President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus (COVID-19). We summarise the key financial relief provisions and tax measures below. Click here for a link to the full text of the bill.
For organisations facing financial strain as a result of COVID-19, the Small Business Administration (SBA ) loans can help offset a variety of costs. The maximum amount for these loans is 2.5 times the average total monthly payroll costs, or up to USD 10 million. The interest rate may not exceed 4%. Businesses can also defer payment of the principal, interest and fees for six months to one year. Part of this loan (spent during the first eight weeks on specific operating expenses such as payroll, mortgage interest, rent or utilities) may be forgiven and not includable as taxable income.
The CARES Act provides eligible individuals with a refund equal to USD 1,200 (USD 2,400 for joint filers) plus USD 500 per qualifying child. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds USD 75,000 (USD 150,000 for joint filers and USD 112,500 for head of household filers). The credit is completely phased out for individuals with no qualifying children if their AGI exceeds USD 99,000 (USD 198,000 for joint filers and USD 136,500 for head of household filers).
Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid Social Security number.
The CARES Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after 31 December 2017, and before 1 January 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made. In addition, the 80% limitation on NOL deductions arising in taxable years beginning after 31 December 2017, has temporarily been pushed to taxable years beginning after 31 December 2020.
The CARES Act allows the refundable AMT credit to be completely refunded for taxable years beginning after 31 December 2018 or, by election, taxable years beginning after 31 December 2017. Under the Tax Cuts and Jobs Act (TCJA), the credit was refundable over a series of years with the remainder recoverable in 2021.
The CARES Act amends Section 163(j) solely for taxable years beginning in 2019 and 2020. With the exception of partnerships, and solely for taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of their adjusted taxable income (ATI), an increase from 30% of ATI under the TCJA, unless an election is made to use the lower limitation for any taxable year.
For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any such contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the five succeeding years.
The CARES Act temporarily suspends the AGI limitation for qualifying cash contributions. Instead, individual taxpayers can take a charitable contribution deduction for qualifying cash contributions made in 2020, to the extent such contributions do not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Any excess is carried forward as a charitable contribution in each of the succeeding five years.
The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries.
Several provisions in the law assist certain employers who keep employees on payroll even though the employees are not able or needed to work. The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels.
Additionally, certain employers affected by the pandemic who retain their employees will receive a credit against payroll taxes for 50% of eligible employee wages paid or incurred from 13 March to 31 December 2020. This employee retention credit would be provided for as much as USD 10,000 of qualifying wages, including health benefits.
Eligible employers may defer remitting employer payroll tax payments that remain due for 2020 (after the credits are deducted), with half being due by 31 December 2021, and the balance due by 31 December 2022. Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits if the employer rehires the qualifying employees.
For more information: Visit the BDO USA COVID-19 Crisis Hub for the latest guidance and advice for businesses and individuals.
Andrew Gibson
agibson@bdo.com
Todd Simmens
tsimmens@bdo.com