The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed by President Donald Trump on March 27, with the objective to combat COVID-19’s crippling effect in the US Economy.
The Act provides multiple benefits for American families, individuals, and businesses, that ranges across tax, regulatory, and reporting relief, as well as loans and grants, and other reporting relief such as deferral of required reporting standards. This article will focus on the relief provided to individuals per Title II Sections A and B of the Act.
Key features of the Act are as follows:
Unemployment Insurance Provisions
Rebates and Other Provisions for Individuals
Tax Reliefs and Other Provisions for Businesses
A. UNEMPLOYMENT INSURANCE PROVISIONS
The CARES Act implements three new Unemployment Insurance (UI) programs in response to the COVID-19 pandemic. All three programs are fully funded by the federal government.
1. Pandemic Unemployment Assistance (PUA)
The primary objective of the CARES Act is to significantly increase unemployment protections. Through Section 2102, the Act creates a temporary program which will provide unemployment benefits to individuals who are otherwise ineligible for such benefits under State or Federal law. This would include individuals who are self-employed (for example, consultants or independent contractors), who are seeking part-time employment, or who lack sufficient work history.
The weekly amount of benefits to be provided will be equal 100% of the covered individual’s regular weekly compensation, and not less than $600 per week.
Covered Individuals. A covered individual:
(1) is not otherwise eligible for, or has exhausted all rights to, unemployment benefits;
(2) is unemployed, partially unemployed, or unable to work because of any of the following COVID-19-related circumstances, such as:
The individual has been diagnosed with COVID-19 or is experiencing symptoms of
COVID-19 and is seeking a medical diagnosis;
A member of the individual’s household has been diagnosed with COVID-19;
The individual is providing care for a family member or household member who has been diagnosed with COVID-19;
The individual is the primary caregiver for a child or other person in the household who is unable to attend school or another facility that has been closed as a direct result of COVID-19 and such school or facility care is required for the individual to work;
The individual is unable to reach the place of employment because of a quarantine imposed as a direct result of COVID-19;
The individual is unable to reach the place of employment because a health care provider has advised the individual to self-quarantine due to COVID-19 concerns;
The individual was scheduled to begin employment and does not have a job or is unable to reach the job as a direct result of COVID-19;
The individual has become the breadwinner or major support for a household because the head of household has died as a direct result of COVID-19;
The individual has been forced to quit a job as a direct result of COVID-19;
The individual’s place of employment is closed as a direct result of COVID-19; and
(3) is self-employed, is seeking part-time employment, does not have sufficient work history, or otherwise would not qualify for regular unemployment or extended benefits under State or Federal law or pandemic emergency unemployment compensation. Covered individuals do not include those able to telework with pay or currently receiving paid sick leave or other paid leave benefits.
The PUA program does not require a covered individual to be actively seeking work to receive unemployment benefits under the program.
Timing. The assistance to be provided are available for the duration of the covered individual’s period of unemployment, partial unemployment, or inability to work, beginning retroactively on January 27, 2020 and ending on December 31, 2020, up to a maximum of 39 weeks. The end date, subject to the condition that the covered individual’s unemployment, partial unemployment, or inability to work caused by COVID-19 continues. This represents a 13-week increase of the 26-week maximum allowed under many states’ unemployment laws.
2. Emergency Increase in Unemployment Compensation Benefits or the Pandemic Unemployment Compensation (PUC)
Per Section 2104 of the Act, the federal-state partnership provides individuals $600 per week, in addition to their regular unemployment compensation under state law, through July 31, 2020. States will be fully reimbursed by the federal government for the extra payments.
Please note that PUC also goes to the individuals receiving the new PUA program described above.
3. Pandemic Emergency Unemployment Compensation (PEUC)
Per Section 2107, States may enter into a partnership with the federal government to fund up to 13 weeks of additional unemployment benefits–thereby increasing to 39 weeks the 26-week maximum common under most States’ unemployment laws–at a weekly rate of $600 during that 13-week period. All but seven States offer 26 weeks of UI benefits during this COVID-19 crisis. These States are Alabama, Arkansas, Florida, Idaho, Missouri, North Carolina, and South Carolina.
As a requirement, individual workers must be actively searching for work to receive the PEUC. However, it was clearly stated in Section 2107(a)(7)(B) that a State shall provide flexibility in meeting such requirements in case of individuals unable to search for work because of COVID-19, including because of illness, quarantine, or movement restriction.
Short Term Compensation Agreements
In addition, according to Sections 2108 and 2109, the federal government will provide funding to States that currently have or choose to implement a Short-Time Compensation (STC) program (also known as work sharing programs) for employers that reduce their employees’ hours in lieu of a lay-off, resulting to the employees to receive a pro-rated unemployment benefit. The federal government will fund 100% of the costs for States that currently have a STC program and 50% for those states that choose to implement one, in each case through December 31, 2020.
B. REBATES AND OTHER PROVISIONS FOR INDIVIDUALS
1. 2020 Recovery Rebates for Individuals – Section 2201
For eligible individuals, CARES Act will provide a refundable tax credit equal to $1,200 and $2,400 for joint filers plus $500 for each qualifying child age 16 or under. The rebates would not be treated as taxable income for individuals, as this was a credit against tax liability. For taxpayers without tax liability to offset, the credit will be refunded to them.
However, the rebates will be subject to phase out based on the adjusted gross income (AGI) reported on the eligible individual’s 2019 return (2018 return if the taxpayer has not filed the 2019 return). The maximum credit amount is reduced (but not below zero) by 5% of the taxpayer’s AGI that exceeds:
$150,000 for joint filers—so the $2,400 credit phases out completely at $198,000
$112,500 for a head of household—so the $1,200 credit phases out completely at $136,500
$75,000 for any other taxpayer—so the $1,200 credit phases out completely at $99,000
Once the credit for an eligible individual phases out, the $500 credit for a qualifying child phases out with another $10,000 in AGI over the threshold. For example, the total credit for an unmarried eligible individual with one qualifying child is $1,700, which phases out completely once AGI hits $109,000.
Generally, income tax credits reduce a taxpayer’s income tax liability and are claimed on the tax return for the year they arise. However, the government will make advance payments of the credit as soon as possible.
Eligible individuals. These are all individuals other than:
An individual who qualifies as another taxpayer’s dependent for a tax year beginning during the calendar year in which the individual’s tax year begins;
A nonresident alien; or
An estate or trust
Timing. The Secretary shall refund or credit any overpayment attributable to the individual as rapidly as possible. No refund or credit shall be made or allowed after December 31, 2020. Although the rebate is based on earlier tax returns, it also actually applies to the 2020 tax year. This means that a taxpayer with reduced or eliminated rebate because of the AGI limit (based on their 2019 or 2018 return) may still be able to claim the credit on the 2020 return if 2020 AGI drops below the phase-out limits, but overpayment of rebate due to a higher AGI in 2020 will not be clawed back.
Delivery of Payments. IRS may certify and pay the refund electronically to any account which the taxpayer authorized, on or after January 1, 2018, for the delivery of the refund of federal taxes or other federal payments. Not later than 15 days after processing the rebate payment, the IRS will mail a letter to the taxpayer’s last known address indicating the method by which payment was made, amount of the payment and IRS phone number to report any failure to receive the payment.
2. Removal of Early Retirement Plan Distribution Penalty for COVID-19 Related Payments – Section 2202(a)(4)
The Act waives the 10% penalty on early withdrawals or aggregate amount of distributions (not exceeding $100,000) received by an individual from an eligible retirement account (e.g. 401(k), IRAs) which may be treated as “coronavirus-related distributions” for any taxable year.
Inclusion in gross income over three years; repayment over three years. Any income attributable to an early withdrawal is subject to tax over a three-year period, and taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years.
Coronavirus-related distributions. The term “coronavirus-related distribution” means any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020 to an individual who is:
Diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
Whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test,
Who experienced adverse financial consequences as a result of being quarantined,
Being furloughed or laid off or having work hours reduced due to such virus or disease, or
Being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
Other rules for coronavirus-related distribution. Coronavirus-related distribution are exempt from trustee-to-trustee transfer and withholding rules.
3. Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts – Section 2203
For the 2020 calendar year, the required minimum distribution (RMD) rules do not apply to any:
Qualified defined contribution plan
Any defined contribution qualified annuity plan or tax-sheltered annuity plan
Any defined contribution plan that is an eligible deferred compensation plan of a government employer
Any traditional or Roth IRA
As a result, plan participants and beneficiaries will not be required by law to take RMDs for the year with the market now down sharply. If the participant dies before minimum distributions have begun, and the entire remaining interest must be distributed within five years of the participant’s death, then 2020 will be excluded from the five-year period.
Each individual’s required beginning date, for purposes of applying the RMD rules in years after 2020, will be determined without regard to the temporary waiver of the requirements.
4. Allowance of Partial Above the Line Deduction for Charitable Contributions – Section 2204
Beginning in tax year 2020, an individual who does not itemize deductions can deduct up to $300 in charitable contributions made to churches, nonprofit schools, nonprofit medical institutions, and other organizations as an above-the-line deduction in calculating adjusted gross income. This allows an individual to claim a deduction for a charitable contribution, even if the individual does not itemize deductions.
A qualified charitable contribution for this purpose is a charitable contribution made in cash that would otherwise be allowed as an itemized deduction and contributed to churches, nonprofit educational institutions, nonprofit medical institutions, public charities, or any other organization described in Code Sec. 170(b)(1)(A). The contribution cannot be made to a supporting organization under Code Sec. 509 (a)(3) or a new or existing donor advised fund. In addition, a qualified charitable contribution for this purposes does any apply to cash contributions carried over from previous tax years.
5. Modifications of Limitations on Charitable Contributions – Section 2205
In general, the itemized charitable deduction for any tax year is limited to a percentage of the taxpayer’s AGI. The percentage is determined by the type of organization receiving the donation and the type of property donated. For the 2020 tax year, the 60% of AGI limitation on charitable contribution deductions for individuals is increased to 100%. For corporate taxpayers, the Act increased the income limits on the charitable contribution deduction from 10% to 25% of the corporation’s taxable income.
6. Exclusion for Certain Employer Payments of Student Loans – Section 2206
Payments made before January 1, 2021, by an employer to either an employee or a lender to be applied toward an employee’s student loans can be excluded from the employee’s income. The payments can be of principal or interest on any qualified education loan that is incurred by the employee for the employee’s education.
An employer may pay up to $5,250 each tax year toward an employee’s student loans, and that amount would be excludable from the employee’s income. The $5,250 cap applies to the new benefit for student loan repayment assistance and other educational assistance already provided, such as for tuition, fees, and books. Any excess of benefits is subject to income and employment taxes.
C. TAX RELIEF PROVISIONS FOR BUSINESSES
1. Employee Retention Credit for Employers Subject to Closure Due to COVID-19 – Section 2301
The CARES Act grants eligible employers a credit against employment taxes equal to 50% of qualified wages paid to employees who are not working due to the employer’s full or partial suspension of business or a significant decline in gross receipts. The credit can be claimed on a quarterly basis, but the amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters.
Eligible employer. It is defined as:
An employer whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease (COVID-19); or
An employer that experiences a 50% decline in gross receipts for the calendar quarter compared to the same quarter in the prior year.
Qualified Wages. The credit applies to qualified wages paid after March 12, 2020 and before January 1, 2021.
If the employer has more than 100 full-time employees, qualified wages are wages paid to employees who cannot work during the COVID-19-related circumstances described above.
If the employer has 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.
This is very similar to the paid leave credits granted to employers under the Families First Coronavirus Response Act signed into law, with some changes to the requirements. Most significantly, neither the employee nor the employer has to be directly impacted by the infection.
2. Delay of Payment of Employer Payroll Taxes – Section 2302
In general, under the Federal Insurance Contributions Act (FICA), taxes are imposed on both employers and employees on wages paid to the employee for Social Security (old-age, survivors, and disability insurance [OASDI]), and Medicare hospital insurance (HI). The FICA taxes are imposed on both the employer and the employee at a rate of 6.2% for OASDI and 1.45%for HI for a total of 7.65% for the employee and 7.65 for the employer (15.3% total).
In order to free up employers’ cash flow and retain employees during times of quarantine or shutdown, the CARES Act defers the payment of payroll taxes. Payroll taxes due from the period beginning on the date the CARES Act is signed into law and ending on December 31, 2020, are deferred. The 6.2% OASID portion of the equivalent payroll taxes incurred by self-employed persons qualify for the deferral. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.
3. Modifications for Net Operating Losses – Section 2303
There is also a modification for net operating losses (NOL), with the CARES Act relaxing certain limitations on a businesses’ use of net operating losses. Also, the loss limitation applicable to pass-through entities and sole proprietorships is also modified so that businesses can access critical cash flows to maintain operations and continue paying their employees’ wages.
The rule limiting an NOL deduction that arises in a tax year beginning after December 31, 2017 to 80% of taxable income in a carryback or carryforward year is suspended in a tax year beginning after December 31, 2017 and before January 1, 2021. In addition, any NOL arising in a tax year beginning after December 31, 2017 and before January 1, 2021 may be carried back five years unless the carryback period is waived. The twenty-year carryforward period for NOLs arising in tax years beginning before 2018 is unchanged.
Extension of time to waive five-year carryback for 2018 and 2019 NOLs. The five-year carryback period may be waived by making a Code Sec. 172(b)(3) election. For NOLs that arose in tax years beginning in 2018 or 2019, the time for making the waiver election is extended to the due date (including extensions) for filing the taxpayer’s return for the first tax year ending after March 27, 2020. Normally, the election is required by the due date (including extensions) of the return for the tax year in which the NOL.
4. Modification of Credit for Prior Year Minimum Tax Liability of Corporations – Section 2305
The Tax Cuts and Jobs Act (TCJA) eliminated the alternative minimum tax for corporations for tax years after 2017, but allowed corporations to claim a refundable portion of any unused minimum tax credits through 2021. Corporations can recover refundable minimum tax credits in tax years beginning in 2018 or 2019. The refundable credit amount is equal to 50% (100% for tax years beginning in 2019) of the excess of the minimum tax credit for the tax year, over the amount allowable for the year against regular tax liability, before being fully refundable in 2021.
The Act accelerates the year for which a fully refundable credit can be claimed to 2019, and allows corporations to elect to claim the fully refundable minimum tax credits in 2018. The new law accelerates the ability of corporations to recover refundable AMT credits by allowing corporations to claim a refund now and obtain additional cash flow during the COVID-19 emergency.
5. Deductibility of Interest Expense Temporarily Increased – Section 2306
There is also an increase to the business interest expense limitation from 30% to 50% of the taxpayer’s adjusted taxable income for 2019 and 2020, and permits taxpayers to elect to use adjusted taxable income for 2019 in calculating the limitation for 2020. The deduction remains limited by the taxpayer’s business interest income and floor plan financing interest.
However, a partner of a partnership may elect to have any excess business interest of the partnership for the 2019 tax year allocated to the partner as follows:
50% of the excess business interest allocated is treated as business interest paid or accrued by the partner in the partner’s first tax year beginning in 2020 but only if the partner is not otherwise subject to the Code Sec. 163(j) limit in that year; or
50% of the excess business interest allocated is treated as business interest paid or accrued by the partner in the next succeeding tax year, but only to the extent the partner is allocated excess taxable income or excess business interest income from the partnership in the succeeding year.
Election Out of Increased Limitation. A taxpayer may elect not to have the increased limitation apply in 2019 or 2020. The time and manner for the election for the 2020 tax year will be determined by the IRS, but if the election is made it can only be revoked with the consent of the IRS. In the case of a partnership, the election not to the have the increased limitation apply for the 2020 tax year is made by the partnership and not the partners.
6. Bonus Depreciation Technical Correction for Qualified Improvement Property – Section 2307
Qualified improvement property is assigned a 15-year recovery period for depreciation under MACRS retroactively effective for property placed in service after 2017. In addition, qualified improvement property placed in service after 2017 will qualify for the 100% bonus depreciation rate.
If a taxpayer filed two or more returns using a 39-year recovery period for qualified improvement property placed in service after 2017 an incorrect accounting* method was adopted and automatic consent to change to the correct method must be filed on Form 3115. Taxpayers who only filed one return using a 39-year recovery period (e.g., a calendar year taxpayer who has not filed a 2019 return) may file an amended return to correct the recovery period or may file Form 3115 with their current year return. The Form 3115 or amended return will generally be filed taking into account the adjustments required if the taxpayer had claimed 100% bonus depreciation.
Improvement must be made by taxpayer. An additional technical correction clarifies that the 15-year recovery period and bonus depreciation only apply to improvements made by the taxpayer.
20 year alternative depreciation system period assigned to qualified improvement property. A 20-year recovery period applies under the alternative depreciation system (ADS) to qualified improvement property, effective for property placed in service after 2017.
D. ADDITIONAL PROVISIONS
The CARES Act contains provisions addressing challenges related to the outbreak. Most of such provisions do not have tax implications. Even though variety of those are not covered under the tax-related division of the Act, they may still have a significant impact on the federal tax. Additional provisions are as follows:
1. Discharge of Certain SBA Loans Excluded from Gross Income. Cancelled debt is excluded from income for certain SBA loans used for payroll costs and other specified expenses
2. Health Savings Account (HSA) Eligibility. For plan years beginning on or before December 31, 2021, a safe harbor for health savings accounts (HSAs) provides that a health plan will not fail to be treated as a high-deductible health plan (HDHP) for failing to impose a deductible for telehealth or other remote care services.
3. Qualified Medical Care Expenses for HSAs, Archer MSAs, HRAs, and Health FSAs. Beginning for amounts paid or incurred after 2019, over-the-counter menstrual care products are treated as paid for medical care for purposes of health savings accounts (HSAs), Archer medical savings accounts (MSAs), health reimbursement arrangements (HRAs), and health flexible savings accounts (FSAs).
We will share more information on other provisions of the CARES Act as it becomes available.
WE’D LOVE TO HELP.
We will continuously update you regarding evolving news surrounding legislative and administrative issuances dedicated to relieve the general public of the effects of COVID-19. Stay tuned with the advisory bulletin. For immediate clarifications, please contact us at firstname.lastname@example.org or discuss it with your Scrubbed professional.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. It is not intended to be relied upon as accounting*, tax, or other professional service. Please refer to your advisors for specific advice. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.