On March 19, Senate Majority Leader Mitch McConnell introduced in the Senate a bill called the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The bill includes several tax-related provisions that are intended to provide economic relief to individuals and businesses, including by postponing certain tax filing and payment deadlines and temporarily removing certain limitations that were enacted as part of the 2017 tax reform legislation. The bill also provides certain technical corrections of glitches in the 2017 tax reform legislation. A summary of the key tax-related provisions is set forth below. We will continue to monitor the bill as it progresses through Congress.
Filing and payment extensions.
- The bill postpones the filing deadline for 2019 income tax returns for individuals until July 15, 2020.
- The bill also postpones any payments due in connection with such returns (including installments) until Oct. 15, 2020.
- The bill postpones for corporations the due date for estimated tax payments that would be due from the date of the bill’s enactment through Oct. 15, 2020, until Oct. 15, 2020.
Employment taxes. The bill treats an employer’s share of Social Security taxes and 50% of the Social Security component of self-employment taxes required to be deposited from the date of enactment through a period ending on or before Jan. 1, 2021, to be timely deposited if 50% of such amounts are deposited by Dec. 31, 2021, and the remainder by Dec. 31, 2022.
Refundable credit for individuals. The bill provides that individuals with incomes of up to $75,000 will receive a check from the U.S. Treasury in the form of a refundable credit of up to $1,200 ($2,400 for joint filers), plus $500 for every child in a family. The amount of the payment phases down with higher incomes, and phases out completely at individual income levels of $99,000 ($198,000 for joint filers). Taxpayers with low federal income tax liabilities will receive smaller credits.
Retirement plan distributions. Under the bill, between the date of the bill’s enactment and Dec. 31, 2020, no penalty would be imposed on distributions of up to $100,000 from qualified retirement plans for individuals who experience hardship related to COVID-19. Individuals who experience such hardship are those who are diagnosed with COVID-19, whose spouses or dependents are diagnosed with COVID-19, or who experience adverse financial consequences as a result of quarantine, furlough, reduction of working hours or reduction of business hours. Any amount distributed will be included in taxable income ratably over a three-year period beginning with the year in which the funds are distributed.
Charitable deductions. For taxable years beginning in 2020, the bill permits individual taxpayers who take the standard deduction (rather than itemizing) a deduction of up to $300 for charitable contributions made in cash, except for contributions to supporting organizations or donor advised funds. Additionally, the bill allows taxpayers to elect to disregard the limitation on charitable deductions as a percentage of their adjusted gross income for charitable contributions made in cash during the 2020 calendar year, except for contributions to supporting organizations or donor advised funds.
Net operating losses. The bill allows net operating losses (NOLs) carried forward or back to taxable years beginning before Jan. 1, 2021, to offset 100%, rather than 80%, of taxable income in such years. In addition, net operating losses generated in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2020, may be carried back five years. (Following the 2017 tax reform legislation, NOLs generated in taxable years beginning after Dec. 31, 2017, could offset only 80% of taxable income and could not be carried back.) Special rules are provided for REITs.
Excess business losses. The bill delays until taxable years beginning after 2020 implementation of a 2017 tax reform provision that disallows a deduction for excess business losses. The bill thus would retroactively allow such losses for 2018 and 2019 as well as for 2020. The bill also makes other changes to the excess business loss disallowance.
Net interest expense. Following the 2017 tax reform, with certain exceptions, net interest expense could be deducted only to the extent of 30% of adjusted taxable income. The bill increases the limitation to 50% for taxable years beginning in 2019 and 2020. In addition, for a taxable year beginning in 2020, a taxpayer may elect to apply the limitation by reference to the adjusted taxable income in a taxable year beginning in 2019.
Qualified improvement property. The bill, retroactively to the effective date of the 2017 tax reform, includes “qualified improvement property” as “15-year property” for purposes of depreciation, including bonus depreciation. The change fixes a technical glitch in the 2017 tax reform legislation that accidentally subjected qualified improvement property to depreciation over 39 years. The bill also clarifies that “qualified improvement property” applies only to improvements made by the taxpayer.
Corporate AMT credit. For the first taxable year beginning in 2018, the bill provides that corporations that have minimum tax credits from alternative minimum tax in prior years will be able to take such credits in full.
CFC downward attribution. The 2017 tax reform legislation modified the attribution rules for purposes of determining whether a foreign corporation is a controlled foreign corporation (CFC) by attributing stock of a corporation that is owned by an entity’s equity owners downward to the entity. That substantially increased the number of corporations that were classified as CFCs. The bill eliminates the downward attribution retroactively to 2018. However, the bill also introduces two new categories — “foreign controlled foreign corporations” and “foreign controlled United States shareholders” — in order to more narrowly prevent the abuse that the downward attribution was intended to target.
Deemed dividends. The 2017 tax reform legislation required certain taxpayers to include in income deemed dividends from foreign corporations equal to the corporations’ accumulated earnings and profits. Taxpayers could elect to pay the resulting tax in installments. The bill makes certain technical changes with respect to the treatment of such installments (including that the installments are not treated as tax liabilities in determining whether an overpayment exists).
For a discussion of non-tax aspects of the bill, see “Phase 3” McConnell Coronavirus Relief Bill Introduced in the Senate