On March 27, Congress passed the Coronavirus Aid, Relief and Economic Security Act (the “Act”), as Phase Three of the government response to the COVID-19 pandemic. The Act contains several tax provisions that are designed to provide relief to individuals and businesses resulting from the pandemic.
The key provisions of the Act are set forth below:
The provisions of the Act are applicable to all U.S. based businesses without regard to ownership as well as foreign entities engaged in a U.S. trade or business.
- Employee Retention Credit
The Employee Retention Credit is refundable payroll tax credit available to employers operating during 2020 that have either been subject to government ordered closure or endured a decline in gross revenues of more than 50% when measured against the same quarter of the prior year.
Eligible employers with more than 100 employees may only apply this credit to the wages of those employees who are not providing services due to COVID-19 restrictions.
Businesses receiving a small business interruption loan are not eligible for this credit.
- Deferral of Employer Payroll Taxes
Employers may defer the employer share of the Social Security payroll tax payments (6.2%) from March 27, 2020, through December 31, 2020. The deferred amounts are due over the next two years with half of the deferred amount due by December 31, 2020 and the remaining half due by December 31, 2022.
Businesses receiving loan forgiveness under the small business loan forgiveness provisions of the Act are not eligible for this deferral.
- Suspension of Net Operating Loss (“NOL”) Limitations
The Act suspends certain provisions of the Tax Cuts and Jobs Act provisions for net operating loss carryovers. NOLs arising in 2018, 2019, and 2020 can be carried back to any of the five preceding tax years and taxpayers may amend those returns and, claim cash refunds if available. The 80% taxable income limitation on NOLs is suspended until after December 31, 2020, and will not apply to taxable years beginning in 2018, 2019, and 2020.
Carried back NOLs are not taken into account in determining the repatriation tax set forth in § 965 of the Internal Revenue Code of 1986, as amended (the “Code”).
Special rules apply to real estate investment trusts, life insurance companies, and partnerships. The disallowed “excess business loss” under § 461(b)(3) of the Code is suspended until after December 31, 2020, and will not apply to taxable years beginning in 2018, 2019, and 2020.
- Acceleration of Corporate Alternative Minimum Tax (“AMT”) Credits
Corporate AMT was repealed in 2018 and previously paid AMTs were allowed as refundable credits over four years beginning in 2018. The Act allows corporations to claim the entire amount of remaining AMT credits.
- Relaxed Interest Deduction Limitations
Section 163(j) of the Code limits the net business interest deduction to 30% of adjusted taxable income for taxpayers other than certain small businesses. The Act increases the limitation to 50% for taxable years beginning in 2019 and 2020.
- Bonus Depreciation for Qualified Improvement Property
The Act provides a technical correction to the TCJA cost recovery related to the improvement to the interior of nonresidential buildings. Business may claim a 100% bonus depreciation for the costs associated with such improvements. This change is effective for all qualified improvement property placed into service before January 1, 2023 and after September 27, 2017.
- Small Business Loans
Small business loans are a central part of the Act which sets aside approximately $349 billion in funds for guaranteed loans to qualifying companies and certain nonprofit organizations with fewer than 500 employees. The borrower must certify that the loan proceeds will be used to retain workers and maintain payroll or make certain mortgage, rent and utility payments. The maximum loan amount is the lesser of $10 million or an amount based on the borrower’s payroll, mortgage, debt and rent payments.
The portion of this loan that is utilized for certain permitted purposes during the 8 week period beginning from the date of the loan grant is eligible for tax-free forgiveness.
- Suspension of Section 382 for Companies Receiving Government Assistance
In addition to the small business loans set forth above, Treasury is authorized to make COVID-19 loans, loan guarantees and other investments in support of eligible businesses in exchange for warrants, stock options or other equity instruments. Loan recipients under this program are subject to both employee and executive compensation restrictions and must maintain a specified level of employment for a certain period.
This type of government investment could potentially result in a change of ownership under §382 of the Code, which could significantly limit a borrower’s ability to utilize its NOLs. The Act grants Treasury the authority to issue regulations that would make §382 inapplicable under this program.
- Charitable Contributions
The Act increases the limitation on charitable deductions to 25% of taxable income
Tax Relief for Individuals
The Act provides a one-time refundable tax credit for individual taxpayers who are U.S. tax residents in an amount equal to $1,200 for single taxpayers or $2,400 for married couples filing joint returns, plus $500 for each child. Accordingly, dependent children are not eligible for this rebate separately. The rebate will be based on the income reported on a taxpayer’s 2019 income tax return, or the 2018 return if the 2019 has not yet been filed.
The rebate is reduced by 5% of the excess of the taxpayer’s adjusted gross income over:
$75,000 for single taxpayers,
$112,500 for heads of households, and
$150,000 for married taxpayers filing jointly.
The rebate is reduced to zero for taxpayer’s with adjusted gross income exceeding:
$99,000 for single filers,
$146,500 for heads of households, and
$198,000 for married taxpayers filing jointly.
- Relaxed Requirements Related to Retirement Funds, Plans and Accounts
The Act suspends the 10% early withdrawal penalty for withdrawals related to COVID-19 occurring in 2020 from eligible retirement plans, including IRAs, if the distribution or amount withdrawn is $100,000 or less. Income attributable to any withdrawal or distribution will be subject to income tax ratably over a three-year period. Taxpayers may recontribute such amounts to an eligible retirement plan without regard to the annual cap on contributions.
The Act suspends the minimum distribution requirements for certain defined contribution plans, including 401(k) plans and IRAs, for 2020.
The Act expands the amount of loans that a taxpayer can take from certain retirement plans for COVID-19 relief up to the lesser of $100,000 or 100% of the account balance. The increase is effective for 180 days from March 27, 2020. The repayment due date is extended for one year for all outstanding loans from qualified employer plans if the repayment date falls prior to January 1, 2021.
The above rules apply only to taxpayers affected by COVID-19 including those diagnosed with the virus or who have a spouse or dependent who are diagnosed with the virus as well as taxpayers who have experienced adverse financial consequences as a result of being furloughed laid off, or suffered reduced work hours, or have been unable to work due to lack of child care or whose employer has closed or reduced hours due to the virus.
- Individual Charitable Contributions
The Act permits taxpayers who take the standard deduction to deduct $300 in charitable contributions for cash payments made in 2020. Taxpayer’s that itemize their deductions may claim 100% of their charitable contributions.