In view of the COVID-19 pandemic, a massive spending bill was signed into law by U.S. President Donald Trump 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 US$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 some of the key provisions including: (A) Tax provisions applicable to corporations and individuals; (B) Tax provisions applicable to corporations. (Please see the full online version of this article for more information, including about 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, 2020
• 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.
• 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.
• 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 (under Section 965) 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)
• Special 5-year carryback period:
Current law: For NOL arising in a taxable year after December 31, 2017, the law informally referred to as the Tax Cuts and Jobs Act of 2017 (or the 2017 U.S. Tax Reform) generally eliminated the 2-year NOL carryback period and allowed the NOL carryforward period to be indefinite.
Change: The CARES 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, i.e. for calendar year taxpayers, this will be 2018, 2019, and 2020.
• Temporary suspension of the 80% NOL Limitation:
Current law: For NOL arising in a taxable year 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 CARES Act repeals the 80% limitation for taxable years beginning before January 1, 2021.
• 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 taxable income in the relevant prior years.
• Accelerating refunds for prior-year alternative minimum tax (AMT) credits
• 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.
• 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.
• 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:
• 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).
• Change: The CARES Act increases the 30%-threshold on ATI to 50% for taxable years beginning in 2019 and 2020. Special rules apply to partnership. Taxpayers are permitted to elect not to use the increased threshold. Also, taxpayers can elect to use their 2019 ATI as ATI for 2020.
• How does it affect you: Taxpayers’ ability to deduct increased 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:
• Current law: A corporation’s deduction for its charitable contributions is limited to 10% of the corporation’s taxable income.
• 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.
• 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.
Important note. The full text of the 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 U.S. tax advisors as to how these (and other) provisions could impact them before any action is taken.
This is an edited version; the full report is available to read on the Chamber’s Coronavirus Business Help Corner.
Patrick Yip, Vice Chair, and Jennifer Shih, Tax Director, Deloitte Chin