Federal Tax Provisions
The Act provides for immediate rebate payments to millions of Americans. The maximum rebate is $1,200 per individual taxpayer and $2,400 for married taxpayers filing a joint return. An additional $500 credit for each child is also provided.
The rebate is reduced by $5 for each $100 that a taxpayer’s income (based on data from their 2019 income tax return, if already filed, or 2018 income tax return, if not filed) exceeds $75,000 or $150,000 for single and joint filers, respectively. The rebate will be completely phased out for income in excess of $99,000 for single taxpayers and $198,000 for joint filers.
Postponed Tax Deposit Deadlines
The 6.2% employer portion of Social Security taxes for wages paid from the date of enactment through December 31, 2020 may be deferred and paid during the subsequent two tax years. Half of the deferred payment is due on December 31, 2021 and the remaining half is due on December 31, 2022.
Employee Retention Tax Credit
The ACT provides a refundable payroll tax credit for wages paid by an employer whose operations were suspended due to a COVID-19 business shut-down order or whose gross receipts declined by more than 50% compared to receipts in the same prior year quarter.
The credit applies to all qualified wages paid by an employer with 100 or fewer full-time employees whether or not the employer’s business is closed or subject to a shut-down order. For an employer with more than 100 employees, the credit applies to qualified wages paid to employees that are unable to work in the employer’s business due to the situations previously described.
The credit is equal to 50% of the qualified wages paid or incurred from March 13, 2020 to December 31, 2020, limited to the first $10,000 (including health benefits) of wages paid to each eligible employee.
Business Tax Loss Limitations
The Tax Cuts and Jobs Act (“TCJA”) eliminated the ability of taxpayers to carryback net operating losses and implemented an 80% taxable income limitation for the utilization of net operating loss carryforwards generated in tax years beginning after 2017. The TCJA also instituted an excess business loss limitation for losses attributable to sole proprietorships or pass-through entities.
The CARES Act allows a five-year carryback of net operating losses generated in tax years beginning after December 31, 2017. The ACT also temporarily suspends the 80% taxable income limitation. Similarly, the Act modifies the excess business loss limitation for 2019 and 2020 so that sole proprietorship and flow-through losses also may be more easily utilized.
The new law suspends the individual charitable contribution limitation of 60% of adjusted gross income for the 2020 tax year and creates a $300 charitable contribution deduction that is available to taxpayers that do not itemize deduction. Similarly, the Act increases the charitable contribution limitation for corporations for the 2020 tax year from 10% to 25% of taxable income and increases the limitation for food inventory contributions from 15% to 25%.
Retirement Plan Withdrawals
Individuals diagnosed with COVID-19 or those subject to a COVID-19 related financial detriment (layoff, reduced hours, required child care, etc.) may withdraw up to $100,000 from a qualified retirement plan account through the end of 2020. The withdrawals are not subject to the 10% early withdrawal penalty. Amounts repaid to the plan within three years would be treated as tax-free rollover contributions and amounts that are not repaid would be taxable over a three-year period.
Other Tax Provisions
The new law contains several favorable changes to business provisions including:
- Increases the interest expense deduction limitation from 30% to 50% of adjusted taxable income for the 2019 and 2020 tax years.
- Accelerates the ability of corporations to recover alternative minimum tax (AMT) credit carryforwards.
- Amends the provisions defining the class life of certain qualified improvement property making that property eligible for immediate bonus depreciation. This amendment is a permanent technical correction to the TCJA.
- Allows employers to provide up to $5,250 of tax-free educational assistance and student loan payments to each of its employees during 2020.