Source: https://www.nexsenpruet.com/insights/continuing-covid-19-impacts-on-federal-taxation---the-cares-act
Timestamp: 2020-08-09 08:48:54
Document Index: 718739861

Matched Legal Cases: ['§ 461', '§ 163', '§ 127', '§ 163', '§ 163', '§ 4261']

Continuing COVID-19 Impacts on Federal Taxation - the CARES Act | Nexsen Pruet
After some tense negotiations, near-misses, and threatened hold-outs, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) H.R. 748, into law on March 27, 2020. This third stimulus bill aims to provide relief and boost the economy via $2 trillion in aid and stimulus money via tax breaks, rebates, small business loans, industry specific aid, and unemployment benefits. Here, we focus on the tax provisions of the CARES Act, which the Joint Committee on Taxation has already scored here, indicating the tax-related provisions will cost in excess of $591 billion over the next 10 years. On top of direct payments to many individuals in the form of recovery rebates, the CARES Act temporarily suspends or adjusts the three largest revenue raisers (allowing NOL carrybacks with no income limitation, suspending the excess business loss rules of IRC § 461(l), and relaxing the business interest limitation of IRC § 163(j)) from the Tax Cuts and Jobs Act – P.L. 115-97 (TCJA) enacted in December 2017, along with making several other technical corrections. This article summarizes the new tax provisions and provides our perceived impact of these new provisions.
Direct Payments (Recovery Rebates) for Individuals – Sec. 2201
Perhaps the most discussed provision of the CARES Act concerns the direct individual stimulus payments, officially dubbed “recovery rebates,” which involves the IRS sending over $500 billion via check or direct deposit to most American adults. The new statute provides $1,200 for single-filers and heads of household and $2,400 for joint filers, along with $500 per qualifying child (using the Child Tax Credit provisions). Thus, a jointly-filing family of four would get $3,400 before the application of any phase out rules.
Generally, taxpayers must submit the SSNs for each family member claiming the direct payments. But, since these direct payments are going to be advanced refunds for 2020 and the IRS is supposed to send these direct payments as soon as possible, a taxpayer’s AGI will initially be determined by referencing the 2019 tax return. If a 2019 tax return has not been filed, the IRS will look at your 2018 return. Non-filers generally need to file a tax return to claim the rebate. However, if neither a 2019, nor a 2018 return was filed because the taxpayer did not have a filing obligation (too little taxable income), but third-party payor information is available to the IRS, like a 2019 Form SSA-1099, the IRS may determine eligibility based on the Social Security Benefits Statement. Note, the direct payment credit will be recomputed again on the filing of taxpayer’s 2020 return in calendar year 2021 based on 2020 data.
The nature of these payments, along with the expedited processing, could lead to an uptick in identity theft issues, scams, etc., that taxpayers, practitioners, and the IRS will have to deal with on the back-end. Low income taxpayers are likely to be impacted more severely.
Retirement Funds and Plans – Secs. 2202 and 2203
Charitable Contributions – Secs. 2204 and 2205
Exclusion for Employer Payments of Student Loans – Sec. 2206
Generally, when someone, say an employer, pays a debt on your behalf, you have taxable income to the extent of the amount paid. However, the CARES Act provides an exclusion by permitting employers to pay up to $5,250 in 2020 of an employee’s student loan obligations tax free. The $5,250 limitation is a combined limit that applies to both student loan payment and other educational assistance provided pursuant to an IRC § 127 plan.
For example, if an employer paid $3,500 of an employee’s qualified educational expenses pursuit of a qualified degree program and another $5,000 of the same employee’s student loan payments in 2020, only $5,250 of those combined payments will be tax free to the employee. In addition, the employee will not be able to deduct the applicable student loan interest.
Employers should update their education assistance plan documentation to make student loan payments part of the plan administration and recordkeeping.
Employee Retention Credit – Sec. 2301
Business operations continued, but during any quarter in 2020, gross receipts for that quarter were less than 50% of what they were for the same quarter in 2019. The business will remain eligible for the credit in 2020 until the business has a quarter where its gross receipts exceed 80% of what they were for the same quarter in the previous year.
An employer is not eligible for the employee retention credit if the employer receives a payroll protection loan under Section 7(a) of the Small Business Act (SBA).
Given the credits provided for paid sick leave and family leave in the also recently enacted Family First Coronavirus Response Act (FFCRA) and the impact of the COVID-19 pandemic, the employee retention credit will be refundable to many employers.
For the employee retention credit in the CARES Act, the window qualified wages runs from March 13, 2020 through December 31, 2020. But, per Notice 2020-21 the IRS established that the effective date of the FFCRA for qualified sick leave and family leave starts on 4/1/2020 and continues through 12/31/2020. So, we have two different effective dates for three credits that impact payroll taxes for 2020.
Employers need to understand that this retention credit cannot be claimed if they took out a 7(a) loan under the SBA, and accountants will need to ask this question during 2020 return preparation.
Delay of Payment/Deposit of Employer Payroll Taxes and Self-Employment Taxes – Sec. 2302
On top of the credits in the FFCRA and the employee retention credit noted above, the CARES Act allows for the deferral of the employer’s share of the 6.2% Social Security tax that would otherwise be due in 2020 from the date of enactment through December 31, 2020, to be paid on December 31, 2021 (50%) and December 31, 2022 (50%).
Employers will be able to: (1) defer payment of its share of Social Security tax until 2021 and 2022, but (2) receive immediate credits against those to-be-paid later payroll taxes in through the sick leave and family leave credits in the FFCRA and the employee retention credit. Who knows how this will be administered on income and payroll tax filings for 2020? Good luck IRS.
The deferral does not apply to employers who took out a loan under section 7(a) of the SBA.
Technical Correction for Qualified Improvement Property – Sec. 2307
Hopefully the IRS will issue some procedural guidance concerning the filing of automatic accounting method changes or amended returns under these circumstances. Particularly concerning partnerships subject to the centralized audit regime of the Bipartisan Budget Act of 2015, as many partnerships will likely need to file Administrative Adjustment Requests with the benefit accounted for in 2020.
This technical correction will create a multimillion swing in depreciation deductions available for many taxpayers, particularly those in the commercial real estate and hospitality industries, who have been lobbying for this correction since December of 2017.
Modification of Net Operating Losses – Temporary Carryback Allowance – Sec. 2303
The CARES Act provides for a temporary five-year carryback period for net operating losses (NOLs) arising in calendar years 2018, 2019, and 2020 and allows NOLs for those calendar years to offset 100% of taxable income until the 2021 tax year. Taxpayers may elect out of this five-year carryback regime, but that election is irrevocable. The creation of this temporary five-year carryback regime will require some taxpayers to track three different groupings of federal NOLs:
Real Estate Investment Trusts (REITs) are carved-out of the CARES Act carryback rules.
Temporary Reversal of the Limitation of Excess Business Losses – Sec. 2304
Temporary Relaxation of the Limitation on Business Interest – Sec. 2306
For partnerships, the 50% ATI limitation does not apply to 2019. Instead, interest disallowed at the partnership level is allocated to the partners and suspended at the partner-level under the normal rules. However, in 2020 there is a bifurcation, 50% of the suspended interest becomes available and deductible, while the other 50% will remain suspended until the partnership allocates excess taxable income or excess interest income to the partner (or the partnership is no longer subject to IRC § 163(j).
If NOLs arise in 2019 or 2020 on account of either the increased IRC § 163(j) limitation or the treatment of excess business interest expense allocated to a partner for a taxable year beginning in 2019, those NOLs are now available for carryback and is not subject to the 80 percent limitation pursuant the CARES Act changes to the NOLs rules discussed above.
Acceleration of the Ability to Use Corporate Minimum Tax Credits – Sec. 2305
It appears that these CARES Act amendments are intended to provide a cash refund for carryforward MTCs following the TCJA’s elimination of corporate AMT.
Temporary Suspension of Alcohol Taxes on Spirits Used in Emergency Production of Hand Sanitizer – Sec. 2308
Distilled spirits are generally subject to an excise tax upon removal from the distillery; however, denatured spirits for non-beverage use may be removed free of tax. The Food and Drug Administration (FDA) has issued recent guidance on the emergency production of hand sanitizer in connection with the COVID-19 outbreak, which taken together, provides that undenatured spirits may be produced by a distillery for use in the production of hand sanitizer, provided such spirits are later denatured prior to use in such production. The CARES Act exempt from tax spirits removed during 2020 and used for the production of hand sanitizer in compliance with all FDA guidance.
This should further encourage an already significant number of distilleries to shift some of their resources to produce hand sanitizer to combat COVID-19.
In addition, the Alcohol and Tobacco Tax and Trade Bureau has waived certain permitting, bond, and formula requirements to expand the ability of distilleries to provide hand sanitizer in connection with COVID-19.
Temporary Suspension of Aviation Excise Taxes – Sec. 4007
There are several aviation-related taxes in IRC §§ 4261 and 4271, including a 7.5% ticket tax and domestic and international segment taxes paid by passengers (ticket taxes), as well as a 6.25% tax on the transportation of air cargo, and a per gallon aviation fuel excise taxes, which range from 4.3 to 21.8 cents per gallon. The CARES Act suspends the collection of these taxes from the date of enactment through 1/1/2021.
This will provide instant relief to the aviation industry and free up cash to cover other expenses.
The relief for transportation taxes seems to apply broadly to all payors of these taxes, including airlines, charter companies, and private and business aviation.