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This JMBM Client Alert summarizes 13 of the most relevant business and individual tax provisions in recent legislation from the Families First Coronavirus Response Act (the “FFCRA”) and the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Many of these provisions reverse or modify amendments made by the 2017 tax act, P.L. 115-97 (the “2017 Tax Act”). In addition to the 13 items below, by now you should already know that the federal and California state income tax filing and payment deadline is automatically extended from April 15, 2020, to July 15, 2020.
Implications for Businesses
1. Employer Tax Credit for Paid Sick Leave and Family Leave
The FFCRA includes an employer tax credit, generally applicable only to for-profit businesses and tax exempt organizations with fewer than 500 employees, for certain paid sick and family leave with respect to employees who are unable to work due to circumstances related to COVID-19. This tax credit is intended to cover all or much of the cost to businesses of providing paid leave from April 1 to Dec 31, 2020 required under the FFCRA (see our March 31 Client Alert covering this topic, linked here).
The employer payroll tax credit is computed using wages paid, and claimed against the employer’s share of the Social Security in each calendar quarter. The tax credit is refundable. If an employer’s tax credits exceed its payroll tax liability, the excess can be received as a payment from the Treasury. Employers that claim this credit are required to include the amount claimed in gross income, for income tax purposes, offsetting the reduction in gross income from deducting wages paid (preventing a double benefit).
The maximum amount of the sick leave credit varies from $511 per day for employees if they are taking leave because (1) the employee is subject to a federal, state, or local quarantine or isolation order related to COVID-19; (2) the employee has been advised by a health care provider to self-quarantine due to COVID-19; or (3) the employee is experiencing symptoms of COVID-19 and is seeking a medical diagnosis, to $200 per day for employees if they are taking leave because (A) the employee is caring for an individual described in number (1) or (2) above; (B) the employee is caring for their own minor child whose school, place of care, or caregiver is closed or unavailable due to COVID19; or (C) the employee is experiencing any other to-be-specified “substantially similar condition.” The tax credit amounts for paid sick leave can be increased by the amount employers pay for an employee’s health care plan while they are on leave.
The employer tax credit for paid family leave is claimed with respect to employees who take leave (are unable to work) because they must care for their own minor child whose school or place of care has been closed due to a COVID-19-related public health emergency, and is with respect to individuals who have already taken 10 days of leave for the family leave purpose described above. These 10 days of leave may consist of unpaid leave, or an employee may elect to use paid vacation, personal, or another form of paid leave. The tax credit for family leave wages is limited to $200 per day, and $10,000 total per employee. The tax credit amounts for paid family leave can be increased by the amount employers pay for an employee’s health care plan while they are on leave.
Self-employed individuals, including gig workers, are eligible for tax credits similar to above.
Employers should use the new IRS Form 7200 to request an advance payment of the credit.
For the IRS FAQs on this Payroll Tax Credit, click here.
2. Employee Retention Tax Credit for Employers Subject to Closure or Substantial Business Loss
The CARES Act creates a refundable payroll tax credit computed as 50% of wages paid by eligible employers. Up to $10,000 in qualified wages can be taken into account per employee in determining the credit amount (amounting to a maximum $5,000 credit per employee). Health plan expenses can be treated as wages when computing the credit. Eligible employers are those who (1) were required to fully or partially suspend operations due to a COVID-19-related order (includes nonprofit employers); or (2) have gross receipts 50% less than gross receipts in the same quarter in the prior calendar year.
Qualified wages depend on the number of employees the employer had during 2019. If the employer had more than 100 full-time employees, qualifying wages are wages paid when employee services are not provided (with qualifying wages limited to the amount the employee would have been paid for working an equivalent duration during the 30 days preceding the nonservice period). If the employer had 100 or fewer full-time employees, all employee wages paid by eligible employers are credit-eligible. Employers who receive SBA loans under the Paycheck Protection Program of the CARES Act are not eligible for the credit.
Employers should use the new IRS Form 7200 to request an advance payment of the credit.
For the IRS FAQs on this Employee Retention Credit, click here.
3. Delay of Payment of Employer Payroll Taxes
Employers and self-employed individuals may defer paying the employer share of the Social Security payroll tax through the end of 2020. The deferred tax liability must eventually be paid in two installments: one due by December 31, 2021, and the second by December 31, 2022. Employers who have SBA loans forgiven under the Paycheck Protection Program of the CARES Act are not eligible for this deferral.
4. Exclusion of Income for Paycheck Protection Program (PPP) Loan Forgiveness
The CARES Act provides that any loan amounts forgiven under the CARES Act’s Paycheck Protection Program will not constitute taxable income (i.e., the amount will not be considered taxable cancellation of indebtedness income). See our previous Client Alerts on the Paycheck Protection Program, linked here.
5. Modifications for Net Operating Losses
The CARES Act allows carrybacks for up to five years for net operating losses (“NOLs”) recorded in tax years 2018, 2019, and 2020. NOL carryback capabilities were repealed by the 2017 Tax Act, and were previously allowed for up to two years. This provision also temporarily lifts the income limitation applicable to the corporate income tax treatment of NOLs under current law.
6. Modification of Limitation on Losses for Taxpayers other than C-corporations
This provision suspends the limit on deductions for excess business losses for 2018-2020. An excess business loss is the amount that a taxpayer’s aggregate deductions attributable to trades and businesses exceeds the sum of (1) aggregate gross income or gain attributable to such activities; and (2) $250,000 ($500,000 if married filing jointly), adjusted for inflation. For partnerships and S corporations, this provision is applied at the partner or shareholder level. This provision expires after 2025.
7. Modification of Limitation on Business Interest
The 2017 Tax Act reduced the limit on the deduction for business interest from 50% to 30% of adjusted taxable income (income before interest deductions, taxes, depreciation and amortization deductions, or EBITDA). The 2017 Tax Act also eliminated the rule that restricted net interest deduction limits to firms with a debt-to-equity ratio above 1.5. These revisions were adopted, in part, to reduce profit-shifting by multinational corporations (by borrowing in the United States). The CARES Act increases the limit to 50% for 2019 and 2020.
8. Technical Amendments regarding Qualified Improvement Property
The 2017 Tax Act erroneously excluded the cost of qualified improvement property (leasehold, restaurant, and retail property improvements) from being eligible for 15-year depreciation and from being expensed immediately (bonus depreciation). The CARES Act now classifies these improvements as 15-year depreciable property and allows them to qualify for bonus depreciation.
Implications for Individuals
9. $1,200 Rebates/Checks for Individuals
The CARES Act allows a credit against 2020 income taxes generally based on information from 2019 income tax returns. The credit will be paid to taxpayers during 2020 and equals $1,200 ($2,400 for married joint filers). Taxpayers eligible for the credit can also receive $500 for each child under the age of 17 eligible for the child tax credit. The credit phases out at a rate of 5% of adjusted gross income (“AGI”) above $75,000 ($112,500 for head of household filers, $150,000 for married joint returns). The IRS intends to send these payments via direct deposit when possible, based on banking information as listed on taxpayers’ tax returns.
For the IRS FAQs on this topic, click here.
10. Special Rules for Retirement Plans in 2020
For retirement plan distributions, the CARES Act provides an exception to the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-affected individuals. Income from such distributions will be recognized over three years, and taxpayers can recontribute funds to an eligible retirement plan in the first year or within three years without regard to the year’s contribution cap. For coronavirus-affected individuals, loan limits from retirement plans would be increased from $50,000 to $100,000 and the repayment deadline is delayed for loans that are due in 2020.
In addition, required minimum distribution (“RMD”) rules generally require that taxpayers withdraw minimum amounts annually after reaching age 72 (70½ before 2020). The CARES Act waives the RMD requirements for 2020.
For the Senate Finance Committee FAQs on this topic, click here.
11. New Above the Line Charitable Contribution Deduction for Non-Itemizers
The CARES Act provides for an above-the-line deduction for charitable cash contributions of up to $300 for taxpayers not itemizing deductions.
12. Modification of Limitations on Charitable Contributions During 2020
Income limits apply to both individual and corporate charitable contribution deductions. The CARES Act suspends the 50% of AGI limit (temporarily 60% for cash contributions through 2025) on cash contributions for individuals for 2020. The corporate deduction limit is increased from 10% of taxable income to 25% for cash contributions. The limit on the deduction of food inventory is increased from 15% to 25%. The increased limits do not apply to contributions to private foundations and donor-advised funds.
13. Exclusion for Certain Employer Payments of Student Loans
The CARES Act temporarily expands the definition of employer-sponsored educational assistance to include qualified student loan payments made to employees in 2020. Under current law, employers can provide their employees with up to $5,250 per employee per year in educational assistance (generally for tuition, fees, and related supplies) that is excluded from wages (and hence not subject to income or payroll taxes). Under this provision, qualified student loan payments are subject to the overall cap of $5,250 per employee per year.
This Client Alert is not intended to be an exhaustive list or description of all of the tax provisions in recent legislation and government action. For more information on any of these tax implications, please contact any member of the JMBM Tax, Trusts and Estates Department.
About JMBM’s Tax Department
Jeffer Mangels Butler & Mitchell LLP has one of the leading tax practices in California within a full service law firm. In addition to serving individuals, families and closely-held businesses, our clients include organizations ranging from start-ups to Fortune 500 companies. When tax-sensitive business transactions and tax controversies arise, our clients rely on us to resolve the matters efficiently and effectively. For more information on our Tax Department, please click here.