,000 for joint filers. The IRS will base these amounts on the taxpayer’s 2018 tax return. The rebate amount is reduced by $5 for each $100 a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single taxpayers with incomes exceeding $99,000 and $198,000 for joint filers. The IRS will base these amounts on the taxpayer’s 2018 tax return. Taxpayers with little or no income tax liability, but at least $2,500 of qualifying income, would be eligible for a minimum rebate check of $600 ($1,200 married). Qualifying income includes earned income, as well as Social Security retirement benefits and certain compensation and pension benefits paid to veterans. This ensures relief gets to low-income seniors and disabled veterans.
Section 2102. Delay of certain deadlines
The provision extends the April 15th filing date to July 15th, giving individuals more time to file their tax returns given the limitations caused by the COVID-19 emergency. The filing date would be aligned with the extended payment filing date already announced by the Internal Revenue Service. The provision also allows all individuals to postpone estimated tax payments due from the date of enactment until October 15, 2020. There is no cap on the amount of tax payments postponed, and any individual required to make estimated tax payments can take advantage of the postponement. This delay should increase the available cash flow for individuals experiencing cash shortfalls as a result of the COVID-19 emergency.
Section 2103. Special rules for use of retirement funds
Consistent with previous disaster-related relief, this provision waives the 10%early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief. A coronavirus-related distribution is a distribution made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of childcare due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
Section 2104. Allowance of partial above the line deduction for charitable contributions.
The provision encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.
Section 2105. Modification of limitations on charitable contributions during 2020
The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50% of adjusted gross income limitation is suspended for 2020. For corporations, the 10% limitation is increased to 25% of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Title II – Business Provisions
Section 2201. Delay of estimated tax payments for corporations
The provision allows corporations to postpone estimated tax payments due after the date of enactment until October 15, 2020. There is no cap on the amount of tax payments postponed. This delay will provide critical cash flow to help businesses maintain operations and continue paying employees during the COVID-19 emergency.
Section 2202. Delay of payment of employer payroll taxes
The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. All employers are responsible for paying a 6.2% Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, The Social Security Trust Funds will be held harmless under this provision.
Section 2203. Modifications for net operating losses
The provision relaxes the limitations on a company’s use of losses from prior years. NOLs are currently subject to a taxable income limitation, and they cannot be carried back to reduce income in a prior tax year. This provision provides that a loss from 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior years’ returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.
Section 2204. Modification of limitation on losses for taxpayers other than corporations
The provision modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can benefit from the NOL carryback rules described above and access critical cash flow to maintain operations and payroll for their employees.
Section 2205. Modification of credit for prior year minimum tax liability of corporations
The corporate AMT was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in The provision accelerates the ability for companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.
Section 2206. Modification of limitation on business interest
The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30% limitation to 50% of the taxable income for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.
Section 2207. Technical amendment regarding qualified improvement property
The provision enables businesses, especially in the hospitality industry, to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act, not only increases companies’ access to cash flow by allowing them to amend a prior year return, but also incentivizes them to continue to invest in improvements as the country recovers from the COVID-19 emergency.
Section 2208. Installments not to prevent credit or refund of over-payments or increase estimated taxes
Section 965, the one-time repatriation toll charge, imposed a tax on the untaxed foreign earnings of U.S. companies in 2017. Companies had the option to pay the tax up front, or in installments over eight years. Some companies overpaid their 2017 taxes as a result of Section 965, but were unable to claim a refund of those taxes due to an interaction with the rules for electing installment payments. This provision, which corrects an error in the Tax Cuts and Jobs Act, allows companies to recover the over-payment of taxes paid on the toll charge to help with liquidity during the current crisis.
Section 2209. Restoration of limitation on downward attribution of stock ownership in applying constructive ownership rules
This technical correction addresses the tax treatment of certain foreign subsidiaries resulting from changes made by the Tax Cuts and Jobs Act, which changed the ownership requirements for foreign entities that are subject to U.S. tax. The goal in changing these ownership rules was to target certain abusive transactions. However, the changes had the unintended consequence of subjecting some foreign entities to excessive tax and reporting requirements. The provision clarifies that certain foreign subsidiaries should not be subject to those requirements, which will permit companies to amend their 2018 tax return to free up critical cash for operations and payroll and significantly reduce their tax compliance burdens this year.
Barnes Dennig COVID-19 Advisory Team Leaders: