Key Tax Components of the Coronavirus Aid, Relief, and Economic Security ActPrint PDF
On March 27, 2020 the House of Representatives approved and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “Act”), which is believed to be the largest emergency stimulus package in United States history. The aim of the legislation is to help American workers, businesses, and the U.S. economy. Most of these provisions are effective for a limited time, in most cases during the 2020 calendar year. The following is a summary of the key tax components of the Act:
- Student Loan Income Tax Relief. An employer now may pay an employee’s student loan obligations and such payments will not constitute taxable income to the employee. This benefit is subject to the current $5,250 cap on overall employer-provided educational assistance.
- Payroll Tax Deferral. Employers now may delay payment of the employer share of payroll taxes (currently 6.2%) through the end of calendar year 2020. These deferred payroll taxes must be paid back in equal installments over two years, with the first payment due by December 31, 2021 and the second payment due by December 31, 2022. It is important to note that equivalent deferral is allowed for self-employed taxpayers.
- Payroll Tax Credit. A refundable payroll tax credit equal to 50% of qualified wages applies from March 13 through December 31, 2020 if:
- A company’s operations were fully or partially suspended, or
- A company’s gross receipts declined more than 50% when compared to the same quarter of 2019.
This credit is limited to the first $10,000 of qualified wages, including health benefits, meaning that the maximum credit amount per employee is $5,000.
For this purpose, qualified wages for employers with more than 100 full-time employees are wages paid to employees when they are not providing services due to the COVID-19 pandemic. All wages are qualified for employers with 100 or fewer employees.
- Paycheck Protection Loans. Under the Act, small businesses with fewer than 500 employees are eligible to receive a federal loan of up to $10 million. For these purposes, small businesses include sole proprietors and nonprofits. The loans may be used to cover payroll, paid vacation time or parental, family, medical or sick leave, costs associated with the continuation of group health care benefits, retirement benefits, rent, utilities, and certain other debts. Subject to certain conditions, the portion of the loan used for these purposes may be eligible for forgiveness, and the amount of the loan forgiven will not be considered gross income for federal income tax purposes. Read our advisory for answers to FAQs which describe the PPP for prospective borrowers.
- Modified Limits on Business Losses for Noncorporate Taxpayers. The Tax Cuts and Jobs Act (“TCJA”) of 2017 introduced a limit on business losses. It applies only to losses of taxpayers other than corporations. As to losses from S corporations and partnerships, the limit applies at the shareholder or partner level. The provision aggregates all of income and deductions of that taxpayer’s trades or businesses to determine the business loss of the taxpayer. To the extent that loss exceeds a threshold amount (initially $500,000 for taxpayers filing a joint return; $250,000 for others), it is disallowed. The disallowed loss is added to the taxpayer’s net operating loss carryforwards for future years. The TCJA provided that the loss limit applied to all tax years beginning after December 31, 2017 and before January 1, 2026. For calendar year taxpayers, that means tax years 2018 through 2025. The Act changes the effective date of the loss provision. Now, the loss limit will apply to tax years beginning after December 31, 2020 and before January 1, 2026. Taxpayers who were affected by this loss limit in their 2018 tax year should amend the return for that year to claim those losses in full for that year.
- Modification of Credit for Prior Year Minimum Tax Liability of Corporations. The TCJA repealed the corporate alternative minimum tax but made alternative minimum tax credits available as refundable credits through 2021. The stimulus package permits taxpayers to accelerate the ability to recover the entire refundable credit amount. This will provide companies with alternative minimum tax credits with additional cash flow.
- Modifications for Net Operating Losses. Prior to the passing of the Act, net operating losses arising in tax years ending after 2017 could not be carried back and were subject to an 80% taxable income limitation. The Act generally amends the net operating loss carryback rules so losses that arise in tax years beginning after December 31, 2017 and before January 1, 2021 can be carried back five years. Furthermore, the Act generally permits net operating losses that arise in these tax years to fully offset prior-year taxable income. This provision will provide companies to immediately utilize net operating losses and receive refunds for prior year taxes to the extent the company incurs a net operating loss.
Special rules apply to real estate investment trusts. Net operating losses may not be carried back to any taxable year preceding the year of loss for real estate investment trusts.
- Modifications of Limitation on Business Interest. The federal interest limitation, enacted under the TCJA, generally limits interest expense deductions to 30% of business adjusted taxable income, plus any interest income. The Act amends the federal interest deduction limitation by increasing the interest expense deduction limitation from 30% to 50% of business adjusted taxable income, plus any interest income for taxable years beginning in 2019 and 2020. Furthermore, pursuant to the Act, in the case of taxable years beginning in 2020, taxpayers may elect to substitute their adjusted taxable income for their taxable year beginning in 2019 for their adjusted taxable income for their taxable year beginning in 2020.
- Bonus Depreciation for Qualified Improvement Property. The TCJA excluded qualified improvement property from bonus depreciation rules. Qualified improvement property includes any interior improvements made by the taxpayer to nonresidential real property after the date that real property was first placed in service. Allowing bonus depreciation for qualified improvement property makes tenant improvements much cheaper on an after-tax basis. This provision applies to all qualified improvement property placed in service after December 31, 2017. So, taxpayers should amend 2018 and 2019 federal income tax returns to claim bonus depreciation for qualified improvement property placed in service in 2018 and 2019. Unless a taxpayer elected against bonus depreciation, bonus depreciation is allowable on qualified improvement property. The basis of that property is adjusted to zero as of the last day of the year it is placed in service whether or not the taxpayer claims the depreciation.
- Relief for Use of Retirement Funds. Several changes to qualified benefit plans have been put in place to provide flexibility to individuals who may need to access retirement funds or may not want to liquidate funds at this time. Specifically, the legislation (1) allows a waiver of the 10% penalty on early withdrawals when made to cover expenses related to the current pandemic and (2) provides increased flexibility for loans from these plans for coronavirus-related expenses. The penalty is waived for withdrawals up to $100,000 for such purposes taken in 2020. A coronavirus-related distribution is one made to someone who is diagnosed with COVID-19, whose spouse is so diagnosed, who experiences adverse financial consequences as a result of the pandemic, or other factors as determined by the Secretary of Treasury.
- Temporary Waiver of Required Minimum Distribution Rules. The required minimum distribution rules are waived for certain defined contribution plans and individual retirement accounts (IRAs). Individuals who otherwise would be required to take distributions will not be required to do so during calendar year 2020.
Certain changes were made to the charitable deduction rules in order to encourage charitable giving during the COVID-19 pandemic.
- Above-the-Line Deduction. Prior to the passing of the Act, only individuals who itemized their deductions received a tax benefit for making charitable contributions. The Act introduced an above-the-line charitable deduction, meaning that individuals who do not itemize their deductions may still take advantage of it. These individuals may now deduct up to $300 of their cash charitable contributions.
- Modified Limits. The Act also relaxes certain limits imposed on charitable deductions for those individuals who do itemize their deductions and for corporations. The 60% of adjusted gross income limit on cash charitable deductions for individuals is suspended for 2020, and excess contributions may be carried forward for five years. Corporations may now take deductions for their charitable contributions up to 25% of their taxable income, as opposed to the previous 10% limit. The Act also increases the limit on deductions for contributions of food inventory from 15% to 25%.
This advisory was prepared by Nutter’s Tax Department. If you would like additional information, please contact any member of our Tax Department or your Nutter attorney at 617.439.2000.
This advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.