On March 19, 2020, the United States Senate released its draft bill in the latest response to the COVID-19 pandemic. The provisions contained within the Coronavirus Aid, Relief, and Economic Security Act, or the ‘CARES Act’ are wide-reaching and could impact almost every single taxpayer in the United States. While the final legislation is still to be negotiated, the CARES Act highlights the urgency of providing relief to taxpayers during these uncertain times.
Prior measures taken by the Executive Branch and Congress include:
- The Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020
- A declaration of a national state of emergency
- The Family First Coronavirus Response Act
- An extension of the time to pay income taxes
The CARES Act (the Act) provides various relief for individuals, families, and businesses. Selected relief provisions included:
- Direct payments to individuals
- Delay in certain deadlines for tax filings
- Special rules for use of retirement funds
- Modification of charitable contribution deductions and limitations
- Delays in certain estimated tax payments
- Modifications for net operating loss (NOL) provisions
- Modification to loss limitation rules for taxpayers other than corporations
- Modification to the alternative minimum tax (AMT) credit
- Modification of the limitation on business interest
- Technical correction regarding qualified improvement property
- Clarifications to certain international tax provisions
- Suspension of certain aviation excise taxes
Direct payments to individuals – section 2101
The Act would provide for individual taxpayers to receive a rebate check from the IRS in an amount equal to the lesser of (a) $1,200 ($2,400 in the case of a joint return) or (b) the individual’s net income tax liability for 2018. The amount of the rebate must be at least $600 per individual ($1,200 for joint returns). The rebate is increased by $500 for each qualifying child. However, the amount of the rebate phases out in 5% increments at $75,000 ($150,000 for joint filers) and is capped at for an individual at $99,000 ($198,000 for joint filers). Thus, the rebate is not available to an individual taxpayer with qualifying income of $100,000 or more. The rebate amount is based on the individual’s 2018 tax return (with accommodations to first-time filers), provided that the return includes a social security number for the taxpayer, the spouse if filing jointly and each qualifying child.
The Secretary will provide the rebates as rapidly as possible, but no later than Dec. 31, 2020.
‘Qualifying income’ for purposes of the rebate means earned income, social security benefits and compensation or pension received in a reorganization or liquidation in bankruptcy. The rebate amount may be reduced by certain other tax credits and refunds available to the taxpayer on the 2018 return.
Delay in certain deadlines for tax filings – section 2102
The Act proposes to defer the filing deadline for taxpayers with a 2019 tax return due April 15, 2020 to July 15, 2020. This follows the already announced extended federal income tax payment relief to July 15, 2020. The filing extension is automatic and would provide for penalty and interest free filing until July 15, 2020. In addition to the Act, on March 20, 2020, Secretary of the Treasury Steven Mnuchin indicated that this delay in filing deadline would be provided as part of administrative relief. At the time of publication, the IRS had not yet issued guidance authorizing the administrative shift in due dates.
Special rules for use of retirement funds – section 2103
Age 59½ premature distribution penalty relief
In many circumstances, individuals who receive distributions from Individual Retirement Accounts, qualified plans (e.g. a 401(k) plan), and 403(b) plans are subject to an additional 10% penalty on the taxable amount received. The Act would provide penalty relief for coronavirus-related distributions, defined as a distribution to a taxpayer who is officially diagnosed with the SARS-CoV-2 virus or has coronavirus disease (COVID-19) or whose spouse or dependent is diagnosed with such virus or disease or experiences adverse financial consequences because of the pandemic (e.g. being quarantined, laid off, reduced hours, etc.). The amount of penalty waiver is limited to the first $100,000 of coronavirus-related distributions received in a tax year.
Repayment, income spreading and withholding
Taxpayers that receive a coronavirus-related distribution have three years (instead of the normal 60 days) to repay the distribution to an IRA or other eligible retirement plan. The Act treats the repayment as if it was a 60-day tax-free rollover.
If a taxpayer chooses not to repay a coronavirus-related distribution, the taxpayer can elect to include the distribution in income ratably over three years starting with the year of the distribution.
In addition to the favorable repayment provisions, the Act specifies that the general withholding requirement does not apply to coronavirus-related distributions. Employer sponsored retirement plans normally are required to withhold 20% of any distribution not paid directly to an IRA or other employer’s retirement plan.
Retirement plan loans
Normally an employee cannot borrow more than the lesser of one-half of their vested account balance or $50,000 from their employer sponsored retirement plan (note: you cannot borrow from an IRA). The Act would open a 180-day window (starting with the date of enactment) that raises the dollar limit to $100,000 and eliminates the one-half of the account balance limit. There is no requirement that the loan be coronavirus-related. The Act would also provide relief for existing retirement plans loan payments that would come due between now and Dec. 31, 2020, employees will have an additional one year to make those repayments.
Modification of charitable contribution deductions and limitations – sections 2104 and 2105
The proposed legislation offers charitable contribution incentives to both itemizers and non-itemizers alike. In both circumstances, the donation must otherwise constitute a charitable contribution, must be a contribution of cash and must be made to a public charity (that is neither a supporting organization (section 509(a)(3)) nor a donor advised fund (DAF) (section 4966(d)(2)), a private operating foundation, (section 170(b)(1)(A)(vii)), or a flow-through private foundation (section 170(b)(1)(A)(vii)). These charitable contributions would be ‘qualified contributions.’
Section 2104 of the Act would permit non-itemizing individuals an ‘above-the-line’ charitable contribution deduction not to exceed $300 in computing their 2020 adjusted gross income (AGI).
Section 2105 of the Act would provide charitable giving incentives to individuals who itemize and corporations by increasing charitable deduction limitations for qualified contributions made in 2020, applicable to tax years ending after Dec. 31, 2019. It would also increase the limitation for the enhanced deduction for food inventory from 15% of AGI or taxable income to 25% of AGI or taxable income.
Under the Act, individuals would be permitted to deduct qualified contributions up to 100% of their 2020 AGI. For ordering purposes, an individual would first apply the standard AGI limitations (i.e., 30%, and 20%) to non-qualified contributions and then utilize his/her qualified contributions up to 100% of AGI. Any excess qualified contributions would be carried forward. For example, if an individual makes non-qualified contributions representing 20% of 2020 AGI, the taxpayer would be permitted to take deductions of qualified contributions of up to 80% of AGI and carry forward any excess.
Corporations would be permitted to deduct qualified contributions up to 25% of 2020 taxable income. For ordering purposes, a corporation would first apply the standard 10% taxable income limitation to non-qualified contributions and then utilize its qualified contributions up to 25% of AGI. Any excess qualified contributions would be carried forward. For example, if a corporation makes non-qualified charitable contributions representing 12% of taxable income, the corporation would limit the deduction to 10% of taxable income and would be permitted to take deductions of qualified contributions of up to an additional 13% of taxable income and carry forward any excess.
The proposed legislation requires the taxpayer to make an election to treat contributions as qualified with respect to this provision. In the case of contributions made by a partnership or S corporation, the election rests with the partner or shareholder.
Delays in certain estimated tax payments – sections 2201 and 2202
Individuals or Corporations with an estimated 2020 tax year payment due starting between the date of enactment until Oct.15, 2020, now have an extension to pay until Oct. 15, 2020. All installment payments (provided there is more than one) will therefore, be treated as one installment payment due by October 15.
Modifications for net operating loss (NOL) provisions – section 2203
The Act proposes adjustments to the Tax Cuts and Jobs Act’s (TJCA’s), 80% taxable income limitation on the use of post-2017 NOLs, and reinstated the ability for taxpayers to carryback post-2017 NOLs.
The 80% taxable income limitation
The Act would modify the rules of section 172(a) previously enacted in the TJCA. The TCJA enacted a limitation on the amount of NOLs that a corporation may deduct in a single tax year under section 172(a) equal to the lesser of the available NOL carryover or 80% of a taxpayer’s pre-NOL deduction taxable income (the 80% limitation).
The Act proposes to suspend this 80% limitation for taxable years beginning before Jan. 1, 2021, and instead allows the full offset of taxable income. For tax years beginning after Dec. 31, 2021, the Act would reinstate a modified 80% limitation.
Reinstatement of NOL carrybacks
While the TCJA repealed the NOL carryback provisions in place for tax years prior to 2018, the Act would provide for a modified NOL carryback. The Act appears to indicate that for losses arising in 2018, 2019 and 2020, such loss shall be an NOL carryback to each of the prior five taxable years. In addition, as was the case under pre-2018 law, the taxpayer may make an election to waive the carryback and instead treat losses arising in those years as NOL carryovers.
Also, the Act includes a welcome technical correction for fiscal year taxpayers that was overlooked in the TJCA. The TJCA provided for an odd result for fiscal year corporations reporting an NOL for a tax year that includes Dec. 31, 2017 and ends after Dec. 31, 2017. The proposed legislation clarifies the treatment for fiscal year taxpayers, providing that the amendments to the 80% limitation and updated carryback provisions will apply to taxable years beginning after Dec. 31, 2017. These technical corrections for fiscal year taxpayers shall take effect as if included in the original TCJA.
Modification to loss limitation rules for taxpayers other than corporations – section 2204
Beginning in 2018, non-corporate taxpayers became subject to a new ‘excess business loss’ limitation. This provision prevented taxpayers with significant business losses ($250,000 for most taxpayers, $500,000 in the case of joint filers) from claiming losses that exceeded the threshold amount, forcing them instead to carry the excess forward as a net operating loss. The Act would do two primary things:
- defer retroactively the effective date of this provision to tax years beginning after De. 31, 2020, and
- make certain technical changes to the definition of an excess business loss, including excluding wages and capital losses from the computation.
If enacted, this change would have immediate implications for 2019 filings. Taxpayers who under current law would be subject to the excess business loss limitation should strongly consider delaying their filing until Congress acts on this measure. Furthermore, taxpayers that were subject to the limitation on their 2018 filings might have an opportunity to file an amended return to claim a refund.
Modification to the alternative minimum tax (AMT) credit – section 2205
The Act would accelerate the payment of AMT credit refunds to corporations, and clarify that these refunds are not subject to limitation under section 383.
Congress previously repealed the corporate AMT for taxable years beginning after Dec. 31, 2017. Where a corporation has an AMT credit from a prior taxable year, the corporation is permitted to use it as a refundable tax credit. Current law provides a schedule for carrying an unused AMT credit forward and permits portions of the credit to be used in each taxable year beginning after 2017 but before 2022. The Bill would accelerate availability of these AMT credits. The full refundable AMT credit amount would be available for a corporation’s first taxable year beginning in 2018. This rule generally would provide affected companies with a tax refund claim opportunity.
In addition, the Act would clarify that corporations’ refundable AMT credits would not be subject to limitation under section 383 following an ownership change (as defined under section 382(g)), but would instead be available for use regardless of who owns the corporation.
Modification of the limita interest – section 2206tion on business
The Act would make two significant changes to the broadly applicable business interest deduction limitation rules of section 163(j). These changes would permit many business taxpayers to deduct a larger portion of their interest expense.
First, the limit on the amount of deductible business interest expense would be increased from 30% of adjusted taxable income (ATI) to 50% of ATI, for taxable years beginning in 2019 or 2020.
Second, the Act would provide an election that generally would benefit taxpayers whose 2019 income is greater their 2020 income. For a taxable year beginning in 2020, taxpayers would be able to elect to apply section 163(j) to their ATI from their last taxable year (beginning in 2019) instead of to their current-year ATI. However, this election would not be available in the case of a short taxable year beginning in 2020.
Technical correction regarding qualified improvement property – section 2207
As part of the Act, the Senate proposes to fix the retail glitch. If passed, qualified improvement property (QIP) will be treated as 15-year property. This correction would allow taxpayers to apply 100% bonus depreciation to eligible QIP. The change as proposed would allow retroactive application back to the enactment of the TCJA.
Clarifications to certain international tax provisions – sections 2208 and 2209
The Act proposes some significant corrections to the international provisions of the TCJA. Section 2208 of the Act would provide Treasury and the IRS the legislative authority to provide a refund to a taxpayer despite the taxpayer having a deferred section 965(h) transition tax liability. This provision would be retroactive and could allow taxpayers to amend prior year returns in order to claim a previously disallowed refund. No interest would be paid by the IRS on any such refund.
Section 2209 of the Act would restore the limitation on downward attribution of stock ownership under section 958(b). Prior to the TCJA, section 958(b)(4) had limited the downward attribution of stock from a foreign parent to its US subsidiary. Section 2209 would reinstate that limitation so that a US subsidiary would not be deemed to own its foreign parent’s non-US subsidiaries. Treasury and the IRS previously issued a patchwork of guidance in Rev. Proc. 2019-40 and Proposed Regulations to provide some relief on this issue. The CARES Act would provide a much needed legislative fix.
Suspension of certain aviation excise taxes – section 3201
The Act proposes to suspend certain aviation industry excise taxes during an excise tax holiday period. This ‘holiday’ starts from the date of enactment and ends before Jan. 1, 2021. This suspension applies to any payment for transportation by air under section 4261 or 4271 of the Code. However, this suspension does not apply to amounts paid for transportation before the date of enactment. The suspension of tax also applies to taxes imposed under sections 4041(e) and 4081 of the Code (other than at the rate provided under subsection (a)(2)(B)), on the use of kerosene in commercial aviation (as defined in section 4083 of the Code). Instead, section 6427(l) will be applied to treat the use of kerosene as nontaxable, without regard to Section 6427(l)(4)(A)(ii).