By: Juliya Ismailov
After the Senate previously passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, H.R. 748) on March 25 by unanimous vote, the House passed it on March 27, and on the same day the President signed it into law.
This is the final of three bills passed by Congress in the last three weeks to provide relief in the midst of the COVID-19 pandemic:
(1) Phase 1 was a bill promoting coronavirus vaccine research and development, at a cost of $112 billion;
(2) Phase 2 provided paid emergency sick leave for some workers, and aid for state unemployment insurance and food assistance, at a cost of roughly $104 billion; and
(3) Phase 3 will cost $2 trillion, the largest emergency aid package in American history.
This article summarizes the provisions of the CARES Act.
Individual-taxpayer provisions
Individual recovery rebate/credit for 2020: made available to any individual (other than a nonresident alien) equal to the sum of: (1) $1,200 ($2,400 for couples ) plus (2) $500 for each child of the taxpayer. This credit is reduced by 5% of the taxpayer's adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers. As a result, the credit is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. The mechanics of the rebate is that, even though the credit is technically for 2020, it is treated as an overpayment for 2019 that IRS will rebate as soon as possible. It is calculated less any other advance rebates allowed to the taxpayer during 2020. No action will be required on the part of the taxpayer to claim the rebate.
10% penalty waived on coronavirus-related retirement plan distributions: this applies for distributions up to $100,000 made in 2020 from an eligible retirement plan made to a qualified individual. A qualified individual is one: (1) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (2) whose spouse or dependent is so diagnosed; or (3) who suffers adverse financial consequences from being quarantined, furloughed, laid off or having work hours reduced, unable to work due to lack of child care, or having closed, or reduced hours, of a self-owned business. Such distribution can be reinvested in the retirement account within 3 years without adverse consequences. For a traditional IRA the distributed funds can be included in the taxpayer’s income ratably over a 3-year period.
RMD requirement waived for 2020: required minimum distributions (RMDs) upon account holders reaching age 72 have been waived for year 2020 for certain defined contribution plans and individual retirement plans.
$300 above-the-line charitable deduction: this is an additional deduction made available for year 2020 to anyone who does not itemize deductions.
Exception to 60% AGI limitation on individual cash charitable contributions: a taxpayer can elect for year 2020 to cause cash charitable contributions to be disregarded for purposes of: (i) calculating the 60% AGI limit on charitable contributions applicable to, generally, public charities and private operating foundations, and (ii) the 5-year carryover of excess contributions.
Modification of limitations on corporate cash charitable contributions: charitable contributions of a corporation may be deducted up to the extent the corporation’s taxable income exceeds all other charitable contributions by 25% (increased from 10%), and the excess over the increased limit is subject to a 5-year carryover rule.
Increase in limits on contributions of food inventory: a donation of food inventory to a charitable organization for the care of the ill, the needy, or infants is deductible up to the amount of 25% of the taxpayer’s income (increased from 15%).
Student loan repayments temporarily excluded from employee income: an employee's gross income can now exclude student loan repayments as a type of educational assistance paid by an employer, up to an overall $5,250 per employee limit for all educational payments.
Business-related provisions
Employee credit for retention by employers: provides a refundable payroll tax credit for 50% of wages paid after March 12, 2020 by eligible employers to certain employees during the COVID-19 crisis. Eligible employers are those (including non-profits): (i) whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings; or (ii) who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act. For employers with an average number of full-time employees more than 100 in year 2019, wages (including health benefits but excluding paid sick leave or required paid family leave in the Families First Coronavirus Act) up to $10,000 per employee who are furloughed or have reduced hours are eligible for the credit. For employers with fewer than 100 average full-time employees in 2019, all employee wages are eligible, regardless of whether the employee is furloughed. No credit is available for any period when a Work Opportunity Credit is allowed on behalf of any particular employee.
Delay of payment of employer payroll taxes: taxpayers are allowed to defer paying the employer portion of certain payroll taxes through the end of year 2020, which includes: (A) social security taxes, (B) tax under the Railroad Retirement Tax Act (RRTA), and (C) 50% of self-employment (SECA) tax.
Temporary repeal of taxable income limitation for net operating losses (NOLs): the 80% limitation on the Net Operating Losses (NOLs) as percentage of taxable income is temporarily suspended.
Net operating loss (NOL) carrybacks allowed: NOLs arising in a tax year beginning after Dec. 31, 2018 and before Jan. 1, 2021 can be carried back for 5 years (whereas previously only farming losses and losses of property and casualty insurance companies could be carried back).
Modification of limitation on losses for noncorporate taxpayers: "Excess business losses" of noncorporate taxpayers can now be deducted for years 2018, 2019 and 2020. Such losses are defined as: (1) the taxpayer's aggregate trade or business deductions for the tax year over (2) the sum of the taxpayer's aggregate trade or business gross income or gain plus $250,000 (as adjusted for inflation).
Deductibility of interest expense temporarily increased: the limitation on the deductibility of interest expense has been increased from 30% to 50% for tax years 2019 and 2020. The increase in the limitation will apply to partners in partnerships only in 2020.
Bonus depreciation for qualified improvement property: provides a technical correction to the TCJA, specifically designating certain qualified improvement property (“QI Property”) as 15-year property (vs. previously 39 years) for depreciation purposes, which makes it eligible for 100% additional first-year depreciation deduction ("100% Bonus Depreciation"). QI property is also specifically assigned a 20-year class life for the Alternative Depreciation System.
Miscellaneous Provisions
Forgiveness for certain SBA-guaranteed loans: provides for exclusion of Cancellation of Debt (“COD”) income generated when SBA-guaranteed loans are forgiven, up to the sum of: (1) payroll costs; (2) interest payments on covered mortgage obligation; (3) payment for covered rent obligation; (4) covered utility payments.
Advance refunding of credits for paid sick leave and paid family leave: provides for advance refunding of credits for paid sick or family leave required by the recently-enacted Families First Coronavirus Response Act to small employers of 500 or fewer employees.
High deductible health plan safe harbor for telehealth services: a health plan will not fail to be treated as a high deductible health plan, for purposes of a deduction available to those covered by the plan on contributions made to Health Savings Accounts (HSAs), by reason of failing to have a deductible for telehealth and other remote care services.
Suspension of aviation excise taxes: suspends excise taxes imposed on air transportation of persons (including amounts paid for the right to provide mileage awards), and on air transportation of property for 2020.
Changes to definition of qualified medical expenses: for Health Savings Accounts (HSAs), removes restriction that qualified medical expenses include only amounts paid for prescribed medicine or drugs, and provides that qualified medical expenses include amounts paid for menstrual care products.