Massive US Tax Relief Act to Combat Economic Fallout From COVID-19
In view of the Coronavirus Disease 2019 (COVID-19) pandemic (the outbreak), the U.S. Government signed into law a massive spending bill on March 27, 2020 – the Coronavirus Aid, Relief, and Economic Security (CARES) Act. By some unofficial estimates, the CARES Act is expected to increase the federal deficit by approximately $2 trillion. The CARES Act provides favorable tax and nontax provisions aimed at improving cash flows and liquidity for U.S. individuals and businesses.
Below is a high-level summary of the key provisions that is presented in three sections: (A) Tax provisions applicable to corporations and individuals; (B) Tax provisions applicable to corporations; and (C) Tax provisions applicable to individuals.
A. Tax Provisions Applicable to Corporations and Individuals
• Delay Filing of and Payment on Federal Income Tax Returns due April 15, 20201
o Current law: Certain taxpayers (the term “taxpayer” refers to an individual, a trust, estate, partnership, association, company, or corporation) would be required to file their 2019 Federal income tax returns and pay the required taxes on or before April 15, 2020.
o Change: The Internal Revenue Service (IRS) grants filing and payment relief for taxpayers (as described above) who are affected by the outbreak (Affected Taxpayers). For an Affected Taxpayer, the relief provides:
1. The due date for making Federal income tax payments (including tax payments on self-employment income) and filing Federal income tax returns due on April 15, 2020 in respect of an Affected Taxpayer’s 2019 taxable year is automatically postponed to July 15, 2020, and
2. The due date for making Federal estimated income tax payments (including tax payments on self-employment income) due on April 15, 2020 in respect of an Affected Taxpayer’s 2020 taxable year is automatically postponed to July 15, 2020.
o How does it affect you:
• Interest and penalties for late filing or late payment will be suspended until July 15, 2020.
• Affected Taxpayers will need to file appropriate extension forms (e.g. Form 4868, Form 7004 or Form 8992)2 by July 15, 2020 to obtain an applicable extension of time to file a Federal income tax return past July 15, 2020.
• Affected Taxpayers that have elected to make transition tax payments over eight annual instalments, and whose Federal income tax return filing due date has been postponed from April 15 to July 15, the due date of the instalment payment has also been postponed to July 15, 2020.
B. Tax Provisions Applicable to Corporations
• Modification for Net Operating Losses (NOLs)
o Special 5-year carryback period:
Current law: For NOL arising in a taxable year ending after December 31, 2017, the 2017 U.S. Tax Reform eliminated the 2-year NOL carryback period and allowed the NOL carryforward period to be indefinite.
Change: The CARE Act allows for NOLs arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to be carried back to each of the five taxable years preceding the taxable year in which such loss arose.
o Temporary suspension of the 80% NOL Limitation:
Current law: For NOL arising in a taxable year ending after December 31, 2017, the 2017 U.S. Tax Reform limited the NOL deduction to 80% of the taxable income for the taxable year.
Change: The CARE Act repeals the 80% limitation for taxable years beginning before January 1, 2021.
o How does it affect you: The special 5-year carryback period, coupled with the repeal of the 80% limitation, provides businesses the ability to –
• Utilize NOLs in a taxable year beginning as early as 2013 (e.g. for an NOL that arose in the 2018 taxable year); and
• Offset taxable income in those prior years that had been subject to a 35% corporate income tax rate.
This relief provision would be able to provide additional cash flows and liquidity to taxpayers who had profits in the relevant prior years.
• Accelerating refunds for prior-year alternative minimum tax (AMT) credits
o Current law: The 2017 U.S. Tax Reform repealed the corporate AMT but enabled corporations to recover previously paid AMT against the regular tax liability (or, if the AMT paid is in excess of the regular tax liability, 50% of the excess is a refundable credit) after 2017 and before 2022.
o Change: Increasing the cash refund attributable to the AMT refundable credit amount (the excess of the credit over the regular liability) from 50% to 100% for 2019.
o How does it affect you: Taxpayers with AMT refundable credit amounts should consider applying for the refunds based on the prescribed procedures.
• Enhanced business interest expense deductibility:
o Current law: Certain taxpayers are subject to a limitation of business interest deduction equal to the amount of business interest income plus a 30%-threshold of its “adjusted taxable income” (ATI).
o Change: The CARE Act increases the 30%-threshold on ATI to 50% for taxable years beginning in 2019 and 2020. Also, taxpayers can elect to use their 2019 ATI as ATI for 2020.
o How does it affect you: Taxpayers' increased ability to deduct business interest expense in 2019 and 2020 may potentially increase the amounts of NOLs generated in these taxable years. This may mean more NOLs may be carried back to the relevant prior years pursuant to the special 5-year NOL carryback period to obtain refunds of higher-taxed income.
• Enhanced charitable contribution deductibility - corporation:
o Current law: A corporation's deduction for its charitable contributions is limited to 10% of the corporation's taxable income.
o Change: Temporarily increase a corporation's limitation on the deduction of its aggregate amount of "qualified contributions" made in cash on or after January 1, 2020, but on or before December 31, 2020 from 10% to 25% of the corporation's taxable income.
o How does it affect you: Increased incentive for taxpayers to make charitable contributions during the 2020 tax year, promoting corporate contributions made towards relieving the outbreak.
• Technical amendment regarding qualified improvement property
o Current law: As part of the 2017 U.S. Tax Reform, improvement to an interior portion of a building which is nonresidential real property, and when such improvement is placed in service after the building itself was placed into service, would be considered "qualified improvement property" (QIP). Further, it was intended that qualified property placed in service after December 31, 2017 with a less than 20-year property classification would be eligible for a 100% bonus deduction. However, the final statutory language neglected to include QIP as a less than 20-year property classification and thus not eligible for the bonus depreciation.
o Change: The CARES Act provides a technical amendment by designating 15-year property as QIP eligible for the 100% bonus depreciation. The amendment is retroactive and would be applicable to property placed in service after December 31, 2017.
o How does it affect you: With the additional 100% bonus depreciation for the 2018 tax year, taxpayers who had QIP placed in service in the 2018 tax year may revisit their filed returns to determine if there would be an increase in depreciation due to the amendment or in the amount of NOL generated in such taxable year. This may mean more NOL may be carried back to the relevant prior years pursuant to the special 5-year NOL carryback period to obtain refunds of higher-taxed income.
• New employee retention credits:
o Current law: Not applicable.
o Change: Provide relief to employers who are compelled to close their businesses due to the outbreak but will continue to pay their employees during the period of closure. The credit is equal to an amount that is 50% of the qualified wages paid by a qualified employer to an employee, with maximum amount of eligible wages capped at $10,000 per employee. The credit can be used to offset against the Old Age, Survivors, and Disability Insurance (OSADI) tax imposed on the amount of wages paid by an employer. If the credit exceeds the employer's overall OASDI tax, the excess would be refunded.
o How does it affect you: The credit only applies to wages paid after March 12, 2020 and before January 1, 2021 and the limitation on the amount of eligible salary may vary depending on the size of the business (i.e. whether the employer has more than 100 or 100-or-less full-time employees).
C. Tax Provisions Applicable to Individuals
• Recovery rebates in the form of direct cash payments
o Current law: Not applicable.
o Change: In the 2020 tax year, the IRS would provide direct cash payments in the amount of USD1,200 for a single individual, USD 2,400 for married individuals filing jointly and an additional USD $500 per qualifying child. A complete phase-out of the payment applies when a taxpayer's adjusted gross income (AGI) exceeds USD 99,000 (for single filers), USD 146,500 (for heads of households), or USD 198,000 (for joint returns) for the 2019 taxable year.
o How does it affect you: The rebate will be determined based on your AGI reported on an already filed 2019 tax return or the AGI on the 2018 return if the 2019 tax return has not been filed. Note that if upon filing the 2019 tax return it was determined that you are not eligible for the rebate, you would be required to repay the amount received.
• Increase access to retirement plans
o Current law: A participant (under the age of 59.5) who receives a distribution from tax-favored employer-sponsored retirement plans and Individual Retirement Accounts (IRAs) is subject to a 10% additional tax (unless an exception applies).
o Change: The CARE Act allows such participants to take "coronavirus distributions" from tax-favored employer-sponsored retirement plans and IRAs of up to $100,000 without incurring the 10% additional tax.
o How does it affect you: To the extent that you are affected by the outbreak (e.g. personally or have a spouse/dependent diagnosed with the coronavirus, experienced adverse financial consequences due to the coronavirus as result of being quarantined, laid off, reduced work hours, etc.), the coronavirus distribution may help increase your cash flows and liquidity. Although still taxable as gross income, the recipient may elect to include in gross income the amount of distribution ratably over a three-year period. The recipient is allowed to repay a coronavirus distribution over a three-year period. Any amount repaid would be deemed rolled over and thus, not included in gross income.
• Enhanced charitable contribution deductibility – Individuals
o Current law: Individual taxpayers who itemize their deductions can deduct cash contributions up to 60% of their AGI for contributions made after 2017 and before 2026.
o Change: Individual taxpayers who itemize deductions can elect to deduct up to 100% of their AGI for "qualified" cash contributions (i.e. cash contributions made to public charities, etc.) paid during 2020. Any excess of such "qualified" contributions not deducted in 2020 can be carried forward.
o How does it affect you: Increased incentive for taxpayers to make charitable contributions during the 2020 tax year, promoting individual contributions made towards relieving the outbreak.
• Relaxation of the excess business loss rule for individuals
o Current Law: For tax years beginning after December 31, 2017 and through 2025, noncorporate taxpayers are generally not allowed to deduct more than $500,000 (for joint filers) and $250,000 (for other taxpayers) of their business losses attributable to trades or businesses.
o Change: the Care Act would generally postpone the effective date of this business loss limitation rule retroactively from tax years beginning after December 31, 2017 to tax years beginning after December 31, 2020.
o How does it affect you: To the extent that the 2018 or 2019 federal income tax return has been filed and the deduction of business losses was limited due to the rule described above, a taxpayer may wish to evaluate whether their returns should be amended to deduct business losses without regard to the limitation such that it may give rise to a reduced amount of taxable income for the taxable year or an additional NOL that may be carried back to obtain a tax refund.
Important note. The full text of CARES Act is 880 pages in length. It is therefore important to note that the above is a highly simplified summary of some fairly complex provisions and taxpayers are strongly advised to consult their qualified US tax advisors as to how these (and other) provisions could impact them before any action is taken with respect to any provision in the CARES Act.
1 Notice 2020-18 (superseding Notice 2020-17): Relief from timely filing 2019 Federal income tax returns due April 15, 2020, timely paying 2019 Federal income tax due April 15, 2020, and timely paying 2020 Federal estimated income tax due April 15, 2020. See HERE for IRS FAQ.
2 Specifically, the postponement applies to filing and payment of Federal income taxes reported on the following forms:
• Form 1040, 1040-SR, 1040-NR, 1040-NR-EZ, 1040-PR, 1040-SS
• Form 1041, 1041-N, 1041-QFT
• Form 1120, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF
• Form 8960
• Form 8991
• Forms 709 (United States Gift and Generation-Skipping Transfer Tax Return) and making payments of Federal gift and generation-skipping transfer tax due April 15, 2020, is automatically postponed to July 15, 2020. [Notice 2020-20]
With respect to Form 990-T, if that Form is due to be filed on April 15, then it has been postponed to July 15 under the Notice. For taxpayers whose Form 990-T is due on May 15, that due date has not been postponed under the Notice.
With respect to returns due on March 16, 2020, which include Form 1065, Form 1065-B, Form 1066, and Form 1120-S for calendar year taxpayers, the filing of those returns has not been postponed.
Tax Newsflash is published for the clients and professionals of Deloitte Touche Tohmatsu. The contents are of a general nature only. Readers are advised to consult their tax advisors before acting on any information contained in this newsletter.
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Posted on 2020/03/31