Relief is coming.

Following supplemental funding for government agencies and individual-focused legislation, the President is expected to sign Phase III legislation in the CARES Act after it clears the House in response to the COVID-19 crisis. The Act is a combination tax, economic, banking and healthcare legislation valued at $2 trillion. We’re addressing the key tax components of the tax legislation which includes direct payments, tax relief and rollbacks as well as technical corrections of The Tax Cuts & Jobs Act (TCJA).

Direct Payments

  • Individual Payments – Each US individual will receive up to $1,200 and an additional $500 for every child. These benefits will begin phasing out for higher-income taxpayers beginning at $150,000 for married couples, $112,500 for a head of household filers, and $75,000 in adjusted gross income for a single taxpayer. These payments will be based on 2019 tax returns if filed or 2018 tax returns. Checks or electronic deposits are expected within weeks.

Tax Relief

  • Employee Retention Tax Credit – Eligible employers will receive a 50% credit on qualified wages against their employment taxes quarterly. This is limited to $10,000 in wages per employee. Excess credits will be eligible for refunds. An eligible employer is one with operations suspended by orders issued in response to COVID-19 or has suffered a decline of more than 50% year over year in gross receipts during the quarters that begin with the quarter in which gross receipts declined by more than 50% and ending with the quarter in which gross receipts have recovered by more 80%.  For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit.
  • Payroll Tax Credit Refunds – The credit for required paid sick leave and paid family leave can be refunded in advance using forms and instructions the IRS will provide. The IRS is instructed to waive any penalties for failure to deposit payroll taxes if the failure was due to an anticipation of this relief.
  • Payroll Tax Payment Deferral – Employers and self-employed individuals will be permitted to defer payments of the employer share (6.2% of employee wages) of Social Security payroll taxes. This applies to otherwise owed amounts from the date of the enactment of the legislation through December 31, 2020. This payment deferral must be repaid over a two-year period, with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
  • Employer Paid Student Loan Payments – Expansion of employer-provided benefits relating to employee-student loan payments, allowing tax-free treatment to employee-students, up to $5,250 per employee.
  • Excise Tax Exemption for Alcohol-Based Sanitizers – Taxpayers subject to the excise tax on distilled spirits will be exempt for distilled spirits removed in 2020 and used in or contained in hand sanitizer produced and distributed in response to the SARS-CoV2or COVID-19 viruses.
  • Charitable Contributions Limitation Modification – The taxable income limitation for corporate taxpayers will be increased from 10% to 25% of taxable income.
  • Individual Charitable Contributions – Regardless of whether individual taxpayers itemize their deductions, they will be permitted to deduct up to $300 of cash contributions. For individual taxpayers who itemize, the 60% adjusted gross income limit will not apply to qualified contributions.
  • Early Withdrawal Penalty Relief – The law waives early withdrawal penalties on coronavirus-related distributions from qualified retirement accounts up to $100,000. Further, it allows tax payments on distributions to be spread out over three years and would allow individuals to return distributions to the retirement account over a three-year period. Redeposits would not be subject to annual contribution limits. Flexibility provisions were also added for loans from certain retirement plans. Eligible taxpayers include most impacted by the SARS-CoV-2 virus or COVID-19.
  • Required Minimum Distributions – Waive required minimum distribution rules for certain defined contribution plans and IRAs for the calendar year 2020.
  • Defined Benefit Contributions – Single employer defined benefit pension plans can delay contributions otherwise due during 2020 until January 1, 2021. Deferral is subject to interest. A plan’s funded status for purposes of calculating benefit restrictions would be determined as of December 31, 2019, throughout 2020.
  • Aviation Taxes – Various aviation excise taxes are suspended until 2021.

Rollbacks and Technical Corrections of TCJA

  • Net Operating Loss (NOL) Modifications – The use of corporate and noncorporate businesses NOLs will be expanded. First, taxpayers will be able to use NOLs to offset income without the 80% taxable income limitation enacted as part of the TCJA. Further, carryback of NOLs to offset prior year income for 5 years is permitted for NOLs arising in a tax year beginning after December 31, 2018, and before January 1, 2021. For tax years after 2020, the 80% taxable income limitation is reinstated with modifications that increase taxable income by a taxpayer’s deductions under Section 199A (deduction for qualified business income) or Section 250 (foreign-derived intangible income and global intangible low-tax income). Special provisions apply where carrybacks extend to periods in which Section 965 transition tax was paid.
  • Non-Corporate Loss Limitation Modifications – Relief is extended to passthrough entities and sole proprietors by allowing excess business losses for taxable years before 2021 and will allow carryover losses into subsequent taxable years as a technical correction to section 461(l)(2) enacted by the TCJA.
  • AMT Credit Acceleration – Taxpayers with AMT credits will be able to claim a refund for the entire amount of the credit on their 2019 filing.
  • Interest Limitation Modification – The interest deduction limitation based on 30% of adjusted taxable income under the TCJA will be increased, temporarily for taxable years beginning in 2019 and 2020, to 50% of a taxpayer’s adjusted taxable income. Furthermore, taxpayers may elect to use 2019 income in their 2020 interest limitation computation.
  • Qualified Improvement Property – Taxpayers that make and have made improvements to their facilities will be able to deduct those costs immediately in lieu of depreciating. This is a correction to the statutory language enacted by the TCJA. This correction is effective as of the enactment of the TCJA, allowing taxpayers to amend returns to claim refunds for costs that were being depreciated.

We remain poised to help you navigate the disruptions caused by this pandemic. Please contact your BMF Advisor to discuss your best course of action for you and your business.

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About the Authors

Michael Hydell

CPA, MTax
Senior Manager, Taxation Services

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