Congress Provides Financial Relief for Taxpayers During Coronavirus Outbreak

This client alert has been updated as of July 20, 2020.

The $2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) unanimously passed in the Senate late on March 25, 2020. On March 27, 2020, the CARES Act was passed by the House and signed into law by President Trump. The CARES Act is intended to increase cash and liquidity available to individuals and corporations during this time of economic hardship. This client alert discusses the key tax benefits available to individuals and businesses under the CARES Act. Congressional leaders are currently working on passing
additional legislative relief.

Recovery Rebates for Individuals

The Treasury was authorized to make direct payments of up to $1,200 per individual ($2,400 for joint filers) plus $500 for each qualifying child to provide an injection of cash into the economy and put money into the pockets of individuals and families to help them through the economic slowdown. Although the CARES Act states that the payments must be made prior to December 31, 2020, most payments were made by the end of June.

The payment is an advance refund of a tax credit that taxpayers will be able to claim on their 2020 returns. The refundable credit is available to all taxpayers, subject to income limitations, except nonresident aliens, dependents and trusts and estates.

The rebate payments are intended to benefit low and middle-income taxpayers. The rebate payment is phased out for individuals with income greater than $75,000 ($150,000 for joint filers). The rebate payment is decreased by 5% of the taxpayer’s adjusted gross income in excess of these thresholds. Thus, the rebate is completely phased out for single taxpayers with incomes exceeding $99,000 ($198,000 for joint filers), therefore persons with income above these thresholds will not receive either the rebate or the credit. These amounts will be determined based on 2019 returns for those who have already filed their 2019 returns and based on 2018 returns for those who have not yet filed their 2019 returns. Individuals must have a social security number to claim the tax credit on their tax returns.

In most cases, obtaining the payments will not require any action by the taxpayer. The payments should be directly deposited (provided the taxpayer’s most recent tax return provides direct deposit information) or mailed to taxpayers.

Other taxpayers will need to take action to receive the payments. Although the IRS has not provided guidance on the issues highlighted below, it has provided a Coronavirus Tax Relief Page that is frequently updated here. Taxpayers may also refer to this page for updates. Any taxpayer facing the issues outlined below should consult their tax return preparers.

  • Taxpayers who received a raise or promotion in 2019: Individuals who received a pay raise or promotion in 2019 may be better off waiting to file their 2019 tax return until after the government sends out the rebates, particularly if their raise subjects them to phaseout of the rebate. If a taxpayer has not yet filed a 2019 tax return, determining the rebate amount on 2018 income would result in a larger rebate payment. While those who receive smaller checks than they should have (e.g., those who have children in 2020) can get the rest of the money as a credit on their 2020 tax returns, the CARES Act does not contain any clawback provision requiring people to repay the rebate if they later file a 2019 return that would have generated a smaller rebate. However, the increased rebate received will reduce the credit that can be claimed on the 2020 tax return.
  • Taxpayers that did not file returns for taxable years 2018 or 2019: Generally, payments are calculated using 2019 tax returns. If a taxpayer has not yet filed a tax return for 2019, the calculation will be based on the taxpayer’s 2018 tax return. Payments will be sent to the account or address of the taxpayer’s most recently filed tax return. Those who do not normally file a tax return may use the new web tool here to quickly register for their payments. Registration using the new web tool is the quickest way to register for payments. Social security recipients that do not normally file a tax return will not need to file a tax return or register using the new web tool in order to receive the payment. For those individuals, payments will be automatically deposited, regardless of whether a return has been filed or the new web tool has been utilized. Other taxpayers that did not file a tax return should immediately file a return for 2018 and 2019 and provide information for direct deposit to receive the payment. Returns filed electronically should be processed more quickly.
  • Taxpayers who have moved: Generally, payments will be sent to the account or address on the taxpayer’s most recently filed return. Thus, taxpayers who have moved since filing their last return will want to file a change of address.
  • Divorced taxpayers: Taxpayers divorced since their last tax return face a number of challenges. If one former spouse lives at the old address or has the old direct deposit account, the entire payment may be sent to that spouse. Taxpayers may need to contact their former spouse to see if a payment has been received. On the other hand, promptly filing one may be an option. It may also be possible to file Form 8888 to split the rebate, though no guidance has been provided on this yet. Taxpayers should talk to their tax preparers for advice on addressing these situations.

On July 14, 2020, the Missouri Governor signed S.B. 676, a tax bill that ensures that any economic impact payment received by Missouri residents will not increase their 2020 state income tax liability. Missouri taxpayers may claim a deduction for a portion of federal taxes paid, reducing their Missouri adjusted gross income. This new legislation provides that any federal income tax credits received under the CARES Act are not considered when determining the amount of federal income tax liability allowable as a deduction.

Payroll Tax Deferral for Employers

To increase the cash available to employers, the CARES Act allows employers to pay a portion of their 2020 payroll tax liability over two years. For 2020, employers must pay social security tax (or in some cases railroad retirement act tax) on wages up to the OASDI cap of $137,400 at a rate of 6.2%. The CARES Act allows employers to defer their liability for taxes accruing for the period from March 27, 2020 to December 31, 2020, without penalty or interest, allowing employers to use the cash that would have otherwise been used to pay these taxes for other purposes. Employers must pay 50% of the deferred taxes by December 31, 2021, and the remaining 50% by December 31, 2022. Self-employed taxpayers may defer payments of 50% of the Social Security tax on their net earnings from self-employment.

The CARES Act originally prohibited employers from taking advantage of this deferral if they received loan forgiveness under the Paycheck Protection Program (PPP). These employers were only permitted to defer the deposit and payment of their share of Social Security taxes until they received notice that the PPP loan would be forgiven. Once the employer received this notice, it was no longer eligible for deferral. The Paycheck Protection Program Flexibility Act of 2020, which was signed into law on June 5, 2020, eliminated this limitation. An employer may now defer its portion of Social Security taxes through December 31, 2020, even if it has a PPP loan forgiven.

No specific election is required to defer payments under this provision. Employers should contact their payroll departments if they wish to defer taxes. Employers should keep in mind that the deferred taxes will eventually have to be repaid and plan accordingly. Even if employers utilize a Professional Employer Organization or PEO to handle payroll, the employers will be solely liable for any deferred tax. Employers should also consider how this deferred liability will affect financial statements and balance sheets.

Employee Retention Credit

A one year credit against the employer’s 6.2% share of Social Security payroll taxes is available to employers that are negatively impacted by the COVID-19 pandemic but continue to pay employees. An employer who continues to retain and pay its employees can be eligible for the credit in two ways:

  1. The employer’s operations are fully or partially suspended during a calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to the COVID-19 pandemic; or
  2. The employer’s gross receipts for a calendar quarter are less than 50% of gross receipts from the same calendar quarter in the prior year. The credit is no longer available once an employer’s gross receipts for a quarter exceed 80% of what they were in the same quarter during the previous year.

Several types of employers are not eligible for the credit:

  1. Employers that receive SBA loans under the PPP are not eligible for the credit. Thus, employers should consider whether a PPP loan or the credit will be more beneficial for its business.
  2. The U.S. government, the government of any state or political subdivision thereof, or any agency or instrumentality of any of the foregoing are not eligible for this credit.
  3. Self-employed individuals are not eligible for the credit for their self-employment services or earnings. Taxpayers who are self-employed and also have other employees in their business would be eligible for the credit with respect to the wages paid to their other employees.

The employee retention credit is equal to 50% of the wages paid to each employee during the quarter, but only takes into account up to $10,000 of wages per employee. If an employer has more than 100 employees, the credit is available only for wages paid to employees who are not providing services because the employer’s operations are fully or partially suspended due to a governmental order, or because the employer has experienced a significant decline in gross receipts. If an employer has 100 or fewer employees, the credit is available for wages paid to all employees. Any wages taken into account for family medical leave or sick leave as part of the Families First Coronavirus Response Act may not be taken into account for the employee retention credit.

The credit is refundable if it exceeds the employer’s payroll tax liability. Employers should report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, typically Form 941, Employer’s Quarterly Federal Tax Return. In order to claim the credit, employers can reduce their deposits for payroll taxes that have been withheld from employees’ wages for the period beginning March 13, 2020 and ending December 31, 2020. Generally, an employer’s reduction in the amount of payroll taxes deposited will not subject the employer to a penalty under Code Section 6656 for failure to deposit payroll taxes so long as the retained amounts are less than or equal to the employer’s anticipated credit. If the employer pays wages in excess of its payroll tax liability, the employer can claim an advance payment of the refundable credit by filing a Form 7200, Advance Payment of Employer Credits Due to COVID-19. If an employer seeks an advance credit by filing a Form 7200 with respect to the anticipated credits it relied upon to reduce its deposits, the penalty for failure to deposit payroll taxes will apply.

The additional liquidity offered by the credit should be carefully evaluated by employers who are shut down or experiencing a diminution of business. Employers should consider whether it is more beneficial to furlough employees or reduce their hours rather than terminate employees. Employers should coordinate with their payroll departments to ensure that the credit is properly claimed.

Increased Limitation on the Business Interest Deduction

The Tax Cuts and Jobs Act of 2017 (“TCJA”) generally limited business interest deductions to 30% of adjusted taxable income. The CARES Act increases this limit to 50% of adjusted taxable income for 2019 and 2020. Additionally, taxpayers may elect to use their 2019 adjusted taxable income, which was not negatively impacted by COVID-19, as their adjusted taxable income in 2020, potentially increasing the amount of business interest that can be deducted in 2020.

Taxpayers should evaluate how the increased limitation will affect their tax liability for 2020 and adjust their tax projections and estimated tax payments accordingly. The increased limitation may reduce the cost of borrowing for many businesses. However, the increased limit may not have much impact on whether businesses try to raise new capital through debt or equity, unless businesses are utilizing short term financing.

Relaxed Limitations on Net Operating Losses (“NOLs”)

The CARES Act temporarily relaxes limitations on the use of NOLs imposed by the TCJA. The TCJA provided that, for NOLs arising in tax years beginning after December 31, 2017, the NOL could not be carried back and carryforwards could only be used to offset 80% of taxable income. This limitation did not affect existing NOLs arising in years prior to January 1, 2018. Under the CARES Act, NOLs arising in 2018, 2019 and 2020 can be carried back for five years, permitting some employers to offset income that was taxed at a rate higher than the 21% rate currently applicable to corporations. In addition, NOLs can be used to offset 100% of taxable income. The limitations on carrybacks of NOLs and the rule that NOL carryforwards can only be used to offset 80% of taxable income will apply to NOLs arising in or carried to 2021 or later years.

Taxpayers should consider whether the carryback of NOLs could allow them to claim refunds for prior tax years. They should also consider the impact that the removal of the restrictions on NOLs will have on tax liability for the current year and revise budgets, financial projections, and estimated tax payments accordingly.

The CARES Act also provides that the limitations on deductions of excess business losses imposed by the TCJA are suspended for taxable years that begin before January 1, 2021. This should allow noncorporate taxpayers to use a larger portion of the losses realized in 2020 to reduce their tax liability. Taxpayers who anticipated that they would have significant suspended losses, may wish to adjust their estimated tax payments and other tax planning to take advantage of such losses.

Taxpayers that had net operating losses in 2018 have a six-month extension to file an application for a tentative refund claim under Code Section 6411. This means that taxpayers have until June 30, 2020 to file a tentative refund claim. To apply for a tentative refund claim, corporations should use Form 1139, Corporation Application for Tentative Refund, and individuals should use Form 1045, Application for Tentative Refund. These refund claims, if no more than 100 pages, can be submitted by fax starting on April 17, 2020 until further notice.

Charitable Contributions

The CARES Act increases the amount of the charitable contributions deduction that can be claimed by corporations and individuals. In 2020, corporations may deduct up to 25% of adjusted gross income as opposed to 10% of adjusted gross income, provided that the contributions are made in cash.

Individuals (including partners, partnerships, and shareholders of S corporations) were previously only able to claim deductions for charitable contributions in an amount up to 50% of adjusted gross income. The CARES Act permits individuals who itemize deductions to offset up to 100% of their adjusted gross income through charitable contributions made in 2020. Individuals that do not itemize their deductions may now claim a permanent $300 above the line charitable contributions made in cash.

Taxpayers should review their charitable giving plans in light of these new rules to determine whether they wish to make larger charitable deductions in 2020 to take advantage of these new rules. Charitable organizations may also wish to highlight these changes as part of their donor solicitations to encourage donors to contribute more significant amounts.

Student Loan Debt

Generally, any payment of debt made for services rendered by an employee constitutes income to the employee. However, the CARES Act provides that employees may exclude up to $5,250 of student loan repayments made by their employer as educational assistance under Code Section 127. These payments are subject to the overall exclusion limitation of $5,250 of educational assistance payments. Thus, additional educational assistance payments made by employers on behalf of employees reduce the amount of student loan repayments that can be excluded from gross income under Code Section 127. However, no deduction is allowed for interest on student loan payments that are excluded under Code Section 127. Employers should consult with their benefit consultants to determine whether they wish to provide this additional benefit.

The CARES Act also suspends the obligation to make payments on principal and interest of certain student loans. Further, the accrual of interest on such loans is suspended until September 30, 2020.

Waiver of Excise Tax on Production of Hand Sanitizer

The CARES Act makes it cheaper to produce hand sanitizer by waiving the related excise tax on alcohol used to produce hand sanitizer in 2020.

Restaurants and Retailers Bonus Depreciation for Qualified Improvement Property

The CARES Act corrects the “retail glitch” in the TCJA that inadvertently extended the depreciation period for qualified improvement property of certain retailers and restaurants from 15 years to 39 years. Qualified improvement property of restaurants and retailers now qualifies for bonus depreciation, allowing it to be written off immediately. The provision retroactively dates back to January 1, 2018. Thus, taxpayers can take advantage of the new provisions and file amended returns for taxable years 2018 and 2019.

The favorable change should significantly reduce the costs of making future improvements. Restaurants and retailers that were negatively affected by the “retail glitch” may want to file amended returns to claim refunds for 2018 and 2019. Plans for such improvements should be reexamined in light of this change.

Accelerated Recovery of Corporate Alternative Minimum Tax Credit

The CARES Act accelerates the timeframe in which corporations may claim refundable minimum tax credits. When the TCJA eliminated alternative minimum tax for corporations, any corporations that had minimum tax credits were allowed to carry those forward and claim a 50% credit in 2018, 2019, 2020, and 2021 against their regular income tax liability. To the extent the entire amount of the minimum tax credit was not recovered by 2021, it was 100% refundable at that time.

The CARES Act provides that minimum tax credits are now recoverable in 2018 and 2019, and 100% of the unused credit is refundable in 2019. By allowing corporations to recover the full amount of their minimum tax credits by 2019, the CARES Act should reduce the tax liability for many corporations and provide greater liquidity for their operations.