Webinar report: CohnReznick – The CARES Act – 6 April 2020
TABS Webinar Report
CohnReznick – The CARES Act
6 April 2020
- Brian Newman, CPA. Partner. Practical leader. Federal Tax Services.
- Dana Fried. JD.LLM. Managing director. National Tax Services.
- Corey L.Rosenthal, JD. Practical Leader. State & Local Tax Services
- Robert C.Moss. Principal, National Director of Governmental Affairs. CohnReznick
- Stephanie Pervez. JD Principal
- Patrick J.Duffany, JD, CPA. Managing Partner tax
(all CohnReznick Advisory, Assurance, Tax)
HOW THE CARES ACT IMPACTS INDIVIDUALS
Recovery rebates act
- Government checks made out to individual taxpayers.
- Provides immediate tax-free cash assistance to Americans and their families.
- Payments of up to 1200$ (2400$ for MFJ), increased by 500$ per qualifying child. This amount starts chasing out at $75000 of income and, anyone making more than $99000 or $198000 for married couples filing jointly, you will not be eligible.
- Treasury Secretary Mnuchin said money should be direct deposited or mailed in a matter of weeks.
- Payments reduced for higher-income taxpayers, begin phasing out at the following AGI (adjustments gross income) thresholds.
- Payments are reduced by 5 percent of the amount of AGI that exceeds these thresholds.
- Payments are based on 2019 tax returns ( or 2018 returns, if 2019 has not yet been filed).
- No guidance yet for when 2019 returns must be filed, so that the IRS will use a 2019 returns rather than a 2018 return to determine payment amounts.
- Eases the limitations on deducting charitable contributions.
- For taxpayers that itemize: 60 percent of AGI deduction limitation for cash contributions is suspended in 2020.
- For taxpayers that do not itemize: up to $300 of cash contributions may be deducted as “above the line” deductions beginning in 2020.
This affects employers and employees.
Exclusion of certain employer payments of student loans
- Employer payment of up to $5,250 of employee student loans excluded from employee income.
- Applies whether the employer pays the lender directly or reimburses the employee.
- Payments can be made through December 31, 2020.
- The $5,250 cap on payments applies to both new student loan repayment benefit and other educational assistance.
- Other educational assistance includes tuition, fees, books etc.
Additional unemployment assistance available to a “covered individual” for up to 39 weeks of unemployment, partial unemployment or inability to work caused by COVID-19 . A covered individual, is an individual not eligible for regular compensation or extended benefits under State or Federal law.
- Applicable individuals must not be entitled to any other Federal or State unemployment compensation or waiting period.
- Regardless of state law, no waiting period applies.
This new pandemic unemployment assistance, provides an additional $600 per covered individual per week up to 39 weeks, ends July 31.
All states that tax personal income have moved their filling deadlines beyond April 15
- New Hampshire and Tennessee do not tax earned income but do tax investment income ( NH deadline: June 15, 2020; TN deadline: July 15,2020).
- Virginia Extended its tax payments deadline to June 1, 2020, but its filling deadline remains May 1, 2020.
- Moved Deadlines to July 15: OR, CA, MT, UT, AZ, CO, NM, ND,NE, KS, OK, MN, MO, AR, LA, WI, IL, MI, IN, KY, AL, GA, SC, NC, OH, WV, PA, NY, ME, MA, RI, CT, NJ, DE, MD, DC.
- Moved deadlines to a different date: ID ( 6/15), IA (7/31), MS (5/15), VA (6/1), HI(7/20).
- No personal Income :WA, NV, AK, WY,SD, TX,TN, FL, NH.
Losses And IRA Distributions
Impact on individuals
- Prior to the CARES Act, individuals were required to carry forward any Net Operating Loss (“NOL”) that they sustained.
- The CARES Act will now allow individuals to carry their 2018, 2019 and 2020 losses back five years and file for a refund.
- The CARES Act also removes the 80% taxable income limitation through 2020.
The CARES Act provides a one-year waiver of Required Minimum Distributions.
For those who are receiving required minimum distribution or RMD from the IRS, whether because you are older than 70 and a half or because you inherited an IRA, those distributions are suspended for 2020. You did not have to take that RMD or if you already have taken it you have 60 days to put it back and it will not be taxable.
Estate planning considerations
GRATs, loans and transferring assets with low fair market value.
- Now is a good time to consider estate planning with depressed values and low interest rates.
- Taxpayers can use GRATs or intra-family loans to take advantage of these historically low rates.
- With values depressed, there is the opportunity to move more value to the next generation so that the appreciation is in their hands rather than in your estate.
CARES ACT: BUSINESSES
Impact of NOLs
Modification of NOLs
Under TCJA NOLs are limited to 80% of taxable income, and may not be carried back.
- The 80% limitation is removed (can offset 100%of taxable income)for tax years beginning after December 31, 2017 and before January 1, 2021.
- NOLs created in taxable years after December 31,2017 and before January1,2021can be carried back 5 years.
- The ACT postpones the enactment of section 461(l),the excess business loss limitation which is applicable to individuals, until tax years beginning after December 31, 2020.
- Note; the Act clarifies that wages are not to be included as business income (post-2020 consideration).
- Special REIT rules:NOLs from a REIT year cannot be carried back and a loss generated in a non- REIT year cannot be carried back to a REIT year.
- There are special rules for life insurance companies and carry back years to which section 965 applies.
Special Rule for Fiscal year returns beginning in 2017
Under TCJA corporations with a fiscal year beginning in 2017 (filed on 2017 returns) were not able to carry back NOLs generated in that year, based on the technical wording of TCJA’s limitation on carrybacks.
- Under the Act, NOLs created on these returns can be carried back 2 years (as would have been expected).
- Procedural relief: An election to forego this 2-year carryback or the filing of a claim for refund on Form 1139 will be considered timely filed if filed within 120 days of enactment of the CARES Act.
- A Taxpayer that misses the 120-day deadline to file Form 1139 can still file an amended return, but the time to receive the refund will increase.
- There is no current guidance on how affected taxpayers will elect to forego the carryback if they choose not to carry it back.
Clarification of interaction of pre-TCJA NOLs and TCJA NOLs
TCJA provided no guidance as to how Pre-TCJA NOLs and TCJA NOLs would interact.
- For taxable years beginning after December 31, 2020, the Act clarifies that pre-TCJA NOLs are applied first, which can offset 100% of taxable income. The TCJA 80% of taxable income rules then applies to the remaining taxable income, which TCJA NOLs can offset.
- Example: Corporation has a pre-TCJA NOL of 50,000 and a TCJA NOL of 50,000 carried to tax year 2022; a year the corporation has 100,000 of income. Total NOL usage equals 90,000: 50,000 of pre-TCJA NOL (100%) and 40,000 of TCJA NOL (100,000 minus 50,000, the net of 50,000 being multiplied by 80% which equals 40,000).
- Had the rule been that the 80% is applied to taxable income before the application of the pre-TCJA NOL, then the full 100,000 of income would have been offset.
Acceleration of corporate AMT credits
Corporations can take AMT credit in 2018 or 2019. TCJA repealed the corporate alternative minimum tax (AMT), but made corporations generally receive credit refunds over 4 years.
- The Act allows corporations to recover remaining AMT credits fully for tax years beginning in 2019.
- Alternatively, an election may be made to take the AMT credit fully in tax years beginning in 2018 (which presumably would only be done by fiscal year returns still on extension).
Changes to 163(j)
TCJA generally limits interest deductions to 30% of an entity’s adjusted taxable income (ATI).
- The Act generally increases the limitation to 50% of ATI for taxable years beginning in 2019 and 2020.
- Taxpayers can elect out of this provision. Presumably most taxpayers would not choose to do so, however it may be beneficial if they are subject to BEAT.
- Taxpayers can elect to use their 2019 ATI in calculating their 2020 limitation. This will be beneficial to the majority of taxpayers that will likely have less income in 2020 due to the epidemic.
- Procedural issue: There is no current guidance on whether any relief will be given to taxpayers who elected out of section 163(j) in 2018 or 2019 and now want to revoke.
Partnership Rules (apply to partnerships only)
- The limitation for taxable years beginning in 2019 remains at 30% of ATI.
- For excess business interest expense (EBIE) created in 2019 and carried to 2020:
- 50% of this EBIE will be deductible by partners in 2020, without regard to 2020 ETI.
- The remaining 50% will be subject to ETI limitations in 2020.
- Partners can elect out of this treatment.
- The ATI limitation for partnerships for taxable years beginning in 2020 is 50% of partnership ATI (unless the partnership elects to use the 30% limitation).
Technical correction to TCJA: QIP
A drafting error in the TCJA required a 39-year depreciable life for qualified improvement property (generally, certain improvements to a building’s interior). The Act corrects this error, and makes it 15-year depreciable property (20-year ADS), as intended. This will allow businesses to deduct the expense of these improvements immediately because they will be eligible for 100% bonus depreciation. They will also be able to potentially amend prior-year tax returns to adjust for this correction and potentially claim refunds.
Procedural Issue: There is no current guidance as to how 2018 and 2019 already filed can be “corrected” to adjust QIP to 15 years and take bonus.
Corporate charitable contributions and Excise tax on Alcohol.
- Charitable contributions: The Act increases the 10 percent limitation for corporations to 25 percent of taxable income.
- Temporary exception from excise tax for alcohol used to produce hand sanitizer: Taxpayers are excepted from excise tax for distilled spirits removed in 2020 and used for hand sanitizer produced and distributed in response to COVID-19.
FFCRA REQUIRED LEAVE.
Health Insurance Coverage, Required Documentation, Recordkeeping and DOL Notice
- Requirement to maintain health coverage during emergency leave period: While employee is taking an emergency paid sick or emergency family leave, employer required to maintain the employee´s coverage under employer´s group health plan on the same conditions as coverage would have been provided if the employee had been continuously employed during the entire leave period.
- Employee documentation/ Employer Recordkeeping and DOL notice Requirements: Prior to taking an emergency leave, employee must provide employer with certain documentation as to the type of leave requested and the reason(s) for the leave. Regardless of whether the requested leave is granted or denied, employer must retain the documentation for 4 years. Numerous other employer recordkeeping and 4-year retention requirements apply. Covered employers must post DOL Model notice regarding the emergency leave requirements on employer’s premises, or can e-mail or direct mail to employees or post on employer´s internal or external website.
FFCRA EMERGENCY FAMILY LEAVE
For the period April 1 – December 31, 2020, covered employers required to provide up to 12 weeks of emergency leave for employees who, because of a public health emergency, are unable to work (or telework) because they need to care for a child under age 18 whose school or place of care is closed, or where such a child’s care provider has become unavailable, or because they need to care for a child of any age who is incapable of self- care on account of a disability.
- Employee must be employed by the employer for at least 30 calendar days to be eligible. Emergency family leave not available for an employee when the employer does not have work for the employee.
- Emergency family leave can be unpaid for the first 10 days. Employees may but cannot be required to use accrued vacation, personal leave or sick leave for this period.
- After the initial 10 days of emergency family leave, the employee must be paid for the remainder of the emergency family leave period, generally at the rate of two-thirds of the employee’s regular rate of pay, for the number of hours the employee would have otherwise been scheduled to work. Special rules apply to part-time employees.
- Emergency paid family leave payment amounts are limited:
- Lesser of 67% of pay or $200 per day/$10,000 in the aggregate
- Leave taken under the Family Medical Leave Act of 1993 within the preceding 12 weeks reduces the 12-week period of an available emergency family leave.
Deferral of Payment of Employer Portion of 2020 Social Security Tax – For the period March 27 – December 31, 2020, otherwise required deposits of the employer portion of the Social Security tax will be considered timely if 50% of the required deposits are made by December 31, 2021, and the remaining 50% is deposited by December 31, 2022. For self-employed individuals, the deposit deferral also extends to 50% of the Social Security portion of the SECA tax and related estimated tax payment obligations. If an employer utilizes a payroll agent or professional employer organization (PEO) for federal payroll tax deposit purposes and directs the agent or PEO to defer the deposit of its payroll taxes, solely the employer will be liable for the deposits being made under this provision on a timely basis.
The deferral is not available for an employer that has had indebtedness forgiven under a loan received under the Paycheck Protection Program.
Employee retention credit
Refundable payroll tax credit applicable to employer portion of the Social Security tax, equal to 50% of the amount of the “qualified wages” paid or incurred from March 13, 2020 through December 31, 2020. Credit available to employer for any calendar quarter:
- Where the employer’s operations were fully or partially suspended due to a COVID-19 related shut-down order, or
- Beginning with a 2020 calendar quarter for which the employer’s gross receipts declined by more than 50% when compared to the same quarter in 2019, and ending with a 2020 calendar quarter for which the employer’s gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019.
- Credit provided against the first $10,000 of compensation, including cost of health plan coverage, paid to an eligible employee for all applicable calendar quarters.
- Employer can obtain credit in advance using IRS Form 7200.
- Credit available only to the common law employer, including where the employer uses a third party payer, such as a payroll agent or PEO.
- Credit not available to self-employed individuals.
- Employer cannot receive an employee retention credit for the same wages that it receives a credit for – mandatory payments for emergency paid sick leave or emergency paid family leave under the FFCRA, paid leave under the Family Medical Leave Act of 1993 or for a Work Opportunity Credit.
- Employee retention credits are not available to an employer that receives a loan under the Paycheck Protection Program.
Tax-Favored IRA and Retirement Plan Withdrawals
The 10% excise tax on taxable IRA/tax-qualified retirement plan distributions received when younger than age 59-1/2 not applicable to a distribution received on or after January 1, 2020 and before December 31, 2020, of up to $100,000.
Applies only to an individual who or whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19 per a test approved by the CDC, or who due to SARS-CoV-2 or COVID-19 experiences adverse financial consequences as a result of being quarantined, furloughed or laid-off or having work hours reduced, being unable to work due to a lack of child care, school closing or reduced hours of a business owned or operated by the individual, or for other factors determined by the Secretary of the Treasury. A retirement plan administrator can rely on an employee’s certification that the above requirements have been met.
The distribution can be partially or fully repaid by making, at any time during the 3-year period beginning on the day after the date of the distribution, one or more contributions to an eligible retirement plan that accepts rollover contributions, for a total amount no greater than the amount of the distribution. This will avoid federal income taxation on the receipt of the distribution as if it had been contributed as a timely direct rollover. Unless the recipient elects not to have it apply for any tax year, the taxable amount of the distribution may be included in income ratably over 3 years.
Increased Maximum Tax-Qualified Retirement Plan Loans – For the 180 day period following enactment, the tax-qualified retirement plan loan limit is doubled for a loan to an individual who or whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19 or who due to SARS-CoV-2 or COVID-19 experiences adverse financial consequences as a result of being quarantined, furloughed or laid-off or having work hours reduced, being unable to work due to a lack of child care, school closing or reduced hours of a business owned or operated by the individual, or for other factors determined by the Secretary of the Treasury. If the individual has an outstanding plan loan (other than a home loan) under which any repayment due date occurs between the enactment date and December 31, 2020, the repayment due date will be delayed for 1 year.
2020 Waiver of Required Minimum Distributions – Required minimum distributions are suspended for 2020 for IRAs and for many defined contribution retirement plans, including defined contribution tax-qualified retirement plans.