Congressional Action on the COVID-19 Pandemic: The Coronavirus Aid, Relief, and Economic Security Act
Congressional Action to Date
In response to the COVID-19 crisis, government officials in Washington DC have taken a number of actions related to the economic effects of the crisis including legislation, regulatory action, and government agency action. The immediate focus has been on immediate, “crisis-specific” proposals, but there will also be discussion of longer-term actions that will be necessary to deal with the economic consequences of the virus crisis.
The Senate has now passed a third economic relief bill, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including $2 trillion of tax and spending proposals designed to address the impacts of the coronavirus pandemic with the House scheduled to vote on the package Friday, March 26th. The President is expected to sign the bill.
Congress had already approved, and the President had signed two pieces of legislation designed to address the economic effects of the global coronavirus outbreak. Read our summary of these two bills.
Additional Tax/Economic Relief and Other Tax Issues for 2020
A “Phase Four” bill will likely be considered by Congress as government officials continue to assess the impact of the COVID-19 pandemic on the economy and the public health system. House Speaker Pelosi (D-CA) has already stated that the CARES Act “is not going to be the last bill.”
Prior to the crisis, 2020 looked to be a quiet year with respect to tax issues due to the November Presidential and Congressional elections. The COVID-19 crisis has now fundamentally changed the tax legislative landscape for 2020 with the legislation already enacted and additional proposals likely to be considered as part of additional economic stimulus packages.
The ability of the two parties to work in a bipartisan manner on crisis legislation may allow for the potential of additional tax legislation, but agreement will continue to be very difficult to reach. Tax issues that could be considered as part of any future economic relief and stimulus packages include tax extenders, technical corrections, additional retirement legislation, green energy, expansion of the Earned Income Tax Credit (EITC), and infrastructure legislation.
IRS Defers Federal Tax Payment and Filing Date for 90 days
On March 24th, the IRS issued a set of answers to frequently asked questions (“Q&A’s”) to further clarify the relief granted to taxpayers due to the ongoing COVID-19 pandemic. On March 20, 2020, the IRS issued Notice 2020-18, which provides for an automatic 90-day extension (to July 15, 2020) of the filing and payment deadline for all Federal income tax returns and payments previously due on April 15, 2020. Notice 2020-18 supersedes and expands upon the relief granted in Notice 2020-17, in which the IRS initially announced that individuals could defer tax payments up to $1 million for 90 days and corporations could defer tax payments up to $10 million for the same period.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act
On March 25th, the Senate voted 96-0 to approve the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which is a $2 trillion tax-and-spending bill intended to address the effects of the COVID-19 pandemic in the United States.
Only one amendment, which was defeated, was offered to the bill by Senator Sasse (R-NE), with language that would have ensured that an individual’s unemployment benefits could not exceed their earnings prior to unemployment. The amendment resulted from a Democratic change to the original Republican draft which added an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
Unofficial estimates are that the provisions in the CARES Act will increase the federal deficit by $2 trillion, but no official estimates are available yet from either the Joint Committee on Taxation or the Congressional Budget Office. The summary of the tax provisions that was issued by the Senate Finance Committee does include a cost estimate for some provisions.
The CARES Act includes several significant new provisions that are designed to assist businesses and individuals who have been affected by the coronavirus pandemic and its economic effects. Taxpayers should carefully review all of these proposals to ascertain where there are opportunities that can be used to continue business operations and retain employees during this public health emergency.
Taxpayers should also stay engaged and knowledgeable about what proposals are advancing in Congress and with respect to the Treasury Department as these new proposals are implemented and while Congress considers additional tax and economic relief.
Summary of the CARES Act
The CARES Act includes several key business tax provisions including the following:
- 5-year net operating loss (NOL) carryback
- Suspension of the excess business loss rules under Section 461(l)
- Changes to the Section 163(j) interest deduction limitations
- Accelerated alternative minimum tax (AMT) refunds
- Payroll tax relief
- Tax credit for employers who retain employees
- Technical correction to the Tax Cuts and Jobs Act (TCJA) related to “qualified improvement property” (“retail glitch”)
- Temporary suspension of certain aviation excise taxes
- Temporary exception from the excise tax for alcohol used to produce hand sanitizer
Tax provisions which were included in the initial drafts of the legislation but dropped in the final bill include:
- Delay of corporate estimated tax payments and expanded filing deadlines – however, recently released IRS guidance, Notice 2020-18, postpones until July 15, 2020 the deadline for making estimated tax payments and filing certain tax returns (discussed above)
- A technical correction to the TCJA regarding Section 965 overpayment refunds
- A provision restoring the limitation on downward attribution of stock ownership in applying constructive ownership rules
The CARES Act includes several provisions for tax and economic relief for individuals:
- “Recovery rebate checks” (direct cash payments)
- Special rules for the use of retirement accounts to allow penalty-free access
- Expanded charitable donation deduction
- Temporary expansion of the scope of the tax exclusion (but not the amount of) for employer-provided educational assistance to include payments of qualified education loans by an employer to either an employee or a lender
The CARES Act also includes several non-tax provisions to assist with coronavirus mitigation and response including:
- $500 billion for a Treasury Department Exchange Stabilization Fund to provide loans, loan guarantees, and other investments to eligible businesses and $349 billion for a Small Business Administration “paycheck protection program.”
- The Act also includes $340 billion in emergency funding for hospitals, healthcare agencies, and assistance to state and local governments responding to the coronavirus.
- The Act includes $260 billion for increased unemployment assistance, including up to four months of full replacement wages up to certain limits for individuals who lose a job or are furloughed due to the coronavirus crisis. A temporary waiver of waiting period requirements is provided and payments are permitted for individuals not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus crisis.
Details of the Business Tax Provisions
Net operating loss carryback: The Act includes provisions that would allow taxpayers to carry back net operating losses (NOLs) arising in tax years beginning after December 31, 2017 and before January 1, 2021 to the five prior tax years. NOLs incurred in these years could fully offset prior-year taxable income.
This would alter changes in the TCJA, which generally eliminated all carrybacks and provided that the NOLs arising in years beginning after December 31, 2017, are deductible against only 80 percent of taxable income under Section 172. A TCJA-related technical correction that clarifies the effective date of the NOL carryback rules is also included.
Relaxation of excess business loss rule: The TCJA included a new Section 461(l), the “excess business loss” rule, which generally limits certain current losses attributable to trades or businesses for noncorporate taxpayers to $250,000 ($500,000 in the case of joint filers), indexed for inflation annually. The CARES Act would generally suspend the limitation through December 31, 2020, so that the limits would not apply to tax years beginning in 2018, 2019, and 2020. These noncorporate owners could also benefit from the Act’s temporary NOL carryback allowance under Section 172.
Enhanced interest deductibility under Section 163(j): The Act increases the 30% adjusted taxable income limitation to 50% for tax years beginning in 2019 and 2020 for all businesses. The TCJA generally limited the deduction for business interest expense to business interest income plus a threshold amount of 30 percent of “adjusted taxable income” (ATI). The Act also allows all taxpayers (including partnerships) to elect to use their 2019 adjusted income for its 2020 limitation.
A special rule was added that excludes partnerships from the increased limitation based on 50% of ATI in tax year 2019. Instead, in 2020 partners may deduct 50% of their distributive share of the partnership’s excess business interest carried forward from prior years without regard to the Section 163(j) limitation. The bill would also allow taxpayers to elect out of the increased limitation because of interaction with Section 163(j) and other provisions, such as the Base Erosion and Anti-Avoidance tax (BEAT).
Enhanced refundability of previously generated AMT credits: The TCJA repealed the alternative minimum tax (AMT) but included a new Section 53(e), which allowed corporations to recover previously generated AMT credits against regular tax (or, if in excess of regular tax, as refundable credits) after 2017 and before 2022. The CARES Act generally would allow corporations to accelerate any remaining AMT credits they have not yet utilized into 2019. The bill provides a mechanism by which a taxpayer can elect to take the entire remaining refundable credit amount in 2018 or apply for a tentative refund of such amount.
Payroll Tax Relief: The CARES Act would allow employers (and self-employed individuals) to defer payment of the 6.2 percent employer-side Social Security payroll tax, effective for wages paid between the date of enactment and December 31, 2020. Payment would be due in equal parts on December 31, 2021, and December 31, 2022. The payroll taxes that can be deferred include the employer portion of FICA taxes, the employer and employee representative portion of Railroad Retirement taxes, and half of SECA tax liability. The shortfalls in the Social Security and Disability Insurance Trust funds would be replaced by transfers from the government’s general fund.
Refundable employee retention credit: The Act includes a new temporary refundable employee retention credit for employers subject to full or partial business suspension due to the COVID-19 crisis, or for employers whose gross receipts have significantly declined due to COVID-19 (defined as a reduction in gross receipts of more than 50% when compared to the same quarter in the prior year). The credit is equal to 50% of the qualified employee wages and will be applied against the employer’s share of payroll taxes. The amount of qualified compensation (including health benefits) eligible for the credit with respect to any individual employee is limited to $10,000, and the credit is limited to applicable employment taxes on wages paid (reduced by the payroll Work Opportunity Tax Credit, the payroll research credit, and the payroll tax credits under the Families First Coronavirus Response Act). Any excess payments will be refunded.
The refundable credit is only applicable for wages paid after March 12, 2020, and before January 1, 2021. The credit is not available to government employers at the federal, state, and local level, but is available to certain tax-exempt organizations.
Eligible employers may elect out of this provision. The Act includes aggregation rules for eligible employers.
TCJA technical correction for qualified improvement property: The Act includes a technical correction to the TCJA that would treat qualified improvement property (QIP) as 15-year property under MACRS and eligible for current law 100 percent bonus depreciation. This corrects an unintended mistake in the TCJA and is effective as of the date TCJA was passed.
Aviation excise taxes: The Act would temporarily repeal federal excise taxes collected for commercial aviation including excise taxes applied to the transportation of persons (the ticket tax), the transportation of property (cargo tax), and aviation fuel – from the date of enactment through the end of 2020.
Excise Tax for Alcohol used in hand sanitizer: The Act includes a new provision under Section 5214 that would waive the excise tax during calendar year 2020 for any alcohol used to produce hand sanitizer that is produced and distributed, consistent with any guidance issued by the Food and Drug Administration related to the COVID-19 crisis.
Details of the Individual Tax Provisions
Direct Cash Relief – Recover Rebate Checks: The Act provides for direct cash relief to individuals in the form of “recovery rebate” checks issued through the IRS with base amounts of $1200 for single taxpayers and $2400 for joint filers. An additional $500 for every qualifying child will be paid.
The payments would begin to phase out when adjusted gross income (AGI) exceeds $75,000 for single taxpayers, $112,500 for heads of households, and $150,000 for joint returns. Payments would be reduced by $5 for each $100 by which a taxpayer’s AGI exceeds the phase-out threshold with relief phasing out completely when a taxpayer’s AGI exceeds $99,000 for single taxpayers, $146,500 for heads of households, and $198,000 for joint returns.
AGI for purposes of this provision would be based on a taxpayer’s 2019 federal income tax return if it has been filed. If a 2019 has not been filed, AGI would be based on the taxpayer’s 2018 return. A Social Security benefit statement will be used for individuals who have not filed tax returns for either 2018 or 2019.
Retirement Funds – Increased Access: The CARES Act includes a provision that would waive the 10 percent early withdrawal penalty for distributions of up to $100,000 from qualified retirement plans to cover emergency expenses related to the coronavirus. Income tax on the distributions would be payable over three years, and withdrawn amounts could be recontributed within three years without regard to that year’s contribution cap. The Act also relaxes the rules for loans from retirement for qualified relief.
The Act also waives the required minimum distribution rules for certain defined contribution plans and individual retirement accounts in calendar year 2020.
The Act defines a coronavirus-related distribution as a distribution made to an individual who:
- Is diagnosed with COVID-19;
- Has a spouse or dependent who is diagnosed with COVID-19; or
- Experiences financial hardship as a result of being quarantined, furloughed, or laid off; a reduction in work hours; inability to work due to lack of child care due to COVID-19; the closing or reduction in hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.
Charitable Deductions – Expanded Rules: The Act modified the current-law limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals who itemize, the limitation based on 60% of AGI limitation would be suspended for 2020 so that charitable contributions up to 100% of AGI would be deductible. For corporations, the current 10 percent limitation would be increased to 25 percent of taxable income.
The current limitation on deductions for contributions of food inventory would be increased from 15 percent to 25 percent. The Act also permits a partial above-the-line deduction of up to $300 for non-itemizers who make cash contributions in 2020.
Exclusion for employer-provided educational assistance expanded: The Act permits employers to provide a student loan repayment benefit to employees on a tax-free basis. The employer may contribute up to $5250 annually toward an employee’s student loans, and the payment would be excluded from the employee’s income. This provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
Health-care related tax provisions: The Act includes two provisions that would expand the flexibility of various tax-preferred health care savings vehicles that are linked to high-deductible insurance plans by:
- Providing that a high-deductible health plan would not lose its qualified status solely because it does not offer telehealth services; and
- Treating payments for certain female care products as eligible expenses under the rules governing health savings accounts (HSAs), medical savings accounts, and similar arrangements.