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CARES Act – Tax Law Changes To Assist Businesses And Other Taxpayers

By Natalie A. Roberts | Categories: Articles, Business & Tax Law, COVID-19 task force | Share April 2020

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or the Act), a federal $2.2 trillion emergency relief package signed into law on Friday, March 27, 2020, was designed to provide financial relief in response to the economic downturn caused by the COVID-19 pandemic. The Act includes a range of tax assistance for individuals, families and businesses.

Highlights

  • Individual Tax Rebates
  • Business Interest Expense Deductions
  • Expanded Ability to Use Losses
  • Acceleration of AMT Credits
  • Increased Charitable Deductions
  • Retirement Plan Contributions and Plan Loan Rules
  • Bonus Depreciation
  • Paycheck Protection Program- covered in other articles

Individual Tax Rebates

The CARES Act gives advance rebates for tax credits of up to $1200 per individual (or $2400 for joint return filers), plus a $500 per child. The rebates phase out ($5 reduction for each $100 the taxpayer’s adjusted gross income exceeds the threshold) for those individual filers with adjusted gross incomes above $75,000 and joint filers with adjusted gross incomes exceeding $150,000; the threshold is $198,000 for joint filers with children. The rebates are not available for single individuals with no children who have incomes over $99,000 and joint return filers with incomes exceeding $198,000. To qualify, the taxpayer must have a work-eligible social security number and cannot be a dependent of another taxpayer. Taxpayers with no income or whose incomes come from non-taxable, means-based benefit programs are nevertheless eligible for the rebates.

Because 2020 incomes are as-yet unknown, the IRS will determine the rebate based on information provided in the taxpayer’s 2019 return (or 2018 return). Subsequently, if the taxpayer qualifies for a larger amount based on the 2020 tax return, the amount may be adjusted.

Most Americans do not have to take any action to receive the rebate.

Business Interest Expense Deductions

The CARES Act expands the allowable business interest expense deduction by easing the percentage limitations for tax years beginning in 2019 and 2020, by permitting businesses to elect to use their 2019 calculations to determine their 2020 business interest deduction, and allowing any excess to be carried forward to future tax years. The limitation is modified in that it now allows deductions of up to 50 % of Earnings Before Interest Expenses, Taxes, Depreciation and Amortization (EBITDA) (a proxy for a company’s current operating profitability) in place of the prior 30 %. This will allow business that were more profitable in 2019 than in 2020 (likely most businesses) to have a higher limit on deductible business interest.

For businesses taxed as partnerships, including LLCs, the new 50 % limitation will apply to income earned in 2020 (but NOT 2019). However, the partnership may elect that, for 2019, 50 % of the excess business interest allocated from the partnership to each partner be treated as business interest paid in 2020 (and not subject to the business interest deduction limitation). The remaining 50 % excess business interest allocated to the partner will continue to be subject to the 30 % limitation, but can be carried forward. The change is designed to allow partnerships to reduce their outlays of cash for tax distributions to their partners.

Expanded Ability to Use Losses

In 2017, the Tax Cuts and Jobs Act (TCJA), in a move subsequently criticized, pared back the ability of businesses to harvest Net Operating Losses (NOLs), a tool used by businesses to mitigate taxes. The CARES Act substantially assists businesses by modifying the limitations on excess losses of certain taxpayers for tax years 2016 through 2021 and thereafter.

The Act repeals the 80 % income limitation on losses for tax years beginning before 2021, and allows 100 % of loss carryforwards and carrybacks for tax years after 2021. Taxpayers (other than REITs) may carry back their NOLs for up to five years where they were incurred in tax years 2018, 2019 or 2020.

The chart below helps demonstrate the changes:

TAX YEAR

EXISTING UNDER TCJA

CARES ACT

2015

Generally cannot amend returns

Generally cannot amend returns

2016

3-year carry-back; 20-year carry-forward

3-year carry-back; indefinite carry-forward; NO 80 % cap

2017

3-year carry-back; 20-year carry-forward 3-year carry-back; indefinite carry-forward; NO 80 % cap

2018

No carry-back of current losses; Indefinite carry-forward of current losses; 80% of taxable income cap for currently claimed losses

5-year carry-back for current losses; indefinite carry-forward; NO 80% cap

2019

No carry-back of current losses; Indefinite carry-forward of current losses; 80% of taxable income cap for currently claimed losses 5-year carry-back for current losses; indefinite carry-forward; NO 80% cap

2020

No carry-back of current losses; Indefinite carry-forward of current losses; 80% of taxable income cap for currently claimed losses

20-year carry-forward NOLs before 1/1/18; PLUS the lesser of: (1) all NOLs after 12/31/17, or (2) 80% of taxable income.

2021+

No carry-back of current losses; Indefinite carry-forward of current losses; 80% of taxable income cap for currently claimed losses 20-year carry-forward NOLs before 1/1/18; PLUS the lesser of: (1) all NOLs after 12/31/17, or (2) 80% of taxable income.

 

For corporations, NOLs carried back to tax years prior to 2018 will be particularly valuable because the corporate income rate was 35 %.

A taxpayer must file the application for their carrybacks within 120 days of the enactment of the CARES Act.

VERY SIGNIFICANT: Businesses with NOL carrybacks will be able to obtain tax refunds for taxes paid within the five-year carryback period, thus permitting immediate refunds for prior tax years.

For non-corporate taxpayers, individuals’ ability to use business losses arising to offset non-business income has been limited to $250,000 for individuals and $500,000 for joint return filers. Such losses that were disallowed could be carried forward and treated as NOLs in future tax years. CARES suspends the limitations for tax years beginning in 2018, 2019 and 2020. Taxpayers should consider filing amended returns for 2018 to take advantage of any permitted deductions for 2019 and 2020.

Moreover, by technically correcting the TCJA, the Act clarifies that losses from the sale of capital assets are not included in calculating excess business losses. The computation of taxable income for purposes of determining the limitation includes only the lesser of: (1) capital gains from a trade or business; or (2) aggregate capital gain net income.

Acceleration of AMT Credits

The CARES Act provides that a corporation, in order to increase cash flow, can claim a full refund of its AMT credits that have been carried forward from the 2018 and 2019 tax years. The corporation must apply by the end of 2020 and the IRS is required to process the application within 90 days.

Increased Charitable Deductions

The Act increases the charitable deduction limitation for corporations from 10 % to 25 % for cash contributions made to charities in 2020, as long as the donees are not donor advised funds (DAFs) or supporting organizations under Internal Revenue Code (IRC) Section 509(a)(3). Qualified charities are those described in IRC Section 170 (b)(1)(A). For individuals who itemize, 100 % of the contribution is deductible, increased from the previous 50 %. For taxpayers that claim the standard deduction, the Act provides a deduction “above the line” for up to $300 of cash contributions.

Retirement Plan Contributions and Plan Loan Rules

Pension Plan Funding

ERISA’s minimum funding requirements for Defined Benefit Pension Plans are temporarily suspended until January 1, 2021. Even if an employer has not funded its plan for 2020, the employer may continue to rely on its 2019 “adjusted funding attainment percentage” (AFTAP) for the 2020 plan year.

Distributions

Required Minimum Distributions (“RMDs”) for retirement accounts, including inherited accounts, are suspended for 2020 until April of next year. For inherited IRAs, if the first RMD was required to be taken by April 1, 2020, this RMD is also suspended. The goal is to help seniors avoid being forced to sell positions at “fire sale” prices in order to withdraw RMDs, with the stock market down. Any amounts distributed under this exception will be eligible for rollover.

The CARES Act allows tax-qualified retirement plans and IRAs to permit an early withdrawal of up to $100,000 as a “corona-virus-related distribution” during the 2020 calendar year. The 10 % penalty tax on distributions before age 59 ½ will not apply to a qualifying distribution of up to $100,000. However, regular income taxes will apply to this distribution, but the tax can be paid over the course of three tax years, beginning in the year of the distributions. A “corona-virus-related distribution” is defined as a distribution to an individual who is: (1) diagnosed with COVID; (2) who has a spouse or dependent diagnosed with the virus; or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having hours reduced, being unable to work to care for a child or the closing or reduced hours of operation of a business due to the virus.

Contributions can be made to a taxpayer’s IRA for a particular year at any time during the year or by the due date for filing of the taxpayer’s return. Because the due date for filing returns has been extended to July 15, the deadline for retirement plan contributions is likewise postponed.

Loans

For the 180-day period beginning on March 27, 2020 and ending December 31,2020, loan limits from retirement plans have been increased from $50,000 to $100,000. The rule that loans may not exceed half the vested account balance has been removed. In addition, new and existing loan payments may be delayed for one year.

Changes to Plan Rules

Revisions to plan rules made to accommodate the above relief must be made by December 31, 2022 for calendar-year plans.

Bonus Depreciation

The TCJA permitted up to 100 % accelerated depreciation deductions for certain property. The bonus depreciation applied to property placed in service between September 17, 2017 and January 1, 2023. The property had to have a depreciable life of 15 years or less. However, it was unclear whether improvements to the interior of a non-residential building was considered to have a 20-year depreciable life. The CARES Act included a technical correction retroactively permitting such expensing.

The Paycheck Protection Program

For detailed information about this program, please see the article by Patrick Traber and William Conroy.

*THIS FAQ IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSIDERED LEGAL ADVICE. LEGAL ADVICE CANNOT BE GIVEN WITHOUT INFORMATION ABOUT YOUR SPECIFIC SITUATION.


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