The Coronavirus Aid, Relief and Economic Security (CARES) Act was passed by the Senate on March 25, 2020, and by the House of Representatives on March 27, 2020. At the time of this writing, President Trump announced that he has signed CARES into law. CARES provides a variety of provisions intended to grant economic relief. Many of the provisions provide tax relief to individuals and corporations. The following is based on the Senate version sent to the House.
The primary tax benefits for individuals include expanded deductions for charitable contributions, relief from early withdrawal penalties for amounts drawn from retirement accounts, relief from penalties for not meeting the minimum required distribution rules and income exclusion for payments from employers for educational expenses. These are in addition to the one-time rebates of $1,200 and $500 per child to individuals based on their income from 2019 tax returns, or in some cases, 2018 tax returns with income less than $99,000 for taxpayers filing as single.
The retirement plan early withdrawal penalty will not apply to distributions up to $100,000 for coronavirus-related purposes made on or after January 1, 2020. This penalty relief provision applies to anyone who contracted, or whose spouse or dependent contracted, the virus or lost work due to the business shutdowns. Income attributable to such distributions would be subject to tax over three years. Taxpayers withdrawing the funds may recontribute the funds to an eligible plan within three years without regard to that year’s cap on contributions. There are favorable loan provisions in CARES as well.
There are many relief provisions for businesses including a refundable credit for employee retention of up to 50% of the wages of certain workers against the FICA obligation of the employer and employee. The credit is provided on the first $10,000 of compensation, including health benefits paid to an eligible employee for the period from March 13, 2020 through December 31, 2020. The credit is available to employers whose: (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order; or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year. Limitations apply to employers with 100 or more employees. There is no overlap with the tax credits under the Families First Coronavirus Response Act and an employer receiving a paycheck protection loan will not be eligible.
In addition to the employee retention credit, CARES defers payment of the employer share of the Social Security tax, relaxes the limitations on a company’s use of net operating losses, modifies the loss limitation applicable to pass-through businesses and sole proprietors, accelerates the ability of companies to recover those AMT credits, increases the 30-percent limitation on interest expense to 50 percent of taxable income, permits immediate write offs of costs associated with improving building facilities correcting the Tax Cuts and Jobs Act of 2017 providing for refund potential, and waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer.
Many of these provisions have additional requirements and limitations. For more information, please contact a member of Warner’s Tax Law Practice Group.