Business and Individual Tax Provisions of Phase Three Federal COVID-19 Legislation
The following provisions were part of the Phase Three COVID 19 relief legislation, H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Employee Retention Credit
The CARES Act creates a refundable employee retention credit for employers subject to closure due to COVID-19. This is a payroll tax credit for 50 percent of qualified wages (up to $10,000 of compensation, including health benefits) paid to individual employees between March 13, 2020 and December 31, 2020. To qualify, employers must have experienced one of the following:
- Operations were fully or partially suspended, due to a COVID-19-related shut-down order; or
- Gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
Qualified wages are:
- Employers with 100+ full-time employees – wages paid to employees when they are not providing services due to the COVID-19-related scenarios above.
- Employers with 100 or less full-time employees – all employee wages, whether the employer is open for business or subject to a shut-down order.
Delayed Payment of Payroll Taxes
Employers and the self-employed are allowed to delay the payment of the employer side of Social Security payroll taxes. The typically required 6.2 percent tax may be deferred from the date of enactment through the remainder of 2020. This tax must be repaid in 50% increments by December 31, 2021 and December 31, 2022, respectively. Taxpayers who have indebtedness forgiven through small business loans authorized elsewhere in the CARES Act are ineligible.
Net Operating Loss Carryback
Under the CARES Act, net operating losses (NOLs) generated in taxable years beginning in 2018, 2019 and 2020 can be carried back for five years. Eligible taxpayers can amend prior year returns and claim taxes paid. The 80 percent taxable income limitation is eliminated to NOLs to fully offset income. Additionally, the limitation of excess business losses for pass-through businesses and sole proprietors is suspended. This enables these entities to take full advantage of this provision.
Business Interest Limitations
Business interest limitations are increased from 30 to 50 percent for taxable years beginning in 2019 and 2020 with special rules for partnerships. Real estate entities subject to the limitation may elect out if real property is depreciated under the Alternative Depreciation System.
Expanded Unemployment Insurance
The CARES Act provides an additional 13 weeks of unemployment benefits through December 31, 2020 and an additional $600 per week per individual. This benefit includes those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history and others) who are unable to work because of the COVID-19 emergency.
The CARES Act creates an advanced tax refund, or “recovery rebate,” direct payment program for individuals and families. The benefit is capped at $1,200 per individual, $2,400 per couple plus $500 per child. It is available to those with adjusted gross income of $75,000 per individual, $112,500 for a head of household and $150,000 per couple. The rebates are phased out in 5 percent increments for single filers at $99,000, heads of household at $136,500 and joint filers at $198,000. The amount of the rebate is based on 2019 tax returns, or 2018 returns for those who have not yet filed for 2019. Taxpayers will have to account for recovery rebates on their 2020 tax returns.