Sidney Kess

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748) is a $2.2 trillion package to help individuals and businesses get through the health and economic crisis triggered by COVID-19. The Act is extensive and impacts not only taxes in 2020 but in prior years as well. Because of the huge scope of the Act, only tax rules are covered here.

Rebate Checks for Individuals

Rebate checks are advanced payments of a new refundable tax credit (Code §6428). These rebate checks for individuals with adjusted gross income (AGI) below set amounts are being paid through the IRS. Eligibility is determined by AGI on 2019 if returns for 2019 have been filed, or on 2018 returns if the 2019 returns have not been filed. Different AGI thresholds apply to joint filers, heads of households, and other filers (singles and married persons filing separately). There is a phase-out range in which individuals can receive a partial payment. There is an added amount for each child; an individual who is another taxpayer's dependent does not receive a rebate check.

Because the rebate check is an advance of a 2020 tax credit, some taxpayers may be eligible for an additional amount when they file their 2020 income tax return. This can occur, for example, if 2020 AGI is lower than the amount used to determine the rebate check. However, if 2020 AGI is higher, there is no clawback of the rebate check. The rebate checks are not included in gross income.

Retirement Plan Relief

In times of financial trouble, many individuals turn to their retirement plans as a source of cash. The Act provides several breaks in this regard:

• No required minimum distributions are necessary in 2020. This waiver applies without regard to whether there is any COVID-19-related need.
• 10% early distribution penalty on withdrawals up to $100,000 from IRAs, 401(k)s, and other qualified retirement plans as well as deferred compensation plans, which usually applies to those under age 59½, is waived if coronavirus-related. This means the individual (or spouse) has been diagnosed with COVID-19 or experiences adverse financial consequences because of quarantine, business closure, layoff, or reduced hours due to the virus.
• Income from a COVID-related distribution can be spread over three years to minimize the tax bite on the distribution.
• Distributions can be recontributed to the plans from which they came within three years. Recontribution amounts are not subject to annual contribution limits.

Charitable Contributions by Individuals and Businesses

To encourage charitable giving, the Act provides several tax breaks for individuals and businesses.

• Individuals who do not itemize can take an above-the-line deduction for charitable contributions in 2020 up to $300. The contributions do not have to relate to COVID-19 relief efforts. In fact, contributions made earlier in 2020, prior to enactment of the CARES Act, can be taken into account for this purpose.
• Individuals who itemize personal deductions in 2020 can deduct all cash contributions. Usually, there is a 50%-of-adjusted-gross-income limit on such contributions.
• Corporations can deduct contributions for 2020 up to 25% of taxable income, instead of the usual 10% of taxable income limit.
• Contributions of food inventory, which usually is limited to 15% of adjusted gross income, are deductible in 2020 up to 25%.

Payroll Tax Changes

There are a number of changes designed to encourage continued employment of workers while easing cash flow on businesses struggling to survive the crisis. The key provision is a new employee retention credit (§2301 of the Act). It is 50% of qualified wages paid to employees who are not working because of business being fully or partially suspended due to government orders related to COVID-19 or a significant decline in gross receipts (50% less in the current calendar quarter compared with the same quarter last year). The credit applies to wages paid after March 12, 2020, through Dec. 31, 2020. The amount taken into account per employee is limited to wages (including health care benefits) up to $10,000 for all quarters. The credit is taken against applicable employment taxes (the employer's share of the Social Security portion of FICA); it is not an income tax credit and does not factor into the general business credit.

Other payroll tax changes include:

• Deferral of payroll taxes from the date of enactment through Dec. 31, 2020. This applies only to the employer's share of Social Security taxes in FICA. Then 50% of the deferred taxes are payable by Dec. 31, 2021, and the other 50% by Dec. 31, 2022. Similar deferral is allowed for a portion of self-employment tax paid by individuals. The "employer portion" of Social Security taxes (6.2% of total self-employment tax) can be deferred.
• Tax-free treatment of student loan repayment assistance. Employer payments made after the date of enactment and before Jan. 1, 2021, of employee's student loan debt up to $5,250 is a tax-free fringe benefit. This benefit is not included in wages and is not subject to employment taxes.

Business Losses

Many, many businesses are expecting losses in 2020. The tax rules for losses have been dramatically changed. First, the limit on losses for noncorporate taxpayers, which was introduced by the Tax Cuts and Jobs Act (TCJA) to curtail current deductions above a set dollar amount, has been repealed.

Second, and most importantly, the rules for net operating losses have been greatly expanded. Prior to TCJA, there had been a two-year carryback for NOLs; carrybacks and carryovers could offset 100% of taxable income. TCJA ended the carryback (other than for farming businesses) and capped offsets from carryforwards to 80% of taxable income. The CARES Act restores and expands the carryback. For 2018, 2019, and 2020, there is a five-year carryback for all businesses and a 100% offset to taxable income. This means that any businesses with losses in 2018 and can file amended returns to claim immediate tax refunds. For 2020 NOLs, keep in mind that quick refunds can be claimed prior to filing tax returns (see instructions to Form 1045 for individuals and Form 1139 for C corporations).

Other Business Tax Provisions

There is a limitation on deducting business interest by other than small businesses (those that meet a gross receipts test) or farming and real estate businesses electing to be exempt from the limitation. The Act eases the limitation to permit more interest to be deducted. For tax years beginning after 2017, the limitation is 30% of adjusted taxable income. But for 2019 and 2020, this is increased to 50% of adjusted taxable income. What's more, on 2020 returns, taxpayers can elect to use 2019 adjusted taxable income. Taxpayers should make this election where the 2019 amount is higher than 2020 amount to allow more interest to be deducted.

TCJA had failed to make an intended change to the recovery period for qualified improvement property (certain internal building improvements), mistakenly leaving it at 39 years. The CARES Act makes the necessary technical correction to fix the recovery period at 15 years. This means qualified improvement property now is eligible for 100% bonus depreciation. It is effective retroactively for property purchased and placed in servicer after Sept. 27, 2017. This presents a refund opportunity for 2017 or 2018 returns.

The Paycheck Protection Program included in the CARES Act is an expansion of the 7(a) loan SBA loan program for small businesses. One of the features of this program is certain loan forgiveness. Generally, income from the cancellation of debt is included in gross income. However, the CARES Act specifically allows this to be treated as tax free.

High deductible health plans (HDHPs) are a prerequisite for contributing to a health savings account (HSA). The HDHP usually must require that the insurance deductible be exhausted before policy benefits apply. However, the Act allows HDHPs to provide telemedicine services without a premium; no disqualification of the HDHP will result. Also, HSAs usually do not permit tax-free reimbursement for over-the-counter items without a doctor's prescription. The Act allows tax-free reimbursements for menstrual products; no prescription is necessary.

Conclusion

Much of the work from the CARES Act falls on the IRS. The Service must issue the rebate checks and update instructions and publications changed by the new law. And, of course, more guidance on new provisions is necessary.

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company.