The CARES Act: What the Stimulus Package Means for You
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on Friday, March 27, 2020, infusing $2 trillion into our economy. The Act is the most expensive piece of legislation ever passed and aims to mitigate some of the economic stress the coronavirus has caused through a multitude of provisions including tax breaks for both individuals and business, unemployment benefits, loan forgiveness, and individual rebates.
Many Americans will be receiving direct monetary support from the government. The current payments begin at $1,200 for individuals whose income is $75,000 or less and $2,400 for couples whose income is $150,000 or less. The amount of support begins to phase out by $5 for every $100 of income over the threshold, with ceilings of $99,000 for individuals and $198,000 for couples. In addition, there is a $500 payment per qualifying child under the age of 17. The IRS will use filers’ 2019 tax returns to determine income levels and dependents. If taxpayers have not yet filed their returns for 2019, the IRS will use the information reported on the 2018 return or Social Security information from Form SSA-1099 for those persons who did not have tax return filing obligations.
For individuals who withdraw up to $100,000 from their retirement plans for coronavirus-related distributions, the 10% early withdrawal fee will be waived. This applies to withdrawals through the end of 2020. The amount withdrawn will be treated as a tax-exempt rollover contribution if repaid in the next three years. There is also the option to spread the taxable income over a three year period, beginning in 2020, for those taxpayers not repaying the distributions.
In addition, the CARES Act temporarily waives the requirement for taking required minimum distributions (RMDs) from retirement plans in 2020. This helps individuals avoid additional taxable income for the year 2020 and also means individuals don’t need to remove money from retirement plans at a time when the markets are at a low caused by this crisis.
In addition to federal student loan payments being suspended for 60 days without penalties and interest, employers can pay up to $5,250 of student loan interest of an employee on a tax-free basis. These payments and other qualified educational expenses cannot exceed the $5,250 threshold on a tax-free basis.
To encourage individuals to contribute to charitable organizations, the ACT allows for an above the line charitable deduction for 2020, not to exceed $300. This provision is applicable whether the individual claims the standard deduction or itemizes their deductions.
The CARES Act would suspend the 60% limitation on AGI for the year 2020 for donations by generous individuals, enabling them to make substantially higher donations and benefit from the deductions. Similarly, for corporate donations, the 10% limitations are to be increased to 25% of their taxable income.
Unemployment Benefits and Gig Worker Protection
The CARES Act expands unemployment by $250B to provide those receiving unemployment with an additional $600 per week for the next four months. It also expands unemployment eligibility to cover gig economy workers such as Uber drivers and independent contractors.
The CARES Act will provide $500B in loans and assistance programs for large companies, states, and cities. These loans come with a variety of rules, including limitations on executive bonuses, bans on stock buybacks for the term of the loan plus one year, and restraints on corporations benefitting from government loans.
The Act also provides $350B for small businesses. These include SBA and bank loans, guaranteed by the government. Loans used for payroll, mortgages, utilities, and rent will be forgiven.
Aside from the “Paycheck Protection Program” loans, the CARES Act also provides benefits to those businesses with loans under Section 7(a) of the Small Business Act, such that the SBA will pay six months of principal, interest, and fees on certain qualifying loans.
Employee Retention Credit
Eligible employers may be granted a credit against employment taxes that are paid to employees who are not currently working due to the employer’s cessation of business, both full and partial., or a significant decline in gross receipts. The credit is equal to 50% of these wages and covers wages paid after March 12, 2020 and before January 1, 2021. While the credit can be claimed quarterly, it is limited to $10,000 per employee over four quarters.
Payroll Tax Deferral
Through December 2020, payroll taxes will be deferred. Repayment of 50% of deferred taxes will be due by December 31, 2021, and the remaining balance by December 31, 2022.
Modifications for Net Operating Losses (NOLs)
The CARES Act temporarily repeals the 80 percent of taxable income limitation enacted by the Tax Cuts and Jobs Act. This allows full use of NOLs for taxpayers for 2018 through 2020. Further, for NOLs arising in a tax year beginning after December 31, 2017, and before January 1, 2021, taxpayers may carryback NOLs to the preceding five tax years. This is significant since corporations were subject to a top tax rate of 35 percent generally before 2018.
Modification of Limitation on Losses for Non-Corporate Taxpayers
The CARES Act suspends the limitation on active business losses for tax years after 2017 and before 2021. The Tax Cuts and Jobs Act imposed a limitation on deduction of losses for non-corporate taxpayers in excess of $500,000 for married joint filers ($250,000 for non-married filers) for tax years beginning after 2017.
Modifications of Limitations on Business Interest
The CARES Act modifies the interest expense limitation rule imposed by the Tax Cuts and Jobs Act after 2017 by increasing the limitation from 30 percent to 50 percent of adjusted taxable income for the 2019 and 2020 tax years. Further, taxpayers may elect to use 2019 adjusted taxable income for purposes of determining their 2020 tax year limitation. As is the case under current tax law, certain small business taxpayers and real estate businesses (real estate businesses can elect out of the limitation rules with a corresponding modification to their depreciation of real property) are not subject to the interest expense limitation.
Technical Amendment Regarding Qualified Improvement Property.
The CARES Act provides a technical correction allowing bonus depreciation or special straight-line MACRS depreciation over 15 years instead of 39 years for “qualified improvement property” (i.e., an improvement to the interior portion of nonresidential real property. This does not include enlargements to the building or internal structural framework). This correction may create opportunities to amend prior-year tax returns for 2018.
Prager Metis continues to monitor this legislation and will provide updates as new developments arise. Please visit our resource center for the latest coronavirus information and insights.