COVID-19 Coronavirus: Global Tax Update (United States)
CARES Act Guidance
On March 25 and March 27 the U.S. Senate and House of Representatives, respectively, passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The President signed the CARES Act into law shortly after and without hesitation. The CARES Act contains numerous tax-related provisions directed at both individuals and businesses. Additionally, the CARES Act contains a number of amendments to provisions found in the Tax Cuts and Jobs Act of 2017 (the “TCJA”). Several of the important tax related features of the CARES Act are summarized below.
Tax Provisions Applicable to Individuals
Recovery Rebates. The CARES Act directs the Internal Revenue Service to issue payments called recovery rebates of up to $1,200 to individual taxpayers. The amount of the recovery rebate increases to $2,400 for married couples filing jointly and increases by $500 for each qualifying child. The recovery rebate is phased out for taxpayers with adjusted gross income over $75,000 ($150,000 for couples filing jointly and $112,500 in the case of a head of household) at a rate of $5 for each $100 over the applicable income threshold. The rebate is completely phased out for a single taxpayer with adjusted gross income exceeding $99,000, for a head of household with adjusted gross income exceeding $136,500 and for a married couple filing a joint return with adjusted gross income exceeding $198,000. Nearly all U.S. residents with income below these limits will receive the rebate even if they do not otherwise have sufficient income to produce an income tax liability.
Tax Provisions Applicable to Businesses
The CARES Act contains several provisions intended to ease the tax burden of businesses. The CARES Act also temporarily eases the impact of several TCJA provisions. The most relevant of these change are described below.
Modification of Net Operating Losses (“NOLs”). The TCJA (i) eliminated the ability of taxpayers to carry back an NOL to prior tax years and (ii) limited the use of an NOL carryforward to reduce no more than 80 percent of a subsequent year’s taxable income (the “80 Percent Cap”). The CARES Act provides relief from these limitations for certain years. For tax years beginning in 2018, 2019 or 2020, a business may carry back an NOL for up to five years, to reduce taxes owed for such years or to allow the business to claim a refund of taxes paid for those years before application of the NOL carryback amount. The CARES Act also removes the 80 Percent Cap for taxable years beginning before January 1, 2021, allowing NOLs to fully offset taxable income in those years. Special rules apply to real estate investment trusts and life insurance companies.
Limitation on Business Interest. The TCJA imposed a strict limit on the deductibility of a taxpayer’s interest expense. Under the TCJA a taxpayer’s interest deduction cannot exceed thirty percent of the taxpayer’s adjusted taxable income. Under the TCJA adjusted taxable income roughly equates to EBITDA for taxable years through 2021 and, beginning in 2022, EBIT. For taxable years beginning in 2019 and 2020, the CARES Act increases the amount of allowable interest expense deduction from 30 percent to 50 percent of the taxpayer’s adjusted taxable income. The CARES Act also allows a taxpayer to elect to use 2019 adjusted taxable income when calculating its 2020 limitation. Special rules apply to partnerships.
In addition to the relief provided by the Act, the IRS previously relaxed tax payment and taxpayer filing obligations (coverage available here). The CARES Act contains numerous other tax related provisions. Many of them are addressed in updates authored by Dechert’s Private Client and Employee Benefits Groups. Links to these updates can be found here.