The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020, is designed to provide quick and substantial relief to individuals and businesses affected by the economic shutdown in response to the spread of COVID-19. Several CARES Act provisions provide temporary tax relief for individuals and businesses, as well as enhanced tax incentives designed to encourage charitable giving.
Tax Relief for Retirement Plan Participants/Beneficiaries, Businesses, and Charitable Donors
The CARES Act creates new distribution options for those adversely impacted by coronavirus, expands the availability of plan loans, and waives required minimum distributions for most retirement plans for 2020.
Early Distributions.1 Pursuant to Section 2202(a) of the CARES Act, the 10% early distribution penalty tax under I.R.C. Section 72(t) that would otherwise apply to the majority of distributions made before a participant turns age 59 ½ is waived for “coronavirus-related distributions” (CRD) made at any time during 2020 from qualified retirement plans for distributions of up to $100,000. The distribution option is permissive, not mandatory, for eligible plans such as IRAs, 401(k)s, 403(a) and (b) plans, and 457 plans.
A CRD means a distribution from an eligible retirement plan made during 2020 to a qualifying individual who is diagnosed with coronavirus, or whose spouse or dependent has been diagnosed with it, or who has experienced adverse financial consequences from a coronavirus-related quarantine, furlough, layoff, work reduction, business closure or reduction in hours (for business owners) or an inability to work due to lack of child care related to coronavirus. The distributions will be subject to income tax, but the qualifying individual may opt to spread the payments evenly over three years rather than having to pay it all in 2020. The participant may also recontribute the distributed funds to the retirement plan or another retirement plan (with an exception for 457 plan distributions), by a single rollover or multiple rollovers, within three years of the date of the distribution regardless of any contribution limit established by the plan.
Loans.2 During the 180-day period from the date of enactment of the CARES Act, plans can increase their loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance for qualified individuals, up from the previous limits of $50,000 or 50% (note that loans are not permitted from IRAs). Qualified individuals with existing loans from a retirement plan that is due to be repaid by December 31, 2020 can delay repayment by one year. Later repayments will be adjusted to reflect the delayed due date plus interest accruing during the delay. In addition, the one-year period of delay in repayment is disregarded in determining the maximum five-year loan period.
Required Minimum Distributions.3 For participants in 401(k), 403(a) and (b) plans, 457, and IRAs (not defined benefit plans), the CARES Act waives required minimum distributions (RMDs) for the calendar year 2020. Under the new SECURE Act, effective January 1, 2020, retirees are typically required to take an RMD from their plan upon reaching age 72. The CARES Act waiver also applies to RMDs for retirees who reached age 70 ½ in 2019 but deferred taking an RMD in 2019, deferring it to April 1, 2020. Normally, retirees in this category would also have to take a second RMD for 2020 by December 31, 2020, but this RMD is waived as well. Although those who have already taken an RMD for 2020 are not allowed to repay it into their retirement plan, they are permitted to roll it over into a new IRA within 60 days of the distribution, allowing them to avoid paying income tax on the RMD.
The waiver is also applicable to designated beneficiaries who have inherited retirement accounts. Further, 2020 is not counted for purposes of the post-death payout “five-year rule” applicable to non-designated beneficiaries when the owner died before his or her own required beginning date.
However, the CARES Act has no impact on the new 10-year payout rule required by the SECURE Act, as 2020 is the first year that non-eligible designated beneficiaries would be subject to that rule when they inherit a retirement account. Because the 10-year payout does not start until the year after the year in which the account owner died, 2021 counts as year one rather than 2020.
Tax Relief for Businesses
The CARES Act contains several tax provisions designed to enable businesses to retain employees despite a COVID-19 related closure or decrease in hours and to enhance their liquidity during the economic downturn.
Payroll Tax Deferral.4 Businesses can defer payment of their share of the Social Security tax on wages paid from March 27 through December 31, 2020, with half of the deferred payment due on December 31, 2021 and the remaining half due on December 31, 2022. Those who are self-employed can defer 50% of their self-employment tax. Form 941, i.e., the Employer’s Quarterly Federal Tax Return, will be revised for April through June, the second calendar quarter of 2020, and further guidance will be provided for employers about how to reflect the deferred deposits and payments otherwise due on or after March 27, 2020 for January through March 2020, i.e., the first quarter.
Guidance issued by the IRS states that employers that receive a PPP loan may defer deposit and payment of their share of the Social Security tax that they would otherwise have to make beginning on March 27, 2020, with no penalties for failure to deposit and pay those amounts, until their lender issues a decision to forgive their PPP loan. The employer is no longer eligible to defer the deposit and payment of their share of the Social Security tax after the date of receipt of the lender’s decision that the PPP loan will be forgiven. The amount deferred through that date continues to be deferred, however, and the employer’s share of deferred deposits and payment will be due on the applicable dates, i.e., December 31, 2021 for 50% of the deferred amount and on December 31, 2022 for the remaining amount. Employers are not required to make a special election in order to defer deposits and payments of these taxes.
Payroll Tax Credit.5 The CARES Act allows an Employee Retention Credit for eligible employers equal to 50% of the qualified wages (including allocable qualified health plan expenses) they pay their employees, up to a maximum of $10,000 in qualified wages per employee. Eligible employers are those business owners that are required to fully or partially suspend their operations during 2020 because of a governmental order, or whose gross receipts have declined by more than 50% compared to the same quarter in 2019, but who nonetheless retain and continue to pay employees. Self-employed individuals are not eligible for this refundable tax credit for their self-employment services or earnings. In contrast to the Families First Coronavirus Relief Act (FFCRA), which requires employers to provide paid sick or family leave to employees who are unable to work (or telework) due to certain COVID-19-related circumstances, an eligible employer for purposes of the Employee Retention Credit is not required to retain its employees and pay qualified wages under the CARES Act, the employer is merely given an incentive to do so.
If a business has more than 100 full-time employees, qualified wages are those paid to employees who are not providing services. For businesses with 100 or fewer employees, all wages are eligible for the credit. The credit applies to qualified wages paid during the period from March 13 through December 31, 2020.
The employer can receive the Employee Retention Credit on qualified wages of up to $10,000 per paid employee (i.e., a maximum credit of $5,000 per employee) to offset their 6.2% share of Social Security taxes, and any excess credit is fully refundable, i.e., the employer may get a refund if the amount of the credit is more than the employment taxes the employer owes. The excess amount will be treated as an overpayment and either refunded to the employer or applied to offset any remaining tax liability on the employment tax return.
An eligible employer may receive tax credits for wages paid to employees who are on sick or family leave under the FFCRA in addition to the Employee Retention Credit under the CARES Act, though not for the same wages. The Employee Retention Credit is not available to those who receive a PPP loan, however.
An eligible employer typically should use Form 941, the Employer’s Quarterly Federal Tax Return, to report total qualified wages and related credits. According to IRS guidance, employers who anticipate receiving the tax credit can access federal employment taxes ordinarily required to be deposited with the IRS to fund qualified wages by reducing the amount of federal employment taxes deposited for that quarter, without penalty6, by half of the amount of the qualified wages paid in that quarter, and if necessary, they can request an advance of the credit from the IRS by filing a Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Net Operating Loss (NOL) Carrybacks Allowed.7 Disadvantageous provisions regarding NOLs in the 2017 Tax Cuts and Jobs Act (TCJA) have been temporarily eliminated, permitting NOLS in 2018, 2019, and 2020 to be carried back up to five years. If a taxpayer chooses not to carry back the losses, the loss carryback provision for 2018 or 2019 must be waived by the taxpayer prior to October 15, 2021.
The CARES Act also removes the 80% per year taxable income limit for utilizing NOL deductions in 2020 to offset adjusted taxable income in carryover years. For tax years 2021 and later, the NOL deduction is allowed for up to 100% of adjusted taxable income for net operating losses that arose pre-2018 and for up to 80% of adjusted taxable income for losses occurring after 2017 (with the exception of 2020 as mentioned above).
The NOL changes, which apply to both corporate and non-corporate taxpayers, are especially important for businesses that have significant variations in profitability from year to year, as these changes may increase their liquidity during the economic downturn resulting from COVID-19. The temporary changes provide businesses with the opportunity to get substantial refunds by filing amended returns. The benefits are further increased by greater tax reduction when losses are carried back to pre-2018 tax years because income tax rates were generally higher pre-TCJA.
In addition, fiscal year taxpayers that had a loss for the fiscal year ending in 2018 but elected to waive their carryback period despite a NOL can revoke their election if they do so by July 25, 2020. However, these NOLs are subject to the two-year carryback rule under prior law rather than the five-year carryback period under the CARES Act. The IRS has provided additional guidance regarding NOLs in Revenue Procedure 2020-24.
Further, in Notice 2020-26, the IRS granted a six-month extension of time to file Form 1045 or 1139 for the carryback of a net operating loss for a taxable year that began during calendar year 2018 and ended on or before June 30, 2019. Those taxpayers now have until June 20, 2020 to file the applicable forms.
Cap on Business Loss Deduction Removed.8 Under the TCJA, trade or business losses exceeding $500,000 for couples and $250,000 for single filers were not deductible. However, this provision has been temporarily suspended for 2018 through 2020 for taxpayers other than corporations. Noncorporate taxpayers will be able to fully offset taxable income by business losses regardless of the cause of those losses, i.e., it is unnecessary for them to be related to COVID-19. The excess business loss for a taxable year is determined without regard to any NOL deduction, qualified business income deduction, capital loss deduction, and deductions, gross income or gains attributable to any trade or business of performing services as an employee. The amount of net capital gain included in the calculation of excess business loss may not exceed the lesser of the taxpayer’s net capital gain attributable to trades or businesses, or total net capital gain. Those who had business losses in 2018 or 2019 that were limited under the excess business loss rules may be able to obtain a refund by filing an amended tax return.
Following the 2017 tax reform, charitable giving dropped by 1.7% in 20189, with some attributing the decrease to the 2017 tax reform act10, which significantly increased the standard deduction, reducing the number of taxpayers who itemize their deductions. The CARES Act includes a number of incentives aimed at encouraging individuals and businesses to make charitable donations in response to the coronavirus crisis.
Above-the-Line Deduction of $300.11 Under the CARES Act, taxpayers are permitted to claim a $300 above-the-line deduction for cash contributions made to public charities during 202012. This allows the estimated 88%13 of taxpayers who now take the standard deduction (for 2020, $12,400 for single filers and $24,800 for those who are married filing jointly) rather than itemize deductions to also claim this limited charitable deduction.
Increased Deduction for Individuals Who Itemize.14 Individuals who do choose to itemize their deductions and make cash contributions to public charities (not private foundations or donor advised funds) during 2020 are not limited to the usual deduction of 60% of modified adjusted gross income under I.R.C. Section 170(b)(1). Instead, the deduction for an individual’s eligible contributions could be as much as 100% of their adjusted gross income under the CARES Act. Taxpayers who make contributions exceeding the limit may also carry forward and utilize the excess amount over the following five-year period. There is no requirement that the contributions be related to COVID-19.
Increased Deductions for Corporations. Corporate deductions for cash contributions to public charities were limited to 10% of their taxable income under the prior law. Under the CARES Act, corporations that make cash contributions to public charities are allowed to deduct up to 25% of their taxable income. As is the case for individuals, corporations can carry forward and utilize the excess amount if the contributions exceed the 25% limitation. Corporations that make contributions of food inventory can also deduct 25% of their taxable income under the CARES Act, up from 15% under prior law.
The CARES Act provides much-needed relief for both individuals and businesses—and the tax provisions discussed here are only a small part of the massive law. It is unlikely to be the last piece of major legislation, as potential phases four and five are already being discussed by Congress and the Trump Administration.
1 CARES Act Section 2202(a).
2 CARES Act Section 2202(b).
3 CARES Act Section 2203.
4 CARES Act Section 2302.
5 CARES Act Section 2301.
6 As long as the following conditions are met: (1) the employer paid qualified wages to its employers in the quarter before the required deposit; (2) the amount of taxes not deposited, reduced by tax credits claimed under FFCRA, is less than or equal to the amount of the employer’s tax credit for qualified wages for the quarter as of the time of the required deposit, and (3) the employer did not also seek an advance credit for any portion of the anticipated credits relied upon to reduce its deposits.
7 CARES Act Section 2303.
8 CARES Act Section 2304
9“Giving USA 2019: Americans Gave $427.71 Billion to Charity in 2018 Amid Complex Year for Charitable Giving,” June 18, 2019, https://givingusa.org/giving-usa-2019-americans-gave-427-71-billion-to-charity-in-2018-amid-complex-year-for-charitable-giving/
10 Howard Husock, “On Giving Tuesday, Consider the Ways Our Tax Code Discourages Charity,” National Review, December 3, 2019, https://www.nationalreview.com/2019/12/on-giving-tuesday-consider-the-ways-our-tax-code-discourages-charity/; David Bennett, “Tax Reform and Charitable Giving,” last visited April 27, 2020, https://static1.squarespace.com/static/58c5af6729687fbc123160a6/t/5d6e97d72f364a00014c97c9/1567528923699/Tax+Reform+and+Charitable+Giving.pdf
11 CARES Act Section 2204.
12It is not clear whether Congress intends to allow this deduction in future years.
13Nearly 90% of Taxpayers Are Projected to Take the TCJA’s Expanded Standard Deduction, Tax Foundation, September 26, 2018, https://taxfoundation.org/90-percent-taxpayers-projected-tcja-expanded-standard-deduction/
14CARES Act Section 2205.