CARES Act – Income Tax Implications

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CARES Act – Income Tax Implications

COVID-19 Tax Update

The CARES Act includes many income tax implications for both businesses and individuals. Below are summaries of the top provisions from this new legislation.

 

Section 2303 – Modifications for net operating losses

  • The CARES Act grants a 5-year carryback for net operating losses (NOLs) generated in tax years beginning after December 31, 2017 and before January 1, 2021. This will potentially create NOLs offsetting taxable income that was taxed at the 35% rates.
  • The Tax Cuts and Jobs Act imposed an 80% taxable income limitation on NOLs generated after December 31, 2017 being carried forward, but the Cares Act suspends the limitations for tax years beginning prior to January 1, 2021.
  • In addition, there are limitations on carrybacks for REITS, rules related to NOL carryback with Section 965 inclusions due to foreign subsidiaries, and technical corrections the Tax Cuts and Jobs Act.

 

Section 2304 – Modification of limitation on losses for taxpayers other than corporations

  • Taxpayers other than corporations were disallowed excess business losses from tax years beginning after December 31, 2017 and before January 1, 2026 under the Tax Cuts and Jobs Act. Excess business losses were the excess of the taxpayer’s aggregate trade or business deductions for the tax year over the sum of the taxpayer’s aggregate trade or business gross income plus $250,000 ($500,000 for married filing jointly) adjusted for inflation.
  • The CARES Act modifies the dates to beginning after December 31, 2020 and before January 1, 2026, so retroactively the excess business loss limitations does not apply to the tax years beginning in 2018 or 2019.
  • It is likely that taxpayers will need to amend their 2018 and 2019 tax returns if they have already been filed.
  • In addition, there are technical corrections related to the Tax Cuts and Jobs Act.

 

Section 2305 – Modification of credit for prior year minimum tax liability of corporations

  • Corporate Alternative Minimum Tax was repealed with the Tax Cuts and Jobs Act, though some corporate taxpayers still had minimum tax credits carrying forward under the Alternative Minimum Tax regime.
  • The Tax Cuts and Jobs Act allowed them to take the credits against regular tax liability through 2021. The CARES Act accelerated the credits to be taken 50% in 2018 and the remaining 50% in 2019.
  • The corporate taxpayer can also elect to take the entire refundable credit amount in 2018. The taxpayer may need to file an application for a tentative refund.

 

Section 2306 – Modification of limitation on business interest

  • Section 163(j) limits the deduction of business interest expense to the sum of the following: the taxpayer’s business interest income for the tax year, 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year, plus the taxpayer’s floor plan financing interest for the tax year. The business interest that is limited in a given year is carried forward indefinitely.
  • The 30% of taxpayer’s ATI is increased to 50% for tax years beginning in 2019 and 2020, except for partnerships.
  • Taxpayers will be able to utilize the 2019 ATI for the 2020 tax year in determining the business interest expense limitation.
  • Partnerships:
    • Partnerships are only allowed the increase to the 50% for tax years beginning in 2020.
    • 50% of the excess business interest expense from 2019 will be treated as if it was paid or accrued in 2020 and will not be subject to limitations of Section 163(j). The remaining 50% will be treated under the normal rules of Section 163(j).

 

Section 2307 – Technical amendments regarding qualified improvement property

  • Qualified improvement property is retroactively enacted to qualify as 15-year recovery period since the enactment of the Tax Cuts and Jobs Act. The change in recovery period allows the additional first-year depreciation deduction (“bonus depreciation”).
  • Qualified improvement property is any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service. The following improvements do not qualify: the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
  • Taxpayers will likely need to file an accounting method change to change the depreciation methods on the 2018 qualified improvement property.

 

Section 2201 – 2020 recovery rebates for individuals

  • All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits.
  • No action is required from most people in order to receive a rebate check as IRS will use a taxpayer’s 2019 tax return if filed, or in the alternative their 2018 return. This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
  • The rebates will be direct deposited to same account the payee authorized their 2018 tax refunds be sent to.

 

Section 2204 – Allowance of partial above the line deduction for charitable contributions

  • For taxable years beginning in 2020, there shall be a $300 deduction against adjusted gross income for qualified charitable contributions. This will allow taxpayers who do not itemize to obtain some benefit of up to $300 of charitable contributions.

 

Section 2205 – Modification of limitations on charitable contributions during 2020

  • The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50% of adjusted gross income limitation is suspended for 2020. For corporations, the 10% limitation is increased to 25% of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15% to 25%.

 

Section 2206 – Exclusion for certain employer payment of student loans

  • The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
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