The Senate and the House of Representatives has passed, an unprecedented $2 trillion stimulus rescue package in response to the devastating economic impacts of the coronavirus. The rescue package, known as The Coronavirus Aid, Relief and Economic Security Act (or CARES Act), offers financial assistance to families, workers and businesses, distressed sectors of the economy, and the nation's healthcare system.
For individuals and businesses struggling in these unprecedented times, liquidity is paramount. Therefore, it is not surprising that most of the CARES Act tax provisions – which will cost nearly $580 billion over the next decade – focus on enhancing taxpayer liquidity. Some of the key tax changes are briefly summarized below.
Individuals
- Recovery rebates for individuals: Most individuals will receive a $1,200 rebate ($2,400 for joint filers), and some will receive an additional $500 per qualifying child. The amount is reduced by 5% of the amount by which the taxpayer's income exceeds $75,000 ($150,000 for joint filers). A $500 payment is provided for each dependent child under age 17. The payment amount will be determined based on the taxpayer's 2019 (or, if not available, 2018) tax return.
- Special rules for use of retirement funds: Coronavirus-related plan distributions will be allowed in 2020 without the 10% penalty as long as the withdrawals do not exceed $100,000. To qualify, an individual (or family member) must have been infected with COVID-19 or have faced adverse financial consequences from being furloughed, being laid off, having a reduction in hours, or being quarantined. An individual is subject to tax over three years and may recontribute the distribution amount for a three-year period following the date of the distribution.
- Temporary waiver of required minimum distribution rules for certain retirement plans and accounts: There will be no required minimum contributions from defined contribution plans and IRAs for calendar year 2020.
- Exclusion of certain employer payments of student loans: A individual who receives student loan repayment assistance from his or her employer of up to $5,250 in calendar year 2020 (after date of enactment) can treat the assistance as a qualified fringe benefit (i.e., an employer-sponsored education assistance program), thus making the payment exempt from income tax.
Businesses
Employee retention tax credit for an employer subject to closure due to the coronavirus: An employer whose business was suspended because of (i) a government shutdown order or (ii) a drop in quarterly revenues of at least 50% year over year, may be eligible for a refundable tax credit. The credit amount varies, depending on the number of employees. For employers with over 100 employees, the wages that are taken into account are those paid between March 12, 2020 and December 31, 2020 to a furloughed worker (or to a worker with reduced hours due to the employer's closure or economic hardship). The maximum credit is $5,000 per employee. The credit is limited to the employer's employment taxes for the quarter, with any excess treated as an overpayment.
Delay of payment of employer payroll taxes: An employer may defer certain payroll tax payments through January 1, 2021. Half of the deferred payroll taxes are due by December 31, 2021; the other half by December 31, 2022.
Modifications to net operating losses: A business will be able to carry back net operating losses arising in years 2018, 2019, and 2020 to the five years preceding the year of the loss. In addition, the net operating losses incurred in those years would not be subject to the reduction that otherwise applies (10% or 20%, depending on the year).
Modification of loss limitation rules for pass-through businesses: For years 2018, 2019, and 2020, a pass-through business (or a sole proprietor) will be able to claim business losses in excess of the $250,000 limit ($500,000 for joint filers) enacted in the 2017 tax reform legislation.
Qualified Improvement Property (QIP): The legislation corrects an error in the 2017 tax reform bill to allow a business to immediately write off the cost of interior building improvements for restaurant, retail, and most other property.
Other Provisions
Delay in 2020 contributions to single-employer pension plans: Employers can defer making required minimum funding contribution payments to pension funds for plan year 2020. The contribution payment (with interest) is due on January 1, 2021. In addition, a plan may elect to use its 2019 funded status for the 2020 plan year.
If you have any questions relating to the legislation, please call on the Venable tax team. We can assist in all aspects of the legislation – from Treasury and IRS guidance to strategic planning and implementation.