Business and Individual Income Tax Provisions of the CARES Act

Expanded Deductibility of Net Operating Losses (“NOLs”) 

The Act permits NOLs generated in taxable years beginning before January 1, 2021, to fully offset taxable income, thereby eliminating the prior 80% of taxable income limitation on deductibility. The Act also eliminates the 80% limitation on the deductibility of NOLs arising in taxable years beginning before January 1, 2018, and carried forward to taxable years beginning after December 31, 2017 (subject to a 20-year carryforward period for such losses). In addition, the Act permits NOLs generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to be carried back for 5 years. These carrybacks are not available to REITs. The Act also allows a 120-day period from the date of enactment to file an application to carry back an NOL to a prior tax year or to make an election to forego certain carrybacks of NOLs. These changes will allow corporations to use losses sustained in 2020 (or 2019 or 2018) to amend prior years’ tax returns and obtain refunds. 

Easing of Business Interest Expense Limitation

For taxable years beginning in 2019 and 2020, the Act permits corporate taxpayers to increase the limitation on the deductibility of net business interest (i.e., business interest income less business interest expense) from 30% of adjusted taxable income (“ATI”) to 50% of ATI. Taxpayers may elect to use 2019 ATI to calculate the 2020 limitation. In the case of partnerships, the higher limitation applies only to 2020, although a partnership may elect to use 2019 ATI to calculate the limitation. In addition, a partner that was allocated excess business interest that could not be deducted by the partnership in 2019 is permitted to deduct 50% of such excess business interest in 2020, with the remaining 50% subject to the new 50% limitation. The current law exceptions from these limitations for electing real property trades or businesses and small-business taxpayers with average annual gross receipts that do not exceed $25 million continue to apply.

Suspension of Limitation on Excess Business Losses for Noncorporate Taxpayers 

Since 2018, noncorporate taxpayers have not been permitted to deduct more than $250,000 ($500,000 in the case of a joint tax return, in each case, increased for inflation) of losses from a trade or business, i.e., excess business losses, to offset non-business income. The Act retroactively suspends this limitation on the deductibility of excess business losses by noncorporate taxpayers for taxable years beginning January 1, 2018, through December 31, 2020. 

Employee Retention Refundable Payroll Tax Credit for Employers Subject to Closure or Reduction in Business Due to COVID-19

The Act grants to eligible employers a refundable tax credit against the 6.2% employer portion of Social Security taxes paid on qualified wages paid in 2020. The credit for each calendar quarter is limited to 50% of qualified wages, subject to a cap on qualified wages of $10,000 per employee for all calendar quarters. Only wages paid after March 12, 2020, and before January 1, 2021, may be taken into account for purposes of this provision. 

If the credit for any calendar quarter exceeds the employer portion of Social Security taxes on the wages paid with respect to all employees for the calendar quarter, the excess is refundable. An “eligible employer” is an employer that was carrying on a trade or business in 2020, the operation of which was fully or partially suspended by a government order limiting commerce, travel or group meetings due to COVID-19 or that experiences a reduction in its quarterly receipts of more than 50% as compared to the same calendar quarter in the prior year. Eligibility ceases in the first quarter in which gross receipts are greater than 80% of gross receipts for the same calendar quarter in the prior year. Tax-exempt organizations may also be eligible employers. 

For an eligible employer with an average of more than 100 full-time employees in 2019, qualified wages eligible for the credit are wages paid to an employee who is not providing services to the eligible employer due to the government order or the reduction of business, as applicable. For an eligible employer with 100 or fewer employees, all wages qualify for the credit. In addition, qualified wages for this purpose include qualified health plan expenses that are properly allocable to such wages. “Qualified health plan expenses” are amounts paid or incurred by the eligible employer to provide or maintain a group health plan, but only to the extent that such amounts are excluded from the employee’s gross income.  

An eligible employer may elect not to have this provision apply. If an eligible employer obtains a Small Business Administration loan under the Payroll Protection Program (discussed below), the employer is not eligible for the payroll tax credit. The credit is subject to recapture if the employer received a credit prior to obtaining such a loan.

Delay of Payment of Employer Payroll Taxes

Both employers and self-employed individuals are permitted to defer the payment of the 6.2% employer portion of Social Security taxes payable on or after the date of enactment of the Act through December 31, 2020. Fifty percent of the deferred amounts must be paid by December 31, 2021, and the remaining 50% must be paid by December 31, 2022. If a taxpayer has indebtedness forgiven under Section 1106 or 1109 of the Act relating to loans made pursuant to the Payroll Protection Program, then the taxpayer is not eligible for this deferral. 

Acceleration of Credit for Prior Year Minimum Tax Liability of Corporations

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) eliminated the corporate alternative minimum tax (“AMT”) but provided for the ability to claim a refundable AMT credit over a four-year period ending in 2021. The Act accelerates to 2019 the end of the period for claiming the refundable credit or, if a taxpayer elects, allows the entire refundable credit to be claimed for its 2018 tax year.

Immediate Expensing of Qualified Improvement Property

The Act made a technical correction to the TCJA to enable businesses to expense immediately the costs of “qualified improvement property” (i.e. interior improvements to nonresidential real property placed in service after the date the building was placed in service) or, in the case of an electing real property trade or business, to depreciate such property over a period of 20 years. This change is retroactive to taxable years beginning in 2018. 

Exclusion for Forgiven Indebtedness of Certain Small Business and Treasury Loans

The Act includes a Paycheck Protection Program, which will make loans available to small businesses through the Small Business Administration’s section 7(a) Loan Guaranty Program. The Act also authorizes the Treasury Department and other federal agencies to authorize banks and other lenders to participate in the Paycheck Protection Program. Borrowers under these programs will be eligible for forgiveness of a portion of such loans under certain conditions. The Act provides that any amounts forgiven under these provisions will be excluded from gross income.¹

2020 Recovery Credits/Rebates for Individuals

An individual with adjusted gross income (“AGI”) of $75,000 or less ($112,500 in the case of a head of household) will be entitled to a tax credit of $1,200 in 2020 under the Act). Married individuals filing a joint return with AGI of $150,000 or less will be eligible for a $2,400 credit. The amount of the credit is increased by $500 for each child who qualifies as a dependent of the taxpayer. The tax credit is reduced by 5% of the excess of AGI over the thresholds set forth above. The Internal Revenue Service will determine qualification based on 2019 income, but, if the taxpayer has not yet filed a tax return for 2019, qualification will be based on 2018 income. The credit will be automatically paid in the form of a tax refund, with no action required. Nonresident individuals, estates and trusts are not eligible to claim the credit.

Distributions and Loans from Tax-Favored Retirement Plans

The Act relaxes rules regarding distributions from certain tax-favored retirement accounts for distributions related to the coronavirus pandemic for individuals who are or have certain family members who are diagnosed with COVID-19 or who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual, in each case, as a result of COVID-19. The Act allows such individuals to take distributions in 2020 of up to $100,000 from their eligible retirement plans without the 10% penalty that would otherwise apply and pay income tax on such distributions over a 3-year period. The amount of such distributions may be recontributed to an eligible retirement plan within 3 years after the distribution. The Act increases the limit for permitted loans from retirement plans to $100,000 and delays the repayment dates for retirement plan loans that are due after the date of enactment and before January 1, 2021. The Act also eliminates the minimum distribution requirements from certain retirement plans for 2020. 

Enhanced Deductions for Charitable Contributions  

The Act permits individual taxpayers who do not itemize deductions to deduct up to $300 for charitable contributions of cash made in 2020 that are not made to donor-advised funds or supporting organizations of other charities. The Act also increases the limitations on deductibility for certain cash contributions made by individuals who itemize deductions and corporate taxpayers.

Exclusion for Certain Employer Payments of Student Loans

Between the date of enactment of the Act and December 31, 2020, if an employer repays, directly or indirectly, an employee’s student loan, the amount repaid, subject to a cap of $5,250, is excluded from the employee’s taxable income. The cap is reduced by any other educational assistance payments received by the employee that are otherwise excluded from taxable income.

Please reach out to Goodwin’s Tax team to review or continue the discussion.

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[1] Goodwin’s client alert discussing Paycheck Protection Program loans is available here.