The $2.2 trillion COVID-19 stimulus package (“the Act”) passed by the Senate last night contains a number of tax provisions affecting both individuals and businesses. Here is a short summary of those provisions along with a few other important considerations:
Recovery Checks to Most Americans
Payments of $1,200 for each U.S. resident adult and $500 for each child, with a phase-out for higher-income taxpayers. For taxpayers with 2018 (or 2019 if a return has been filed) adjusted gross income (“AGI”) over $150,000, there is a reduction of $5 for every $100 over that threshold. For a married couple filing a joint return with no children, the rebate is fully phased out at $198,000 (phase-out for single individuals begins at $75,000 and fully phased-out at $99,000 if no children).
Unemployment Insurance Assistance
There are several components in the Act to help individuals affected by the Coronavirus pandemic. These include a temporary Pandemic Unemployment Assistance program through the end of 2020 to provide payments to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, and others) who are unable to work because of the Coronavirus pandemic. The Act also provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months. An additional 13 weeks of pandemic unemployment benefits will be provided to help those who remain unemployed after weeks of state unemployment benefits are no longer available. Funding will be provided to pay the cost of the first week of unemployment benefits for states that choose to pay benefits as soon as someone is unemployed, rather than observing the one-week waiting period before the individual is eligible for benefits. Funding will also be provided to support states with “short-time compensation programs”, where employers reduce employee hours instead of laying off workers.
Early Withdrawal of Retirement Funds
The 10% early withdrawal penalty will be waived for distributions up to $100,000 from qualified retirement accounts for Coronavirus related purposes, and income tax on such distributions would be subject to a 3-year spread instead of all of it being taxed in the year of distribution. Further, an individual can re-contribute the funds to an eligible retirement plan within 3 years. There will also be flexibility for loans from certain retirement plans for Coronavirus-related relief. Conditions for eligibility include individuals: (1) who are diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, having their hours cut, being unable to work due to lack of child care, closing or reducing hours of their business, or other factors to be determined by the Treasury Secretary.
Waiver of Required Minimum Distribution (“RMD”) Rules
For certain defined contribution plans and Individual Retirement Accounts (“IRAs”), the RMD rules will be waived for calendar year 2020. This provides relief to individuals who would otherwise be required to liquidate retirement assets to make the RMD.
Charitable Contributions Deduction Made Easier
Individuals can take an above-the-line charitable contribution deduction of up to $300 for the 2020 tax year. The limitation on individuals to 50% of adjusted gross income is suspended and the 10% limitation for corporations is increased to 25% of taxable income, each applicable only to the 2020 tax year.
Exclusion for Certain Employer Payments of Student Loans
Employers will be able to provide a student loan repayment benefit to employees on a tax-free basis. Up to $5,250 can be applied toward an employee’s student loans and excluded from their taxable income. The $5,250 applies to both the new student loan repayment benefit as well as other educational assistance (e.g. tuition, books) provided.
Employee Retention Credit for Employers Closed due to COVID-19
Employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year will be entitled to a refundable payroll tax credit for 50 percent of qualified wages paid by employers to employees during the COVID-19 crisis. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Delay of Payment of Employer Payroll Taxes
Employers and self-employed individuals will be able to defer payment of the employer share of the payroll tax they would otherwise owe. Taxes deferred must be paid over the following two years, with half of the amount to be paid by December 31, 2021 and the remainder by December 31, 2022.
Net Operating Loss Rules Changed
The net operating loss (“NOL”) rules are modified to permit the carryback of losses from 2018, 2019 or 2020 for losses arising in those years, and can be carried back five years. Also, the current provision limiting NOLs to only offset 80% of taxable income is suspended for 2019 and 2020.
Net Business Loss Limitation
The special rules under Internal Revenue Code Section 461 to limit certain business losses is suspended for the 2019 and 2020 tax years.
Corporate Alternative Minimum Tax (AMT) Credit
The Act accelerates the ability of companies to recover unused AMT credits, permitting companies to obtain a current refund.
Business Interest Expense Limitation Relaxed
The provision under Internal Revenue Code Section 163(j) limiting business interest expense to 30% of taxable income (with adjustments) is relaxed to raise that limit to 50% for tax years beginning in 2019 and 2020. The new limitation does not apply to partnerships for tax years beginning in 2019 only, but a special rule is provided such that 50 percent of excess business interest expense allocated to a partner is fully deductible in the partner’s first taxable year beginning in 2020, and the remaining 50 percent is suspended until sufficient excess taxable income is allocated from the partnership to the partner at a future date, or Section 163(j) no longer applies to that partnership. Additionally, a taxpayer may elect to use their 2019 adjusted taxable income for their 2020 tax year (for partnerships, this election must be made by the partnership).
Qualified Improvement Property Glitch Fixed
A technical correction to the Tax Cuts and Jobs Act (“TCJA”) was included in the Act to remedy the omission of qualified improvement property (“QIP”) from being eligible for bonus depreciation. Under the act, the depreciable life for QIP is reduced from 39 years to 15 years. This fix is retroactive to the date of enactment of the TCJA so it would apply for 2018 and going forward, as well as certain assets placed in service late in 2017. Taxpayers can immediately amend any tax returns for depreciation after the enactment of TCJA that have already been filed for 2017, 2018 or 2019 to claim refunds as a result of this technical correction.
Distillery Exception for Production of Hand Sanitizer
In a nod to distillers who have switched over production from their usual products, the Act waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer.
Exclusion from Tax on Forgiveness of Small Business Loans, Other Debt
For certain Small Business Administration (“SBA”) loans and other covered debt forgiven by a lender, the Act provides that such forgiveness will be excluded from taxable income.
For more helpful tax updates and business continuity resources to navigate COVID-19, visit the Elliott Davis COVID-19 Resource Center