In response to COVID-19, the federal government has enacted unprecedented legislation to mitigate the economic impact of the virus on businesses and individuals. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) builds tremendously on two previously enacted pieces of legislation and largely provides for targeted and temporary relief. Tax policy is front and center, with a focus on getting money directly into the hands of millions of individuals and providing liquidity for small businesses.

Here are the key tax and other significant provisions of the CARES Act.

Business Tax Relief

Many of the business tax provisions suspend or relax changes implemented by the 2017 Tax Cuts and Jobs Act, while others focus on incentivizing employee retention. The business tax provisions include: 

• A dollar-for-dollar employee retention credit against payroll tax liability equal to 50 percent of the first $10,000 in wages per employee paid after March 12, 2020, and before January 1, 2021. Eligible employers must have carried on a trade or business during 2020 and must either (1) have business operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel or group meetings due to COVID-19 or (2) experience a significant year over year reduction in profits (looking at calendar quarters) within a certain time period. Businesses participating in the Paycheck Protection Program (PPP) are ineligible for this relief.
• Employer-side Social Security payroll tax payments attributable to wages paid in between March 27, 2020, and January 1, 2021, may be delayed and paid back over the next two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. A general fund transfer will replace these employer payments to make the Social Security Trust Fund whole. This provision also covers self-employed individuals. Businesses participating in the PPP may defer without penalty through the date their lender issues a decision to forgive the loan.
• Net operating losses (NOLs) earned in 2018, 2019 or 2020 are automatically carried back up to five years. Taxpayers desiring to avoid the carryback must opt out for each year. The NOL limit of 80 percent of taxable income is also temporarily suspended, so businesses may use any NOLs they have to fully offset their taxable income. Corporations, pass-through business and sole proprietors will be able to take NOLs in accordance with these provisions.
• Suspends the limitations on excess farm losses as well as excess business losses of pass-through businesses and sole proprietors for 2018, 2019 and 2020 tax years.
• An increase in the net interest deduction amount from 30 percent to 50 percent of taxable income for 2019 and 2020. There are special rules that apply to partnerships’ 2019 tax year.
• Current deduction for qualified improvement property costs instead of being depreciated over many years; prior year’s returns may be amended to take advantage of this provision.
• The acceleration of corporate AMT credits available through 2021 for current use, allowing businesses the chance to claim a current refund.
• A waiver of the federal excise tax on any distilled spirits for or contained in hand sanitizer for 2020. The hand sanitizer must be produced and distributed according to guidance issued by the FDA in order to qualify under this provision of the Act.

Paycheck Protection Program

The CARES Act also amends the Small Business Act (SBA) to create a new business loan program category that will provide 100 percent federally-backed loans to eligible small businesses to help cover costs of operation such as payroll, rent, health benefits and insurance premiums. Key aspects of these provisions include the following:

• Eligible entities include certain nonprofit organizations employing no more than 500 employees.
• Certain loan forgiveness allowed for business loans will be excluded from gross income. Loan forgiveness will be allowed in an amount equal to the cost of maintaining payroll continuity and costs related to debt obligations during the period of March 1, 2020, through June 30, 2020, and is reduced for employee cuts or reductions. Employers with tipped employees may receive loan forgiveness for additional wages paid to those employees.
• The CARES Act also expands on the SBA’s Economic Injury Disaster Loan Program for a period from January 31, 2020, to December 31, 2020. Businesses will receive an advance of $10,000 within three days of filing an application, regardless of whether they are ultimately approved for the loan. This advance does not need to be repaid. If a business that receives an emergency advance transfers into the PPP, the advanced amount will reduce any payroll cost forgiveness amounts.

Individual Tax Relief

The individual tax provisions of the CARES Act range from individual rebates to expanded charitable deduction limits. The Act specifically provides for:

• Advanced refundable tax credits (rebate checks) of up to $1,200 for eligible individuals, $2,400 for eligible joint filers, and an additional $500 per child. These numbers begin to phase out for individuals earning $75,000 and joint filers earning $150,000, with the IRS using taxpayers’ 2019 returns if filed, or 2018 returns in the alternative, to determine these amounts. There is a complete phaseout for incomes exceeding $99,000 for individuals and $198,000 for joint filers, but there is no minimum income requirement. The CARES Act exempts the rebates from offset to pay debts owed to other federal agencies, state income tax obligations and unemployment compensation debts (except for support that is past due).
• Retirement account distributions up to $100,000 will not be subject to the 10 percent early withdrawal penalty for any “coronavirus-related distribution,” meaning a distribution by a person who has been diagnosed with COVID-19, whose spouse or dependent has been diagnosed with COVID-19; or who experiences financial hardship as a result of being quarantined, furloughed, laid off, caring for children or working reduced hours due to such virus. This provision covers retirement plans and IRAs. Taxpayers can recontribute the withdrawn funds into their retirement accounts at any time for three years from the date of distribution without affecting retirement account caps. To the extent these amounts are not repaid, they may be included in the taxpayer’s taxable income ratably over the same three-year period.
• A waiver of the required minimum distributions for certain contribution plans and IRAs for calendar year 2020. The delay applies to both 2019 required minimum distributions that need to be taken by April 1, 2020, and the 2020 required minimum distributions. There is a special rollover rule allowing amounts subject to required minimum distribution in 2020 to be rolled over. The CARES Act also delays the due date for certain amendments to plans, as well as delays the minimum funding contributions for qualified plans, including quarterly contributions until January 1, 2021.
• A charitable contribution deduction of up to $300 in cash contributions in addition to the standard deduction. For those who itemize, the CARES Act also removes the cap on permissible charitable deductions for 2020. Individuals may therefore deduct certain contributions to the extent of their adjusted gross income for 2020 and carry over any excess to be used during the following five-year period. The Act also relaxed the deduction limitation on corporations for qualified contributions made in 2020, expanding it from 10 percent to 25 percent of a corporation’s taxable income and allowing for certain carryovers of excess contributions for five years. Finally, the CARES Act raises the limit on the amount that may be deducted for contributions of food inventory during 2020, raising it from 15 percent to 25 percent.
• An expanded definition of employer-provided educational assistance that is excluded from gross income to include up to $5,250 in student loan payments made by an employer between the date of the CARES Act and the end of 2020. The CARES Act also suspends involuntary collections on student loans.

Individual Unemployment Insurance

Beyond individual tax relief provisions, the other major form of relief for individuals is unemployment compensation. More specifically, the CARES Act provides for:

• Expanded unemployment assistance (Pandemic Unemployment Assistance) through December 31, 2020, to provide payments to those who are traditionally ineligible for unemployment benefits (self-employed individuals and independent contractors) and are unable to work as a direct result of COVID-19. This expansion largely covers gig-economy workers.
• Payments of an additional $600 per week will be given to recipients of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
• Emergency unemployment relief payments to states, which allow them to reimburse nonprofits, government agencies and Indian tribes for half of the costs they incur to pay unemployment benefits from December 31, 2020.

Other Provisions

Other key provisions in the CARES Act include:

• Up to $500 billion for severely distressed economic sectors, including air carriers and air cargo carriers, businesses critical to maintaining national security and other facilities established by the Federal Reserve to support lending to eligible businesses, states and municipalities.

• Mortgage forbearance at the request of a borrower with a federally-backed mortgage loan, regardless of delinquency status and without penalties, fees or interest for those affirming financial hardship due to COVID-19.

• Expanded coverage for certain testing and expedited coverage for any service, treatment or immunization that is intended to prevent or treat COVID-19.

• Clarification that for health savings account (HSA) plan years beginning on or before December 31, 2021, a plan will not fail to be a high deductible health plan by failing to have a deductible for telehealth and other remote care services. The CARES Act also repeals the rule enacted in the Affordable Care Act that prohibited the use of HSA funds for over-the-counter medicines.

• $150 billion appropriated to states, territories, Indian tribes and local governments to help these bodies respond to the COVID-19 public health emergency.
• Emergency appropriations for various federal programs that may be available to companies during this financial downturn.

In addition to the CARES Act, Congress enacted the Families First Coronavirus Response Act (FFCRA) to provide emergency family and medical leave broader than the current Family and Medical Leave Act and paid sick leave to certain employees affected by COVID-19, as well as other provisions to help individuals and businesses handle impacts of the pandemic.

For more details on the FFCRA, the CARES Act, and the latest developments related to COVID-19, visit Williams Parker’s resource center. 

Christina J. Strasser is a business and tax attorney with the law firm of Williams Parker.