Tax Implications of COVID-19
The U.S. Congress has been moving swiftly in recent weeks to address the COVID-19 pandemic. The $8.3 billion Coronavirus Preparedness and Response Supplemental Appropriations Act was signed into law by President Trump on March 6, 2020. Just twelve days later, on March 18, 2020, the Families First Coronavirus Act was signed into law with an estimated $100 billion of additional stimulus. Currently, there are talks of at least one much larger stimulus package that is expected to be passed sometime in March. This summary will highlight the tax law changes that have happened to date, plus those that may occur in future stimulus packages given the current information.
The Tax Law Changes So Far
The first two stimulus bills focused heavily on funding certain governmental agencies, making COVID-19 testing free, providing paid leave for employees, and other provisions aimed at reducing the spread of the pandemic. While these first two bills did not have many provisions specific to tax, below are the provisions that were contained in the bills or subsequent executive actions by the Treasury.
Tax Filing Date Extension. Pursuant to Notice 2020-18, all individuals have until July 15, 2020, to file their tax returns and make any necessary payments without interest or penalties. This notice also removes the cap on the amount of tax payment that can be postponed. Prior notices had set a cap of $1 million on individual income tax payments that could be postponed.
Paid Sick Leave Tax Credit for Employers. The Families First Coronavirus Act (“FFCA”) generally requires most employers with under 500 employees to provide up to 10 business days of paid sick leave. The law provides qualifying employers a refundable payroll tax credit equal to 100% of the total wages paid on these additional sick days. These credits will generally apply to the employer’s portion of its Social Security taxes. The credit is limited to $511 per day ($5,110 total) if taking time off to care for themselves or $200 per day ($2,000 total) to care for (1) an individual who’s quarantined; (2) showing symptoms of COVID-19; or (3) a minor child whose school is closed.
Paid Sick Leave Tax Credit for the Self-Employed. The FFCA also provides for a similar credit to self-employed taxpayers as it provides qualifying employers, except the credits are taken against the taxpayer’s income tax and are refundable to the extent they exceed the taxpayer’s tax liability.
Family Leave Tax Credit for Employers. The FFCA generally requires most employers with under 500 employees to provide public health emergency leave under the Family and Medical Leave Act when an employee cannot work because they must care for a minor whose school or care provider is closed or unavailable due to a coronavirus emergency as declared by a Federal, State, or local authority. The FFCA requires employers to provide at least two-third of the employee’s usual pay up to $200 per day, or a total of $10,000. Employers receive a refundable credit that is equal to qualified family leave amount to be used against its share of payroll taxes for each employee.
Family Leave Tax Credit for the Self-Employed. A similar family leave credit is also available for self-employed taxpayers. The refundable credit is used to offset the taxpayer’s income tax liability and is equal to 100% of the qualified leave amount.
Tax Filing Date Extension. All businesses have until July 15, 2020, to file their tax returns and make any necessary payments without interest or penalties. Notice 2020-18 removed the prior $10 million cap on tax payments for corporate taxpayers, so currently there is no cap on the deferred payments.
Proposed Tax Provisions in the Phase 3 Stimulus Bill
Over the last few days there has been much speculation about future actions that will be taken by Congress in the potential third stimulus bill. So far, Senate Republicans have drafted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that outlines many tax proposals, discussed below, which are intended to stimulate the economy. While these proposals in the CARES Act have been reduced to writing, there will likely be future additions and subtractions to these proposals.
Draft Individual Provisions (Subject to Change)
Recovery Rebate Checks. Recovery rebate checks of up to $1,200 ($2,400 for taxpayers married filing jointly) will be made available to most individuals and families, with an additional $500 for every child. These recovery rebate checks are reduced by $5 for each $100 a taxpayer’s income exceeds $75,000 ($150,000 for taxpayers married filing jointly). This means that all taxpayers making below $99,000 ($198,000 for taxpayers married filing jointly) will generally receive some amount of a recovery rebate check. For those taxpayers that had a federal tax liability less than $1,200, they are eligible to receive a recovery rebate check for at least $600 if they had at least $2,500 of qualifying income. The taxpayer’s filing status, number of children, and adjusted gross income are from the taxpayer’s 2018 tax return.
Delay of Estimated Tax Payments. Individuals that are required to make estimated tax payments can postpone those payments until October 15, 2020.
Special Rules for Use of Retirement Funds. The CARES Act provides some retirement account relief for coronavirus related Distributions. Specifically, it waives the 10% early withdrawal penalty from qualified retirement accounts for amounts up to $100,000. Taxpayers can generally recontribute these amounts back to an eligible plan within three years regardless if the contribution would exceed the contribution cap for that year. The CARES Act also has some provisions that provides for increased loans from certain retirement plans.
Importantly, these special rules are currently drafted to only apply to coronavirus related distributions, which are defined as a distribution made to an individual: (1) who is diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experiences 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 due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
Above-the-Line Charitable Deduction. Generally, taxpayers must itemize their deductions to take advantage of charitable deductions. However, the CARES Act allows for a charitable deduction of up to $300, for most contributions, by taxpayers that do not itemize their deductions for the 2020 tax year. Certain contributions, such as those to a private foundation or donor advised fund, are not eligible for the above-the-line charitable deduction.
Increase in Charitable Contribution Limitations. Generally, individual taxpayers must itemize their deduction to take advantage of charitable deductions and those deductions are often limited to 50% of the individual taxpayer’s adjusted gross income. However, for 2020, the 50% limitation is suspended. Certain other restrictions do apply.
Draft Business Provisions (Subject to Change)
Delayed Estimated Tax Payments. Corporations can postpone their estimated tax payments until October 15, 2020. There is no cap on these deferred payments.
Delayed Payroll Tax Payments. Employers are responsible for paying a 6.2% Social Security tax on employee wages. The CARES Act allows for most employers to defer paying their share of the social security tax from the time the CARES Act is signed into law through December 31, 2020. Half of this deferred amount would be due on December 31, 2021 and the other half by December 31, 2022.
Modifications for Net Operating Losses. The Tax Cuts and Jobs Act of 2017 (“TCJA”) changed how businesses utilize net operating losses (“NOLs”). The most drastic changes were the inability for taxpayers to carryback NOLs to a previous tax year and the limitation of NOLs to only 80% of taxable income. The CARES Act rolls back some of these changes (at least partly). Taxpayers are generally able to carryback a loss from 2018, 2019, or 2020 for five years. Further, the 80% limitation on NOLs is also temporarily suspended. The goal is for companies to gain liquidity during the pandemic by possibly amending tax returns to take advantage of these provisions.
Non-corporate Limitation on Loss Rules. The TCJA created a limitation on the amount a non-corporate taxpayer could deduct from a pass-through entity. The CARES Act effectively modifies these rules by changing their effective date for tax years beginning after December 31, 2020. This modification should allow pass-through businesses to benefit from the new NOL carryback rules.
Alternative Minimum Tax Credits. Another part of the TCJA was the elimination of the Alternative Minimum Tax (“AMT”). The payment of corporate AMT effectively generated credits against future payments. Once repealed, the AMT credits became refundable through the 2021 tax year. The CARES Act allows companies to claim a refund for the AMT credit immediately to increase liquidity during the pandemic.
Limitation on Business Interest. Under the TCJA, starting in 2018, the deduction for business interest was generally limited to 30% of the taxpayer's adjusted taxable income for the tax year. The CARES Act increases the limitation from 30% to 50% for 2019 and 2020.
Technical Correction for Depreciating Qualified Property. Due to a drafting error in the bonus depreciation rules in the TCJA, “qualified improvement property” was not included in the definition of “qualified property” for bonus depreciation purposes. The CARES Act would correct Section 168(e), which would enable businesses to immediately write off costs associated with improving businesses. The Senate Finance Committee’s publication anticipates this will add cash flow to businesses through amending past returns.
Technical Correction for Mandatory Repatriation. A major part of the TCJA was mandating a deemed repatriation on untaxed foreign earnings by U.S. companies. Companies generally were able to pay this tax over eight annual installments. However, due to a drafting error, companies that overpaid their annual mandatory repatriation installment could not get a refund until the entire income tax liability was satisfied. The CARES Act allows companies to seek a refund on overpaid mandatory repatriation taxes as a way to increase liquidity.
Technical Correction for Constructive Ownership. The TCJA attempted to change the downward attribution of stock ownership rules on certain foreign subsidiaries as a way to prevent certain abusive transactions. However, this TCJA provision effectively caused burdensome tax and reporting requirements. The CARES Act clarifies these constructive ownership rules.
Increase in Charitable Contribution Limitations. A corporation’s charitable deductions are generally limited to 10% of its taxable income. However, the CARES Act increases this limitation to 25% of taxable income. Further, the limitation on deductions for contributions of food inventory is increased from 15% of taxable income to 25%. This increase could be especially helpful to the restaurant industry.
Proposed Next Steps
We are continuing to monitor the situation and working with our people on the ground in Washington D.C. to determine what additional tax changes are likely to apply to the CARES Act and in any future stimulus bills.