Overview
For additional guidance, please refer to Steptoe's COVID-19 Resource Center.
Yesterday, Senator McConnell released draft legislation representing the Senate Republican position for negotiations on a third COVID-19 related piece of legislation to address the economic impact of the coronavirus.
The bill still needs to be negotiated with Senate Democrats, who previously released their own proposal, and that negotiation is expected to occur on Friday. Democrats have criticized the proposal as too focused on assistance to corporations. For instance, House Ways and Means Chairman Richie Neal issued a statement describing the legislation as "inadequate," and Senate Finance Committee Ranking Democrat Ron Wyden called it a "corporate tax wish list."
The 247-page bill, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), consists of several different divisions:
A. Small Business Interruption Loans
B. Relief for Individuals, Families, and Businesses
C. Assistance to Severely Distressed Sectors of the United States Economy
D. Health Care Response
E. Temporary Permit Use to Guarantee Money Market Funds
Relief for Individuals, Families, and Businesses
Division B of the CARES Act provides for tax relief for both individuals and businesses.
Recovery Rebates
The CARES Act provides for recovery rebates of up to $1,200 ($2,400 for joint filers) for US taxpayers. The mechanism for paying the rebates is an advance refundable tax credit. The rebates are subject to certain special rules:
- Amounts are increased by $500 for each child.
- Amounts are phased out for taxpayers making $75,000 ($150,000 for joint filers).
Taxpayers with insufficient tax liability to utilize a refundable tax credit, but at least $2,500 of qualifying income, would be eligible for a minimum rebate check of $600 ($1,200 for joint filers). Qualifying income includes earned income, as well as social security benefits and certain compensation and pension benefits paid to veterans. This ensures that tax relief gets to low-income seniors and veterans.
Extend Filing and Payment Deadlines
The CARES Act extends various filing and payment deadlines to provide individuals and businesses additional cash flow during the COVID-19 emergency.
- Postpones the April 15 filing date for individual taxpayers to July 15 to align with the extended payment date already announced by the IRS.
- Postpones the due date for individual and corporate estimated tax payments otherwise due between date of enactment and October 15, 2020 until October 15.
- Postpones the due date for depositing employer payroll taxes and 50% of self-employment taxes related to Social Security and Railroad Retirement and attributable to wages paid during 2020. The deferred amounts would be payable over the next two years – half due December 31, 2021, and half due December 31, 2022.
Charitable Contributions
The CARES Act encourages individuals to contribute to churches and charitable organizations in 2020 by:
- Allowing a deduction of up to $300 of cash contributions, whether or not the taxpayer itemizes deductions.
- Suspending the 50% limitation on individuals, increasing to 25% the 10% limitation on corporations, and increasing to 25% the 15% limitation on food inventory.
Treatment of Losses
Certain changes to the loss provisions made by the Tax Cuts and Jobs Act (TCJA) are suspended in an effort to allow companies to utilize greater losses as well as to claim refunds for certain losses. Specifically, the CARES Act:
- Suspends the TCJA's 80 % of taxable income limit on net operating loss (NOL) carryovers for three years, so that the limit would not apply to tax years beginning in 2018, 2019, and 2020.
- Allows NOLs arising in 2018, 2019, and 2020 to be carried back five years.[1]
- Suspends the TCJA's limitation on the use of a pass-through business' losses against non-business income for three years, so that the limit would not apply to tax years beginning in 2018, 2019, and 2020.
Limitation on Business Interest Expense
The CARES Act would temporarily increase the limitation on interest deductions imposed by the TCJA. Specifically, the Act would increase the 30% of adjusted taxable income (ATI) threshold to 50% of ATI, for tax years beginning in 2019 and 2020. It would also allow a taxpayer to elect to use tax year 2019 ATI in lieu of tax year 2020 ATI for the purpose of calculating its tax year 2020 limitation.
Corporate AMT Credits
The corporate AMT was repealed as part of the TCJA, but corporate AMT credits are allowed as refundable credits until 2021. The CARES Act accelerates the ability for companies to recover those AMT credits.
Retirement Provisions
The CARES Act makes several welcome changes in the retirement space, but makes no changes to the requirement minimum distribution (RMD) provisions of the code. RMD relief is particularly worrisome because individuals who have not taken their RMD for 2019 will need to take it by April 1, 2020.
The CARES Act extends the tax return filing date for individuals until July 15, which will move the due date for 2019 IRA contributions to July 15, 2020. In addition, the Act waives the 10% additional tax for premature distributions related to the coronavirus for amounts not to exceed $100,000 (the distribution provision), subject to the following rules.
- The distribution provision covers retirement plans and IRAs.
- Amounts distributed may be repaid at any time over the three-year period commencing on the date the distribution was received (and there is no requirement that the repayment occur in one tranche).
- Amounts can be paid to a qualified plan or an IRA so long as the account is one to which a rollover contribution could be made under the code.
- The distribution provision applies to individuals who have been diagnosed with COVID-19, their spouse or dependent, or a person who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or suffered reduced working hours, or who is unable to work due to lack of child care.
- To the extent that the amounts are not repaid, the income inclusion with respect to any coronavirus distribution can be included ratably over the three taxable years beginning with the taxable year in which the distribution was received.
- Distributions will be deemed to meet the permissible distribution requirements of section 401(k), which essentially means that they will satisfy the hardship distribution provisions of the code.
In addition, the bill increases the dollar amount available for loans from qualified plans from $50,000 to $100,000 and increases the percentage test limit for loans from half the present value of the participant’s benefit to the present value of his entire benefit under the plan. In addition, the bill allows the repayment of loan payment outstanding on the date of enactment to be delayed to the later of one year from the original due date or the date which is 180 days after the date the enactment of the act. Thus, if a participant has the first of five annual loan repayments due on April 1, 2020, the participant has 180 days after enactment to repay that installment and all future installments are similarly delayed.
The bill delays the due date for amendments to plans, so long as the plan is operated as if the amendment is in effect and any subsequent writing is retroactive.
Aviation Excise Taxes
The CARES Act provides an excise tax holiday from the date of enactment through the end of 2020 for aviation ticket taxes (both passengers and freight) and taxes on kerosene used in commercial aviation.
TCJA Technical Corrections
The CARES Act would adopt a few TCJA technical corrections:
- Qualified improvement property;
- Treatment of overpayments with respect to taxpayers making a section 965(h) election;
- Restoration of limitation on downward attribution of stock for purposes of subpart F and GILTI;
- Effective date of NOL provisions; and
- Technical corrections related to section 461(l).
Note that all of the TCJA technical corrections would be permanent, whereas the other tax provisions generally are temporary.
[1] Note that the legislative text only applies to NOLs arising in 2018 and 2019, but we have confirmed that this is an error and the intent is to apply the rules to losses arising in 2020 as well.
