Senate Bill Offers Potential Tax Relief for Individuals and Troubled Businesses
On March 19, the US Senate introduced the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the continued spread of the COVID-19 pandemic. While the Act is still in the process of negotiation and must be approved by Senate Democrats before becoming law, the legislation would provide significant administrative and liquidity enhancements for dealing with the current crisis. The CARES Act provides forgivable loans to small businesses, financial assistance for vulnerable industries, direct payments and tax relief for individuals, and tax relief for businesses.
- Payment to individuals and delay of tax filing deadlines: The CARES Act would provide immediate payments to individual taxpayers who reported income on 2018 tax returns. These payments would start at $600 and rise to $1,200. Joint filers would receive double these amounts, and any qualifying children would increase these amounts by $500 per child. These benefits would phase out for individuals reporting more than $99,000, or joint filers reporting more than $198,000, on 2018 tax returns. The Act would also delay 2019 tax year filing deadlines to July 15, 2020, aligning the filing deadline with the payment deadline recently announced by the IRS. Additionally, any estimated tax payments may be delayed until October 15, 2020.
- Withdrawals from retirement savings: The Act would waive the 10 percent excise tax on early withdrawals from qualified retirement accounts for those individuals diagnosed with COVID-19, who have a spouse diagnosed, or who suffer adverse financial consequences from quarantine.
- Expanded charitable deductions: The Act would provide individuals with a $300 deduction for donations to charitable organizations, whether they itemize their return or not. The Act would also suspend recent limitations on charitable donations by individuals, such as the 50 percent of adjusted gross income limitation, and by corporations, by increasing the deduction limitation from 10 percent to 25 percent of taxable income.
- Delay certain tax payments: Corporations may delay estimated tax payments due to October 15. Additionally, employers and self-employed individuals may delay payment of the employer’s share of payroll taxes, with 50 percent of such taxes due by December 31, 2021, and the other 50 percent due the following year.
- Net operating losses (NOLs): The Act would relax NOL limitations enacted in the Tax Cuts and Jobs Act (TCJA). More specifically, corporations would be able to carry back for five years NOLs from 2018, 2019, and 2020. Additionally, the Act would temporarily remove the 80 percent taxable income limitation, ensuring that NOLs could be used to fully offset taxable income. Thus, corporations may have the opportunity to file for quick refunds and access cash from the expanded ability to utilize NOLs.
- Expand access to corporate alternative minimum (AMT) credits: The corporate AMT was repealed as part of the TCJA, but corporate AMT credits are allowed as refundable credits until 2021. The CARES Act accelerates the ability for companies to recover those AMT credits.
- Deductibility of business interest expense: The CARES Act would temporarily increase the limitation on interest deductions imposed by the TCJA. Specifically, the Act would increase the 30 percent of adjusted taxable income (ATI) threshold to 50 percent of ATI, for tax years beginning in 2019 and 2020. The Act would also allow a taxpayer to elect to use tax year 2019 ATI in lieu of tax year 2020 ATI for the purpose of calculating its tax year 2020 limitation.
Preventing the spread of COVID-19 will take a financial toll on individuals, families and businesses. If passed and signed into law, the Act would blunt the impact of COVID-19 and limit damage to the US economy.