Source: https://www.michaelbest.com/Newsroom/234109/The-CARES-Act-ndash-Summary-of-Tax-Provisions
Timestamp: 2020-07-09 15:18:49
Document Index: 543373063

Matched Legal Cases: ['§ 170', '§ 509', '§ 4966', '§ 170', '§ 170', '§ 509', '§ 4966', '§ 170', '§ 170']

The CARES Act – Summary of Tax Provisions - Michael Best & Friedrich LLP
Home > Newsroom > The CARES Act – Summary of Tax Provisions
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security Act,” commonly referred to as the “CARES Act.” The principal provisions relating to taxes are contained in Title II, Subtitles B and C. Michael Best has previously prepared and posted, and is continually updating, extensive materials regarding the provisions relating to retirement funds, temporary waiver of required minimum distributions for certain retirement plans and accounts, the exclusion for certain employer payments of student loans, employee retention credits, and delay of employer payroll taxes. The purpose of this Update is to summarize the remaining tax-related provisions in Title II, Subtitles B and C of the CARES Act.[1]
As discussed below, the primary provision (and by far the most expensive) is a one-time direct cash payment equal to $1,200 for individuals with adjusted gross income (AGI) of $75,000 or less (or $112,500 or less if filing status is head of household) and $2,400 for couples filing jointly with AGI of $150,000 or less. The payments are increased by $500 for each qualifying child. Beyond the noted income levels, the payment amounts begin to phase out, until the payments are eliminated completely (i.e., no payment is available) at $99,000 of AGI for single taxpayers without children and $198,000 of AGI for taxpayers filing joint returns without children.
The remaining provisions generally enhance the ability of taxpayers to obtain prompt federal income tax benefits from certain deductions, particularly (1) certain charitable contributions made in cash during 2020; (2) net operating (business) losses generated in 2018, 2019 and 2020, which can now be carried back in full to the preceding five taxable years to obtain refunds of income taxes paid in those earlier years; (3) certain “excess business losses” of individuals generated in 2018, 2019 and 2020; and (4) certain business interest expenses. It should be noted that the following summaries relate solely to federal taxes, and do not address the potential adoption of these provisions by states that have income taxes. In general, the legislatures of each state will have to decide whether, and to what extent, they adopt (or, as the case may be, exclude) these provisions. Taking Wisconsin as an example, based on the Wisconsin statutes as currently in effect, none of the provisions discussed below would apply for Wisconsin purposes.
Prepared by Daniel LaFrenz
The CARES Act provides for a one-time direct cash payment equal to $1,200 for individuals with adjusted gross income of $75,000 or less (or $112,500 or less if filing status is head of household) and $2,400 for couples filing jointly with adjusted gross income of $150,000 or less. The payment amount is increased by $500 for each qualifying child. To the extent that an individual’s or couple’s adjusted gross income exceeds the thresholds above for their respective filing status, the payment amount is reduced by 5% of the excess until the payment amount is equal to zero.
According to an estimate prepared by the Joint Committee on Taxation, this provision is expected to reduce federal income tax revenues by approximately $292 billion.[2]
Mechanics and Timing. The IRS will calculate the payment amount using the individual’s or couple’s filing status, adjusted gross income and number of qualifying children reported on their filed 2019 federal income tax return. If a 2019 federal income tax return hasn’t been filed as of the time of the determination, the IRS will use their 2018 federal income tax return.
The Act requires the payments to be made “as rapidly as possible.” On March 30, 2020, the IRS announced that the distribution of the payments will begin within three weeks and occur automatically, with no action required for most individuals. The payments will be deposited directly into the banking account reflected on the applicable return filed by the taxpayer. With respect to taxpayers who did not provide direct deposit information on their tax returns, the Treasury Department plans to develop a web-based portal for individuals to provide their banking information, so that individuals can receive payments immediately. If the information is not provided, the checks will be sent by mail.
In the March 30, 2020 announcement, the IRS said that some seniors and others who do not file returns will need to submit a simple tax return to receive the payment. On April 1, 2020, however, Treasury Secretary Mnuchin said that “Social Security recipients who are not typically required to file a tax return need to take no action, and will receive their payment directly to their bank account.”
Social Security Numbers Required. No payment will be made to an individual who does not include his or her valid social security number on the income tax return for the taxable year. In the case of joint returns, both spouses must include valid social security numbers. In addition, a valid social security number must be provided for each qualifying child.
Most Offsets and Reductions do not Apply. The Act provides that the payments are not subject to reduction or offset for certain debts owed to federal agencies, for collection of past-due, legally enforceable state income tax obligations, for collection of unemployment compensation duties, or for other assessed federal taxes that would otherwise be subject to levy or collection. There appears to be no exception, however, for offset or reduction with respect to past-due child support.
Examples. The following are examples of the calculations for a payment amount assuming different filing statuses and varying adjusted gross income amounts up to the amount at which the payment is completely phased-out:
[1] The complete text of the CARES Act is available at: https://www.congress.gov/bill/116th-congress/house-bill/748/text/er. In this Update, the CARES Act is referred to as either the “CARES Act” or the “Act.”
[2] The revenue estimates prepared by the Joint Committee on Taxation that are cited throughout this Update are available at: https://www.jct.gov/publications.html?func=startdown&id=5252.
$136,500 or more
Prepared by Elizabeth Prendergast
Section 2204 of the CARES Act allows individual taxpayers who do not itemize deductions (i.e., those who take the standard deduction) to deduct up to $300 of cash contributions made in taxable years beginning in 2020 to qualifying charitable organizations. A “qualifying charitable organization” is described in Internal Revenue Code (IRC) § 170(b)(1)(A) and includes all charitable organizations to which donations are normally deductible, other than supporting organizations (as defined in § 509(a)(3)) and donor advised funds (as defined in § 4966(d)(2)). Excess charitable contributions that have been carried over from prior years are not eligible for the new above-the-line deduction.
Historically, charitable deductions have been below-the-line deductions, meaning only taxpayers who itemized their deductions could deduct charitable contributions. Charitable deductions have declined drastically in recent years, due, at least in part, to a substantial increase in the amount of the standard deduction under the Tax Cuts and Jobs Act of 2017 (TCJA) thereby resulting in more taxpayers taking the standard deduction instead of itemizing. This CARES Act amendment is intended to incentivize more taxpayers to provide support for charitable organizations as they face increasing demands in service alongside projected declines in giving due to a slowing economy – in addition to the decline in giving they saw following enactment of the TCJA. Nonprofit advocate groups will likely push for a greater limit to the above-the-line deduction in Phase 4 of the CARES Act.
Section 2205 of the CARES Act temporarily raises certain existing limits on the amount of cash charitable contributions that individuals and corporations may deduct. Individuals who itemize may deduct 100% of “qualified contributions,” capped by the amount of their adjusted gross income (AGI), less the amount of all other charitable contributions allowed under IRC § 170(b)(1). This individual deduction cap is increased for 2020 from the usual maximum of 60% of the taxpayer’s AGI. Charitable contributions that exceed the cap may be carried over for the next five tax years. For this purpose, “qualified contributions” means contributions that are made in cash to an organization that is described in § 170(b)(1)(A), and includes all charitable organizations to which donations are normally deductible, other than supporting organizations (as defined in § 509(a)(3)) and donor advised funds (as defined in § 4966(d)(2)).
For corporations, the increase with respect to “qualified contributions” (as defined above) is from 10% to 25% of taxable income, less the amount of all other charitable contributions allowed under § 170(b)(1), with a similar five year carry over allowance for excess contributions. The limit on food inventory contributions by corporations under § 170(e)(3)(C) is increased from 15% to 25%.
The new provision is “elective.” Furthermore, in the case of partnerships and S corporations, the election is made separately by each partner or shareholder. At this time, there is no guidance concerning how these elections are made, although the election presumably will be made on the individual’s 2020 income tax return.
Prepared by Thomas Pranica
The CARES Act amends the rules regarding net operating losses (NOLs) to: (1) provide that NOLs generated in taxable years beginning in 2018, 2019 and 2020 can be carried back for up to five taxable years; and (2) delay, until 2021, the rule that limits the deduction of an NOL carryforward to 80% of taxable income.
These amendments will allow many taxpayers to more quickly monetize their NOLs. The Joint Committee on Taxation estimates that these changes will result in revenue decreases of approximately $80 billion in 2020 and $8.6 billion in 2021. Because NOLs deducted during the five-year carryback period will not be available to be carried forward, however, the revenue impact to a significant extent relates to timing. For this reason, the Joint Committee estimates that there will be substantial revenue increases in in 2022 –2030, but that the net tax impact for 2020 – 2030 overall is estimated to be a tax decrease of approximately $25.5 billion.
The following describes the treatment of NOLs prior to and after the CARES Act and practical considerations for taxpayers with respect to the changes.
1. Tax Years Ending Before December 31, 2017. Historically, NOLs incurred in tax years ending before December 31, 2017 generally could be carried back up to two years prior to the year of the loss and, to the extent not used, carried forward for up to twenty years. To the extent that the carry back of an NOL reduced the amount of tax due that had already been paid in a prior year, a taxpayer could obtain a refund for the prior year.
2. Changes Made by the 2017 Tax Cuts and Jobs Act. Under the TCJA, an NOL incurred in a tax year ending after December 31, 2017 generally could not be carried back but could be carried forward indefinitely. In addition, the deduction of an NOL arising in a tax year beginning after December 31, 2017 was limited to 80% of the taxpayer’s taxable income (determined without regard to the NOL deduction).
3. The CARES Act.
a. Five-Year Carryback. The CARES Act provides that NOLs from tax years beginning after December 31, 2017 and before January 1, 2021 (i.e., tax years beginning in 2018, 2019 and 2020) may be carried back up to five years. Thus, for example, an NOL from the 2018 tax year could be carried back to 2013. The general rules applicable to the carryback of NOLs continue to apply. When carried back, an NOL is applied first to the earliest carryback year prior to the year the NOL is created and the unused balance, if any, is carried forward to the next subsequent year. Additionally, a corporation may irrevocably waive the carryback of an NOL by making an election by the due date (including extensions) for filing the tax return for which the election is to be in effect.
b. Delay of the 80% Limitation. The CARES Act retroactively delays the application of the 80% limitation. Under the Act, the 80% limitation applies only to tax years beginning after December 31, 2020 and only with respect to NOLs arising in tax years beginning after December 31, 2017. Thus, for tax years beginning in 2018, 2019 and 2020, the 80% limit does not apply. For example, an NOL created in 2020 will not be subject to the 80% limitation if it is carried back to prior years; however, to the extent any portion is carried forward to 2021, the ability to use the carryforward portion will be limited to 80% of the corporation’s 2021 taxable income.