CARES ACT Overview - Business Tax & Employer Health Plan Information
COVID-19 Update: Opportunities Amid the Challenges -
Coronavirus Aid, Relief, and Economic Security (CARES) Act Tax and Health Plan Changes Overview
On March 27, 2020, Congress passed, and the President signed into law the "Coronavirus Aid, Relief, and Economic Security Act" (CARES ACT). The bill includes several changes to the tax code and health care plans as part of its goal to provide targeted relief for hard-hit industries impacted by the COVID-19 national emergency. Please consult your tax advisor for any information on how these changes may impact you.
The main takeaways of the tax adjustments are: 1) restoration or adjustment to several Tax Cuts and Jobs Act reforms that can reduce tax liabilities due in 2020, 2) deferral of 2020 payroll tax deposits, and 3) expanded charitable contribution limits.
The main takeaway of the healthcare adjustments are more flexible deduction policies for HSA, HRA, & FSAs.
As you review the below details, please note the CARES Act provides benefits to US companies only, and this information is not comprehensive to the CARES Act or other programs already passed in response to COVID-19 and its impact to the US and global economy. In addition, we are not providing legal advice and would encourage you to speak to an appropriate professional legal, tax services, accounting or banking institution to better understand your eligibility, need, and fit for these programs.
Corporate and Business Tax Changes
Net operating loss (NOL) carrybacks
The CARES Act restores NOL carrybacks that were eliminated by 2017 tax reform known as the Tax Cuts and Jobs Act or TCJA for businesses and individuals. The new carryback provisions allow for a five-year carryback of NOLs incurred by corporations and individuals in the 2018, 2019, and 2020 tax years. The CARES act also provides for a two-year NOL carryback for losses incurred in fiscal years beginning in 2017 and ending in 2018. The CARES act temporarily removes the 80% limitation on the amount of income that can be offset by post-2017 NOLS through the 2020 tax year. It also provides that an NOL carryback will not affect the 2017 IRC Section 965 transition tax amount.
Refundable alternative minimum tax (AMT) credits
The TCJA repealed the corporate AMT and provided that credits for prior year minimum tax would be refunded over a four-year period from 2018 through 2021. The CARES Act accelerates the refund of these credits under one of two options:
1. The default option gives the balance of refundable credit to taxpayers with their 2019 tax return.
2. An election is available to allow taxpayers to claim a refund of the entire credit in 2018
Business interest expense limitation
The TCJA added a limitation on the deductibility of business interest. Interest expense deductions were capped at 30% of adjusted taxable income (ATI). The CARES Act increases the deduction to 50% of ATI for the 2019 and 2020 tax years. The act also allows taxpayers to make an election to use their 2019 ATI in the computation of the 2020 interest expense limitation. This increased deduction and election will benefit taxpayers that have a significant decline in 2020 income.
Qualified improvement property
In the TCJA, Congress intended to treat certain real estate improvements called qualified improvement property (QIP) as having a 15-year life that was eligible for 100% bonus depreciation. Due to an apparent drafting error, the statute did not make QIP eligible for bonus depreciation. The CARES Act restores 100% bonus depreciation for QIP retroactively to enactment of the TCJA. The default option gives the balance of the refundable credit to taxpayers with their 2019 tax return. An election is available to allow taxpayers to claim a refund of the entire credit in 2018
Employer payroll tax deposit deferral
Businesses can defer the deposit due date for the employer 6.2% Social Security tax (reduced by other payroll tax credits, including those under the FFCRA) otherwise due from March 27, 2020 – Dec 31, 2020. Half of the deferred amount is due by Dec. 31, 2021, with the balance due by Dec. 31, 2022. No deferral is available for the employer 1.45% Medicare tax. Certified professional employer organizations also are eligible for the deposit deferral. Self-employed individuals may defer 50% of the 12.4% self-employment tax but not the 2.9% Medicare portion of the self-employment tax. However, the deposit deferral is not permitted if a taxpayer has been discharged from an SBA loan under the Paycheck Protection Program.
Expanded charitable contribution deductions
The CARES Act allows nonitemizers a charitable contribution deduction for up to $300 of cash contributions beginning in 2020. The law also relaxes the overall limitation on cash contributions. In 2020, the 50% limitation on cash contributions by an individual will not apply. This relaxation does not apply to cash contributions to private foundations or to contributions to donor advised funds. Corporate charitable contributions typically are limited to 10% of taxable income. The law increases the limitation to 25% of taxable income for 2020.
Employer Health Plans and Accounts
The CARES Act permits telehealth as pre-deductible service in high deductible health plans (HDHPs). For plan years beginning on or before Dec. 31, 2021, the law permits telehealth services to be provided under HDHPs prior to satisfying the plan’s deductible so that individuals in HDHPs still can establish and contribute to health savings accounts (HSAs).
The CARES Act provides permanent expansion of HSA, health reimbursement arrangement (HRA), and health flexible spending account (FSA) uses. As of Jan 1, 2020, the law exempts from taxation HSA distributions as well as HRA and health FSA reimbursements for amounts related to the purchase of over-the-counter medical products and menstrual care products.
Final thoughts from us at MHW
We welcome any questions or feedback you have for us regarding COVID-19; we’ve created a dedicated email address specifically for related matters; firstname.lastname@example.org