COVID-19 - “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act)

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Rödl & Partner Tax Matters Vol 2020 – 3, published March, 27, 2020

 

President Trump has signed the new Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. Major highlights of the Act are discussed below. Details regarding the specifics of each provision are forthcoming. If you have questions, please contact your Rödl & Partner representative.  

 

Business Provisions

Refundable payroll tax credit

 

The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended due to a COVID-19-related shut-down order or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. There are limits to the credit.

 

Delay of payment of employer payroll taxes

 

Employers and self-employed individuals can defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.

 

Modifications for net operating losses

 

Net operating losses arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the 80% taxable income limitation to allow an NOL to fully offset income. Corporate taxpayers can file Form 1139 and individuals can file Form 1045 to request a tentative refund.  Note that the instructions to these forms state they are due within 12 months of the last day of the tax year in which the loss was created.

 

Modification of loss limitation for taxpayers other than corporations

 

The loss limitation applicable to pass-through businesses and sole proprietors has been modified so that they can utilize excess business losses.

 

Modification of credit for prior year minimum tax liability of corporations

 

Companies can claim a refund now of their remaining AMT credits.

 

Modification of limitation on business interest

 

The amount of interest expense businesses are allowed to deduct on their tax returns is increased from 30 percent to 50 percent of taxable income (with adjustments) for 2019 and 2020.

 

Technical amendment regarding qualified improvement property

 

Certain businesses can immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision corrects an error in the 2017 Tax Cuts and Jobs Act.

 

Temporary exception from excise tax for alcohol used to produce hand sanitizer

 

The federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration has been waived for calendar year 2020.

 

Tax Provisions For Individuals

2020 recovery rebates for individuals

 

All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and who have a work eligible Social Security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, such individuals are eligible for an additional $500 rebate per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits. Generally, no action is required to receive the rebate check. The rebate is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.

 

Special rules for use of retirement funds

 

This provision waives the 10 percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year's cap on contributions. The provision also provides flexibility for loans from certain retirement plans for coronavirus-related relief.

 

A coronavirus-related distribution is one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

 

Temporary waiver of required minimum distribution rules for certain retirement plans and accounts

 

The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.

 

Allowance of partial above the line deduction for charitable contributions

 

Individuals can deduct up to $300 of cash charitable contributions whether they itemize their deductions or not.

 

Modification of charitable contribution limitations during 2020

 

The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50 percent of adjusted gross income limitation is suspended for 2020. For corporations, the 10 percent limitation is increased to 25 percent of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent.

 

Exclusion for certain employer payments of student loans

 

Employers can provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee's student loans, and such payment would be excluded from the employee's income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after the date of enactment and before January 1, 2021.

 

Unemployment Provisions

Pandemic unemployment assistance

 

A temporary Pandemic Unemployment Assistance program is created through December 31, 2020 to provide payments to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency.

 

Emergency increase in unemployment compensation benefits

 

Provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.

 

Temporary full federal funding of the first week of compensable regular unemployment for states with no waiting week

 

Provides funding to pay the cost of the first week of unemployment benefits through December 31, 2020 for states that choose to pay recipients as soon as they become unemployed instead of waiting one week before the individual is eligible to receive benefits

 

Pandemic emergency unemployment compensation

 

Provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available.

 

Temporary financing of short-time compensation payments

 

Provides funding to support "short-time compensation" programs where employers reduce employee hours instead of laying off workers and the employees with reduced hours receive a pro-rated unemployment benefit. This provision would pay 100 percent of the costs the employers incur in providing this short-time compensation through December 31, 2020. It pays 50 percent of the costs that a state incurs in providing short-time compensation through December 31, 2020.

 

Paycheck Protection Program

Please refer to our detailed explanation of the Paycheck Protection Program here.

 

 

There are many other provisions in the CARES Act related to employment and labor laws, educational institutions, health care providers, life sciences and biotech companies, and Native American tribes. Please continue to check our website for updates or contact your Rödl & Partner representative for more information.

 

 

IRS Information on Employee Retention Credit

 

 

IRS FAQs on Employee Retention Credit

 

 

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisor.

We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user's risk.

Any tax and/or accounting advice contained herein is based on our understanding of the facts, assumptions we have been asked to make, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein.

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