The Senate voted 96-0 late Wednesday to approve a sweeping $2.2 trillion stimulus package to help the nation emerge from the coronavirus pandemic.
The CARES Act package includes “recovery rebates” of $1,200 for individual taxpayers and $2,400 for married couples, along with an additional $500 for each of their children. That money will go to individual taxpayers with up to $75,000 in adjusted gross income ($150,000 if they are married). Even those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as Social Security benefits, will be able to receive the money. The Internal Revenue Service will distribute the funds, preferably by direct deposit for taxpayers whose bank accounts are on file with the IRS from a tax return. If not, the IRS will mail out the checks, but this is likely to take much longer.
“For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as [the] IRS will use a taxpayer’s 2019 tax return if filed, or in the alternative their 2018 return,” according to a summary from the Senate Finance Committee majority staff led by chairman Chuck Grassley, R-Iowa. “This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.”
“This legislation is the result of bipartisan compromise and significant give-and-take on both sides,” Grassley said in a statement. “This bill would send a recovery check to most Americans for at least $1,200. A typical family of four would be eligible for $3,400. Seniors, veterans, the unemployed and low-income Americans would be eligible too. This would help workers, families and small businesses absorb some of the financial impact of the coronavirus. We also provide significantly enhanced unemployment insurance and expand eligibility to the self-employed, gig workers and other Americans who aren’t working due to the coronavirus. The legislation also includes assistance for small businesses so they can stay afloat and not lay off their workers."
There are also accounting-related provisions in the bill, including one that would allow banks and financial institutions to delay compliance with the credit losses accounting standard, also known as CECL for the Current Expected Credit Loss model it uses, until either the end of the year or the end of the national emergency, whichever comes earlier.
As with previous disaster-related relief, the IRS is waiving the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after Jan. 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and taxpayers can recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. The provision provides flexibility for loans from certain retirement plans for coronavirus-related relief. The coronavirus-related distribution is made to an individual: (1) who is diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
There is also a temporary waiver of required minimum distribution rules for certain retirement plans and accounts such as IRAs to help individuals who would otherwise be required to withdraw funds from retirement accounts during the economic slowdown due to COVID-19. This provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
“Our objective in trying to structure the tax components was to make them fit within the overall structure of the bill, knowing that a number of the other committees were focused, for instance, on the small-business loan side and working through the structures that are available there,” said a Republican Senate Finance Committee aide who briefed reporters Wednesday. “What we were really trying to focus in on was how can we fit in within all of that in a way that would help individuals who right now are out of work or having to take home either no wages, or potentially lower wages. What can we do to get them cash to help them access cash that they might have in, say, retirement accounts, in order to get through this storm? Similarly, with businesses, to try to use broad-based tools that we have in the Tax Code in order to help businesses of all sizes and structures to hold onto the cash that they have in terms of deposits, use losses and other tax attributes, and carry them back to amended returns, all with an idea of trying to address liquidity and give them the cash to keep the doors open and keep employees on the payroll. It’s kind of a broad-based way to address the immediate crisis and help folks deal with the individual level, but also for businesses to keep people on the payroll, so they don’t only have the alternative of going to the unemployment line.”
Other provisions include:
Allowance of partial above the line deduction for charitable contributions: The provision encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.
Modification of limitations on charitable contributions during 2020: The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50 percent of adjusted gross income limitation is suspended for 2020. For corporations, the 10 percent limitation is increased to 25 percent of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent.
Exclusion for certain employer payments of student loans: The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (such as tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after the date of enactment and before Jan. 1, 2021.
Employee retention credit for employers subject to closure due to COVID-19: The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order; or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through Dec. 31, 2020.
Delay of payment of employer payroll taxes: The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by Dec. 31, 2021 and the other half by Dec. 31, 2022. The Social Security Trust Funds will be held harmless under this provision.
Modifications for net operating losses: The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019 or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.
Modification of limitation on losses for taxpayers other than corporations: The provision modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.
Modification of credit for prior year minimum tax liability of corporations: The corporate alternative minimum tax (AMT) was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The provision accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.
Modification of limitation on business interest: The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.
Technical amendment regarding qualified improvement property: The provision enables businesses, especially in the hospitality industry, to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act, not only increases companies’ access to cash flow by allowing them to amend a prior year return, but also incentivizes them to continue to invest in improvements as the country recovers from the COVID-19 emergency.
Temporary exception from excise tax for alcohol used to produce hand sanitizer: The provision waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration and is effective for calendar year 2020.
