(Updated April 10, 2020) On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law by President Trump. Although the CARES Act was drafted to predominantly assist small businesses, specific industries, and health care professionals; several of the CARES Act provisions were tax related. Our team of attorneys briefly describes several of the material tax updates below. However, please note that due to the rapidly changing nature of this pandemic, additional guidance and regulations will evolve and be communicated in the coming weeks. Check our CARES Act Resource Page regularly for updates.
Business Related Changes
- Net Operating Losses (NOLs) – Changes the current tax law to permit a business (with additional rules for pass-throughs) to apply an NOL from tax years beginning in 2018, 2019, or 2020 to be carried back for five years. Prior to this change, NOLs could generally only be carried forward.
- Employee Retention Credit – The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose: (i) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (ii) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
- Delay of payment for employer payroll taxes – The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax that they otherwise are responsible for paying with respect to their employees. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
- Modification of limitation on business interest expense – The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.
Individual Related Changes
- Temporary waiver of early withdrawal penalties for certain retirement plans – The provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for COVID-19 related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.
- Temporary waiver of required minimum distribution rules for certain retirement plans – The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
- Allowance of partial above-the-line deduction for charitable contributions – The provision encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.
Economic Stimulus Checks
- Widely talked about and advertised, the $1,200 economic stimulus rebate checks are scheduled to be automatically issued over the next few weeks to all “Eligible Taxpayers” via direct deposit. Generally, an Eligible Taxpayer is a single individual whose Adjusted Gross Income (“AGI”) was less than $75,000 for tax year 2018 or 2019 (if you already have filed your 2019 return your eligibility will be based off 2019’s AGI). The amount of the stimulus check will be reduced or “phased out” for individuals whose income is between $75,000 and $99,000, with no checks issued for those making above the $99,000 threshold. The $1,200 economic stimulus checks and eligibility rules are nearly doubled for qualifying married joint filers (separate rules for Head of Household filers), with additional benefits for taxpayers with qualifying children. A helpful “shortcut” to determine your eligibility is to compare the AGI amount as shown your most recent tax return (Line 7 for tax year 2018 or line 8(b) for tax year 2019) to the threshold amounts described above.
- What if I don’t have to file a tax return or I don’t have direct deposit? – The IRS will use the information on Form SSA-1099 (Social Security Information) or Form RRB-1099 (Railroad Benefits Information) to generate economic stimulus checks to recipients who are not required to file a tax return and did not file a return for 2018 or 2019. This includes senior citizens, Social Security recipients and railroad retirees who are not otherwise required to file a tax return. In the coming weeks, the Treasury Department plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail. Please stay tuned for further updates.
In addition to the above, it is possible that Congress may enact further tax related provisions as the impact of COVID-19 becomes more clear. If you have any questions regarding how the COVID-19 pandemic impacts your business or personal situation, please contact us using the form below, or give us a call at 610-797-9000. We wish you well during these extraordinary times.