On March 27, the historic Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law, providing an estimated $2-trillion in emergency economic relief and stimulus for Americans and U.S. businesses. This Act contains numerous tax provisions that will likely dominate the advice that financial advisors give to clients in the months ahead. Below is an overview of the key CARES Act tax provisions that financial advisors and wealth managers need to know.

Retirement Plan And IRA Adjustments

Required Minimum Distributions: The 10% early distribution penalty, when applicable in light of the pre-existing IRS Tax Code (Tax Code) exclusions from such penalty, is temporarily waived for distributions paid from retirement plans (Plan) and IRAs where up to $100,000 is withdrawn for reasons related to COVID-19.

The federal income tax payable with respect to such Plan or IRA distributions may be paid to the U.S. Treasury in three or fewer years. In addition, these amounts may be paid back to the Plan or IRA over three years or less, without changing the participant’s annual plan contribution limits in each year.

The RMD amount is waived. This allows amounts otherwise required to be paid to participants to remain in the plan and not be taxed as income, and protects plan assets from being sold at depressed values.

Plan Loans: Plan loans may exceed existing limits when obtained in 2020 for reasons related to COVID-19. Plan sponsors may allow participant loans of up to a maximum amount of $100,000 or 100% of the participant’s account balance (increased from the lower of $50,000 or 50% of the account balance). Loan repayment starting dates may also be delayed for the participant in the Plan.

Contributions: Due dates for IRA contributions and employer contributions to retirement plans for 2019 are extended until July 15, 2020. HSA Plan contributions for 2019 are also extended.

Qualifications: A COVID-19-related plan or IRA payment to an individual exist when:

1. the taxpayer, their spouse or a dependent is diagnosed with COVID-19; or

2. the taxpayer suffers adverse economic effects due to quarantine, furlough, lay off, reduced work hours, closing, or reductions in their business due to COVID-19, where such business is operated by the taxpayer.

Controlled groups of business entities have a limit of $100,000 per participant if more than one plan exists. An employee may certify to a plan that such conditions have been met. In addition, single employer pension plans have been provided with relief to meet required funding obligations by delaying the contribution due date until January 1, 2021. Interest will accrue on the deferred payment owed to the single employer plan and adjustments will be permitted to occur in Tax Code Section 436 and ERISA Section 206 adjusted funding target percentages.

Charitable Contributions: The Tax Code now includes a new deduction for up to $300 for 2020, above the line, in calculating adjusted gross income (AGI) for charitable contributions.

The limit on qualified charitable cash contribution deductions has increased from 60% of the individual’s AGI to 100% of the individual’s AGI for this year. Excess charitable contribution amounts are to be carried over to future tax years under existing Tax Code provisions.

The deductible limit for “C” corporation charitable contributions is increased to 25% from 10% of taxable income for 2020.

Business-Related Tax Benefits

Employee Retention Tax Credits: An employee retention tax credit is available to eligible employers that close their businesses or suffer large business declines due to COVID-19. This tax credit applies to the employer’s share of the relevant FICA employment taxes for each quarter, which equals 50% of the qualified employee wages. This 50% tax credit is based on an amount that may not exceed $10,000 in wages paid to each person for all covered quarters in 2020. This credit is reduced by the other described credits allowed under the CARES Act, and it relates to all eligible employees for each quarter.

If the employee retention credit exceeds such limited amount, the difference may be refunded to the employer as a federal tax overpayment. This benefit may also apply to tax-exempt entities. There are separate detailed tests that are applied to determine the extent of the required business decline and other qualifications to obtain this tax credit.

Deferred FICA Tax Payment: Employer and self-employed persons may now defer payment of applicable FICA payroll taxes. The employer portion of employment taxes or self-employment taxes may be deferred to December 31, 2021 and December 31, 2022. However, 50% of the total deferred payroll taxes for 2020 must be repaid on each such date. Penalties will not apply for non-payment of taxes under these provisions. The tax deferral period is from March 27, 2020 to January 1, 2021.

Expansion of Net Operating Loss and Related Carryback Rules: The net operating loss (NOL) carryover and carryback rules are expanded. NOLs from 2018 to 2020 are now eligible for a five-year loss carryback and federal income tax refund period. The 80% prior limit in NOL usage per year is eliminated, so the loss may be fully utilized to offset prior or future net income in any applicable tax year.

The employer corporate change in control loss limiting rules will not apply to stock or equity transfers made as part of a COVID-19 covered loan.

Previously, non-corporate taxpayer losses were limited to $250,000 ($500,000 for a jointly filed married personal tax return) under Tax Code Section 461. The CARES Act eliminates the prior dollar limit on such losses, so any current year loss amount may be utilized in the relevant tax year from 2018 to 2020, thus creating possible prior year federal income tax refund claim situations.

Changes to the 2017 Tax Cuts and Jobs Act: Alternative Minimum Tax credits that were deferred under the 2017 Tax Cuts and Jobs Act (TCJA) may now be fully utilized and refunded in 2018 or 2019 without the previously required four-year (2018-2021) utilization period. If the taxpayer’s 2019 tax return is delayed, the refund may be elected to be paid for 2018 by the taxpayer.

Tax Code Section 163(j), previously amended by the TCJA, increases the limit on deductible interest expense paid from 30% to 50% for the greater of the 2020 or 2019 (by taxpayer election) tax return adjusted taxable income amounts. The 2019 election may be more beneficial if 2020 net income declines materially.

Tax returns for tax years 2018 and 2019 may be amended to claim bonus depreciation amounts that were not available due to a drafting error that was enacted as part of TCJA, making further tax refund claims possible.

Accounting Changes: Congress has enacted certain changes in the accounting rules that apply when an idle asset is placed in service, and for depreciation of idle assets among other matters, and which will also involve GAAP and SEC Disclosure questions as well.

Small Business Loans: Government-sponsored small business loans provided under the CARES Act are stated to not result in cancellation of debt income for federal income tax purposes if later forgiven. Separate grants provided by the government to certain qualified businesses appear to result in taxable gross income to the grantee. Tax Code Section 118(b) had previously excluded from gross income grants that were treated as capital contributions received from the government by a corporation. Other kinds of entities tax treatment for this purpose are less clear but such grants are likely to result in taxable income absent further legislation.  IRS Notice 2020-32, issued on April 29, 2019, prohibits an allocable income-tax-related deduction for the employer, where a portion of such SBA loan is forgiven on a tax-free basis, thus barring a double tax benefit for the employer from such loan cancellation.

On May 5, The Senate Finance Committee and the House Ways and Means Committee asked the IRS to withdraw Notice 2020-32 as incorrect and reflecting a result that was not intended by Congress when the CARES ACT was enacted. How this inconsistency will be resolved is not now known.

Richard J. Hindlian is a tax and business lawyer at the Boston law firm of Davis Malm, focusing primarily on tax controversies, international and domestic tax planning and employee benefit plans. He can be contacted at [email protected].