US CARES Act
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This page was last updated on April 14, 2020.
President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security Act” (“CARES Act”) on March 27, 2020. It is a comprehensive $2 trillion act with a significant number of tax items applicable to individuals and businesses. The following includes the highlights of the CARES Act changes.
Delays in General Tax Filings and Payments
Although this is not part of CARES, it is worth mentioning. According to IRS Notice 2020-18, the deadline for all April US federal income tax filings and payments is postponed from April 15, 2020 to July 15, 2020. There is no requirement to file extension request forms. This includes a postponement of income tax payments by the 3 months.
Delay in Employer and Self-employment Payroll Taxes
The CARES Act allows employers and self-employed individuals to defer payment of the employer share (6.2%) of the 2020 social security tax effective immediately. 50% of the deferred amount will be due December 31, 2021 and the remainder due December 31, 2022.
Employee Retention Payroll Tax Credit for Certain Businesses
The CARES Act provides a refundable payroll tax credit for 50% of wages paid by certain employers from during March 13, 2020 to December 31, 2020:
- employers which operations were fully or partially suspended due to the Covid-19 crisis; or
- employers’ gross receipts declined by more than 50% when compared to the same quarter in the prior year.
In the case of an employer that qualifies by virtue of the gross receipts test, its eligibility ceases at the end of the calendar quarter when its gross receipts are greater than 80% of gross receipts for the same calendar quarter for the prior year.
For larger employers (>100 full-time employees), wages qualify if paid to employees when they are not providing services due to Covid-19 crisis. For smaller employers (100 or less full-time employees), all employee wages qualify for the credit. The credit is capped at the first $10,000 of compensation for each employee. The credit is refundable to the extent that it exceeds the employer portion of social security taxes.
Temporary Changes to Business Interest Expense Disallowance Rules (Section 163(j))
As section 163(j) stood before enactment of the CARES Act, a taxpayer could deduct business interest only up to 30% of the taxpayer’s adjusted taxable income for the tax year plus certain minor adjustments. Non-deductible interest is permitted to be carried forward indefinitely.
Effectively for 2019 and 2020, the CARES Act increases the 30% limit to 50%.
Changes to NOL Rules
The CARES Act introduced several changes to the US net operating loss (“NOL”) rules, the two more relevant include:
- The CARES Act grants taxpayers a five-year carryback period for NOLs arising in tax years beginning in 2018 through 2020, normally, no carryback for NOLs arising after 2017.
- The CARES Act also suspends the 80% of taxable income NOL deduction limitation for 2018-2020, taxpayers can now temporarily use its NOL to fully offset its taxable income.
Corporate Alternative Minimum Tax Relief
For any corporate tax payer with forthcoming AMT credits, the CARES Act accelerates the use of such credits to 50% for 2018 and 100% for 2019 (formerly 50% for 2018 through 2020 and 100% in 2021). If an election is properly filed, a taxpayer may elect to claim the entire refundable credit amount for the 2018 tax year.
Modification of Charitable Contribution Limitation for Corporations
The CARES Act increases the limitation on deductions for charitable contributions for corporations who make cash contributions in 2020 from 10% of taxable income to 25% of taxable income. The relevant percentage limitation applicable to certain donations of food inventory (already eligible for an enhanced charitable deduction of 15%) is also increased to 25% for 2020.
Emergency Paid Sick Leave Act Limitation
The CARES Act limits amounts employers are required to pay as part of sick leave to not more than: a) $511 per day and $5,110 in aggregate for each employee experiencing symptoms of Covid-19; or b) $200 per day and $2,000 in aggregate for each employee for taking leave to care for a child or quarantined individual.
Recovery Rebate Credits
The CARES Act provides that all US resident individuals with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer, with a $1,200 rebate ($2,400 married filing jointly). In addition, they are eligible for an additional $500 per qualifying child. For the vast majority of Americans, there is nothing to do, the IRS will use the taxpayer’s 2019 tax return to send out rebate cheques.
Changes to Charitable Deduction Rules
The CARES Act proves a new charitable contribution deduction of up to $300 for individuals who do not itemize their deductions. For individuals who do itemize their deductions, the CARES Act permits a charitable contribution deduction of up to 100% of their adjusted gross income.
Temporary Waiver of Early Withdrawal Penalty for Certain Withdrawals from Qualified Retirement Plans
The CARES Act waives the 10% penalty for early withdrawal from a qualified retirement account for distributions up to $100,000 for coronavirus-related purposes. Further, the distribution is taxed over three years as opposed to immediately. The taxpayer has the option to repay the amount to the retirement plan within the three-year period. Distributions are coronavirus related if made to an individual:
- who is diagnosed with Covid-19 with a test approved by the CDC,
- whose spouse or dependent is diagnosed with Covid-19, or
- who experienced adverse financial consequences (such as being quarantined, laid off, reduced work hour, lack of child care) as a result of Covid-19.
Temporary Waiver of Required Minimum Distribution Rules for Certain Plans and Accounts
The CARES Act waives the required minimum distribution rules for calendar year 2020 for certain defined contribution plans and IRAs. Individual are usually required to take mandatory distributions starting at age 72, but such distributions are not required during 2020.
Please remember that the CARES Act is new, big, and full of loose languages. We are still working through the various analyses and summaries. Just like the late Tax Cuts and Jobs Act, we will likely get clarifications for years to come. The above is merely a summary of certain key issues the we deem to be relevant to our clients.
For more information, please contact:
Director International Taxation