COVID-19: CARES Act and FFCRA Tax Provisions

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides relief to taxpayers affected by COVID-19. The CARES Act is the third round of federal government aid related to COVID-19. The following is a summary and analysis of the tax provisions of the CARES Act (and the Families First Coronavirus Response Act (FFCRA), effective as of April 1, 2020) to assist you in determining how they may affect or benefit you.

Tax Provisions Benefitting Individuals

2020 Recovery Rebates (aka Current Year Tax Credits) for Individuals

• For the tax year beginning January 1, 2020, “eligible individual” taxpayers (which excludes nonresident alien individuals, dependents, estates, and trusts) can benefit from a tax credit equal to the sum of: (i) $1,200 for single filers or $2,400 for married individuals filing a joint return plus (ii) an amount equal to the product of (a) $500 multiplied by (b) the number of qualifying children. This credit is phased out by 5% of the amount by which such eligible taxpayer’s adjusted gross income (AGI) exceeds: (i) $150,000 for joint-filers; (ii) $112,500 for heads of household; and (iii) $75,000 for all other types of filers. For example, the credit is fully phased out and unavailable for married joint filers with two children with an AGI in excess of $218,000.
• While the credit is ultimately determined based on the eligible individual taxpayer’s AGI for 2020, the credit can be advanced to taxpayers on their 2018 or 2019 tax return, as applicable, based on the taxpayer’s AGI for that tax year. This is referred to in the Internal Revenue Code[1] as an “advance refund.” Thus, if a single eligible taxpayer with no children has an AGI of $80,000 in 2019, she could take an advance refund of $950 on her 2019 federal income tax return ($1,200 single filer amount less $250, which is 5% of the excess of $80,000 over $75,000 threshold). If an eligible individual’s 2020 AGI is higher than the 2018 or 2019 AGI used to determine the advance refund amount, the eligible individual will not be required to pay back any excess credit. However, if the eligible individual’s 2020 AGI is ultimately lower than the 2018 or 2019 income used to determine the advance refund amount, then the eligible individual will be able to claim the additional credit for the 2020 tax year.
• Eligible individuals who have not filed a federal income tax return for 2018 or 2019 may still receive an advance refund based on their Social Security benefit statements (Form SSA-1099) or Social Security equivalent benefit statement (Form RRB-1099). As of April 1, 2020, the IRS has indicated that Social Security and Railroad Retirement recipients who are not typically required to file a tax return do not need to take any action to receive their advance refund payments. These recipients will receive these payments as a direct deposit or by paper check, just as they would normally receive their benefits. Social Security Disability Insurance (SSDI) recipients are also part of this group who don’t need to take action. Social Security, Railroad retirees, and SSDI recipients who have qualifying children can take an additional step to receive $500 per qualifying child.

(CARES Act, Title II, Subtitle B. Section 2201)

Special Rules for Use of Retirement Funds for Coronavirus-Related Distribution

• A “coronavirus-related distribution” is generally defined as any distribution from an eligible retirement plan made during the 2020 calendar year to an individual (a) who is diagnosed with COVID-19; (b) whose spouse or dependent is diagnosed with COVID-19; or (c) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, had hours reduced due to the virus or disease, being unable to work due to lack of child care due to the virus or disease, closing or reducing hours of a business owned or operated by the individual due to the virus or disease, or other factors as determined by the secretary of the Treasury Department during the COVID-19 pandemic.
• Individuals who elect to receive a coronavirus-related distribution will not be subject to the traditional 10% tax penalty imposed under the IRC for early withdrawals from eligible retirement accounts, to the extent the aggregate amount of such distributions from all plans maintained by the employer (and any member of any “controlled group” that includes the employer) to such individual does not exceed $100,000.
• Coronavirus-related distributions made from both eligible employer-sponsored retirement plans and individual retirement accounts are exempt from the 10% early distribution penalty tax to the extent the aggregate amount of the distributions to such individual does not exceed $100,000. These distributions are subject to regular income tax, although it may be spread over three years.
• Any individual who receives a coronavirus-related distribution may generally, at any time during the three-year period beginning on the day after the date such coronavirus-related distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary. These repayments of coronavirus-related distributions for eligible retirement plans, will, to the extent of the amount of the contribution, be treated as eligible rollover distributions and as having been transferred to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of distribution.
• The limitation on loans from any qualified employer plan made to qualified individuals during the 180-day period beginning on the date of the enactment of the CARES Act will be increased from $50,000 to $100,000 (or, if less, the qualified individual’s nonforfeitable benefit under the plan). In addition, should the due date of any loan repayment occur between the date of the enactment of the CARES Act and December 31, 2020, it will be delayed for one year.
• A plan will not fail to be treated as being operated in accordance with the terms of the plan during such period, solely because the plan operates in accordance with the CARES Act, so long as the plan is retroactively amended to incorporate the new rules by the last day of the first plan year beginning on or after January 1, 2022.

For more information regarding the considerations of Retirement Plan Committees in determining whether to add the coronavirus-related retirement plan distribution and loan provisions to their retirement plans, see “Coronavirus-Related Retirement Plan Distributions and Loans: Helping Retirement Plan Committees Decide.”

(CARES Act, Title II, Subtitle B. Section 2202)

Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts

• The CARES Act temporarily waives the minimum distribution requirements for: (i) most defined contribution plans (e.g., IRC section 401(k) plans); (ii) IRC section 457(b) deferred compensation plans that are maintained by an eligible employer; or (iii) Individual Retirement Accounts. This applies for all required minimum distributions that otherwise would have been required to be made in 2020.
• A plan will not fail to be treated as being operated in accordance with the terms of the plan during such period, solely because the plan operates in accordance with the CARES Act, so long as the plan is retroactively amended to incorporate the new rules by the last day of the first plan year beginning on or after January 1, 2022.

(CARES Act, Title II, Subtitle B. Sec. 2203)

Changes to Charitable Contribution Deductions

Allowance of Deduction for Charitable Contributions by Individuals Who Do Not Itemize

• The CARES Act provides taxpayers who do not itemize deductions the opportunity to take an above-the-line tax deduction for charitable contributions of up to $300 for the tax year beginning in 2020. A qualified charitable contribution is a charitable contribution (i) made in cash; (ii) for which a charitable contribution deduction is otherwise allowed; and (iii) that is made to certain publicly supported charities and not to supporting organizations, non-operating private foundations, or to donor-advised funds.

(CARES Act, Title II, Subtitle B. Sec. 2204)

Modification of Limitations on Charitable Contributions During 2020

• In the absence of the CARES Act, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI, and contributions in excess of this limitation may be carried forward as a charitable contribution in each of the five succeeding years. The CARES Act provides that, with certain exclusions described below, the percentage and excess carryover restrictions on “qualified contributions” made in 2020 are disregarded.
• “Qualified contributions” are those (i) made in cash; (ii) that are made to certain publicly supported charities and not to supporting organizations, non-operating private foundations, or to donor-advised funds; and (iii) with respect to which the taxpayer has elected to apply the modified limitations.
• With respect to individuals, qualified contributions will be allowed as deductions to the extent that the combined 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.
• With respect to corporations, qualified contributions will be allowed as deductions only if these contributions do not exceed 25% of the taxable income of the corporation (an increase from the current 10% taxable income limit). To the extent a corporation exceeds this limit, it can carry over the excess that will be eligible to be applied as charitable contribution deductions for the subsequent five tax years.
• In addition, the limitation on deductions for contributions of food inventory is temporarily increased during 2020 from 15% to 25%. Note that there may be state sales tax implications of donating food items that were purchased as inventory for resale, which will vary from state to state.

(CARES Act, Title II, Subtitle B. Sec. 2205)

Exclusion for Certain Employer Payments of Student Loans

• The CARES Act expands IRC section 127(c) educational assistance programs to allow employers to reimburse such employee for qualified education loan payments the employee has made or by making the payment directly to the lender. Qualified education loan payments include payments on principal or interest with respect to loans incurred by the employee to pay for “qualified higher education expenses” at an “eligible educational institution,” as defined in section 221(d).
• The employee can exclude the first $5,250 of such payments in 2020 from the employee’s gross income. The payments must be for a student loan incurred for the education of the employee only (not an employee’s child or spouse). This is a temporary benefit that is only available through the end of 2020.

(CARES Act, Title II, Subtitle B. Sec. 2206)

Provisions Benefitting Employers – Including Not-For-Profit Organizations

The CARES Act encourages eligible employers (including section 501(c) organizations) to keep employees on their payroll in spite of the employers’ economic hardship related to COVID-19, with an employee retention tax credit (Employee Retention Credit). At the same time, the FFCRA, which requires certain employers to pay sick or family leave wages to employees who are unable to work or telework due to certain circumstances related to COVID-19, provides a refundable tax credit to those employers for the required leave paid, up to specified limits. The same wages cannot be counted for both credits.

Employee Retention Payroll Tax Credit for Employers Subject to Closure Due to COVID-19

• Eligible employers will receive a refundable credit applied to applicable employment taxes for each calendar quarter in an amount equal to 50% of the “qualified wages” paid to employees after March 12, 2020, and before January 1, 2021. The amount of qualified wages taken into account for each eligible employee cannot exceed $10,000 per calendar quarter, and the credit itself cannot exceed the applicable employment taxes owed for such calendar quarter.
• Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
• Eligible employers are defined as employers that:
  • Operate a trade or business during calendar year 2020 and experience either:
    • The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19; or
    • A significant decline in gross receipts (this gross receipts test does not apply to section 501(c) organization employers).
  • A significant decline in gross receipts begins:
    • On the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019.
  • The significant decline in gross receipts ends:
    • On the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than 80% of its gross receipts for the same calendar quarter in 2019.
  • The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended.
• For eligible employers with an average of more than 100 full-time employees during 2019, qualified wages are generally those wages, including certain health care costs (up to $10,000 per employee) paid to employees who are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
• For eligible employers with an average of 100 or fewer full-time employees during 2019, qualified wages are those wages, including health care costs (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether its employees are providing services.
• If an employer receives a small business interruption loan under the Paycheck Protection Program, authorized under the CARES Act, then the employer is not eligible for the Employee Retention Credit.
• Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the FFCRA.
• Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under IRC section 51 for the employee.

The IRS has issued FAQ relating to the Employee Retention Credit at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act.

(CARES Act, Title II, Subtitle C. Sec. 2301)

Payroll Tax Credit for Required Sick and Family Leave Pay

• Any employer who is required under the FFCRA to pay:
  • Sick leave to an employee who is unable to work (including telework) because of coronavirus quarantine or self-quarantine or has coronavirus symptoms and is seeking a medical diagnosis, for up to 10 days (up to 80 hours) at his or her regular rate of pay (or minimum wage, if higher) up to $511 per day, but no more than $5,110 in total;
  • Sick leave to an employee who is unable to work due to caring for someone with coronavirus, or caring for a child because the child’s school or place of care is closed, or the paid child care provider is unavailable due to the coronavirus, for up to two weeks (up to 80 hours) at two-thirds the employee’s regular rate of pay (or minimum wage, if higher) up to $200 per day, but no more than $2,000 in total; or
  • Family and medical leave to an employee who has been employed for at least 30 day and who is unable to work because of a need to care for a child whose school or place of care is closed or whose child care provider is unavailable due to the coronavirus, for up to 10 weeks at two-thirds the employee’s regular pay, up to $200 per day and $10,000 in total;
  • Is entitled to a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through December 31, 2020. The refundable credit is applied against certain employment taxes on wages paid to all employees.

The IRS has issued FAQ relating to the FFCRA payroll tax credit at https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs

(FFCRA, Division G. Secs. 7001-7004)

Delay of Payment of Employer Payroll Taxes

• The CARES Act permits the deferral of payment of an employer’s share of applicable employment taxes from March 27, 2020, through December 31, 2020. Half of this deferred amount would be due on December 31, 2021, and the other half by December 31, 2022.

(CARES Act, Title II, Subtitle C. Sec. 2302)

Provisions Benefitting Businesses

Modifications for Net Operating Losses

• Prior to the CARES Act, net operating losses (NOLs) arising in a tax year beginning after December 31, 2017, could only be carried forward (not back) and are subject to an annual deduction limitation of 80% of taxable income.
• The CARES Act provides that NOLs arising in a tax year beginning after December 31, 2017, and before January 1, 2021, generally may now be carried back five years.
• The CARES Act also suspends the application of the 80% taxable income limitation for tax years beginning before January 1, 2021.
• Taxpayers may need to amend prior year returns or request refunds to take advantage of the revised NOL limitations.
• There are additional rules that apply specifically to “real estate investment trusts” and life insurance companies.

(CARES Act, Title II, Subtitle C. Sec. 2303)

Suspension of Excess Business Loss Limitation for Non-Corporate Taxpayers

• The CARES Act temporarily postpones the application of the “excess business loss” limitation applicable to pass-through businesses and sole proprietors until tax years beginning after December 31, 2021. Taxpayers may, therefore, use such excess business losses in the current year and submit amended returns and request refunds to take advantage of such excess business losses with respect to the 2018 and 2019 tax years.

(CARES Act, Title II, Subtitle C. Sec. 2304)

Modification of Credit for Prior Year Minimum Tax Liability of Corporations

• The corporate alternative minimum tax (AMT) was repealed in 2017, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The CARES Act permits corporations to claim a current refund.

(CARES Act, Title II, Subtitle C. Sec. 2305)

Modification of Limitation on Business Interest

• The CARES Act temporarily increases the amount of interest expense businesses are allowed to deduct by increasing the 30% taxable income limitation to 50% of taxable income (with adjustments) for 2019 and 2020.

(CARES Act, Title II, Subtitle C. Sec. 2306)

Technical Amendments Regarding Qualified Improvement Property

• The CARES Act contains a retroactive technical correction to the useful life of qualified improvement property (QIP), such that QIP can now be depreciated over 15 years instead of 39 years, which qualifies such property for 100% bonus depreciation. Taxpayers who placed QIP into service in 2019 can claim 100% bonus depreciation on their 2019 return. Taxpayers who placed QIP in service in 2018 should consider amending their 2018 return to treat such assets as eligible for bonus depreciation. (This can be especially effective when used by C corporations in connection with the modification to the NOL rules permitting carryback to years prior to 2018 when the tax rates were 35%, rather than the current 21%.)

(CARES Act, Title II, Subtitle C. Sec. 2307)

Temporary Exception From Excise Tax for Alcohol Used to Produce Hand Sanitizer

• After December 31, 2019, and before January 1, 2021, the CARES Act temporarily suspends the excise tax on alcohol used to produce and distribute hand sanitizer in a manner consistent with any guidance issued by the FDA related to the outbreak of COVID-19.

(CARES Act, Title II, Subtitle C. Sec. 2308)

Suspension of Certain Aviation Excise Taxes

• The CARES Act temporarily suspends the imposition of aviation excise taxes through December 31, 2020.

(CARES Act, Title IV, Subtitle C. Sec. 2309)

[1] All references herein are to the Internal Revenue Code of 1986, as amended.