Late last night, the Senate unanimously passed the Phase 3 COVID-19 Bill (“Final Bill”). The Final Bill is 880 pages long and is largely based on the last Senate bill that was circulated last week. The Final Bill now moves to the House where it is expected to be passed tomorrow. The following highlights many of the tax provisions in the Final Bill.
NOL Carrybacks and Excess Business Losses
The Final Bill modifies the rules governing net operating losses (NOLs) for 2018, 2019, and 2020 taxable years by:
- Generally allowing for the carryback of the NOLs from those years for 5 taxable years and
- Removing for those years the 80% taxable income limitation on the deduction of NOLs that was added as part of TCJA.
The Final Bill also relaxes the rules governing excess business losses of noncorporate taxpayers for taxable years beginning after December 31, 2017 but before December 31, 2020 so that pass-through entities and sole proprietors are not limited in their use of trade-or-business losses to offset their nonbusiness income.
AMT Refundable Credit
The Final Bill provides that the AMT minimum tax credit is 50% refundable in 2018 and 50% refundable in 2019. The Original Proposal provided that the entire amount of the credit was refundable in 2018, requiring taxpayers to file an amended 2018 tax return to claim the refund. The change to spread the refund period over 2018 and 2019 makes it so taxpayers do not need to file an amended 2018 return in order to obtain the refund.
However, taxpayers can elect to claim the full amount of the refundable credit in 2018. If such an election is made, then Revised Bill provides that such claim for refund is not subject to review by the Joint Committee of Taxation prior to issuance of the refund.
Modifications to Limitation on Interest Expense Deduction
As part of TCJA, Congress limited a taxpayer’s deduction for business interest expense to the sum of: (1) the taxpayer’s business interest income, (2) 30% of the taxpayer’s adjusted taxable income (i.e., taxable income computed with certain adjustments) and (3) floor plan financing interest (section 163(j) limitation). The Final Bill proposes to modify the section 163(j) limitation for taxpayers other than partnerships as follows:
- For taxable years beginning in 2019 or 2020, taxpayers can calculate the amount of interest they can deduct based on 50% of their adjusted taxable income (instead of 30%), unless they elect not to, and
- For taxable years beginning in 2020, taxpayers can generally elect to use their 2019 adjusted taxable income to calculate the interest deduction limit.
For partnerships, the Final Bill provides:
- For 2019, partners that were allocated excess business interest expense from a partnership (business interest expense that exceeded the partnership’s section 163(j) limitation) can deduct 50% of that amount in 2020 without any limitation, unless they elect not to do so, and
- For 2020, similar to non-partnership taxpayers, a partnership can elect to use its 2019 ATI in place of its actual 2020 ATI (prorated if the 2020 taxable year is a short taxable year).
Retail Glitch Correction
As part of TCJA, the ability to depreciate an improvement to an interior portion of a building which is nonresidential real property, made after building was first placed in service (i.e., qualified improvement property or QIPs), was modified so that it had a useful life of 40 years and was therefore ineligible for the additional first year depreciation deduction (section 168(k)). The Final Bill corrects this so that QIP is now eligible for the section 168(k) deduction.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
Eligible employers (except those receiving a Small Business Interruption Loan) are entitled to a refundable credit against Social Security taxes equal to 50% of the qualified wages of each employee if their operations are fully or partially suspended due to the impact of COVID-19, or if they suffered significant economic loss due to shutdowns. Qualified wages are limited to those paid after March 12, 2020 and before January 1, 2021 and the amount of qualified wages differs based on the employer’s number of employees. The aggregate amount of wages is capped at $10,000 per employee and is subject to certain reductions for other payroll credits.
Delayed Payment of Employer Payroll Taxes
Employers (except those with indebtedness forgiven under the Act) and self-employed individuals can defer the employer portion of Social Security due from the Act’s enactment through the end of 2020 until the following future dates:
- 50% deferred until December 31, 2021; and
- 50% deferred until December 31, 2022.
Clarifications of the Families First Coronavirus Act (FFCA)
The CARES Act clarifies several provisions of the FFCA, including:
- Adding limitations on the amount of paid sick leave;
- Clarifying the ’30-day rule’ to determine employee eligibility for enhanced FMLA; and
- Providing further guidance with respect to the refundable credits related to paid sick leave and enhanced FMLA.
Individuals are Entitled to a Refundable Credit
The Final Bill provides for a one-time refundable credit available for individual taxpayers against their 2020 tax liability in the amount of $2,400 if the taxpayer’s filing status is married filing joint (MFJ) and $1,200 for all other taxpayers, increased in each case by $500 for each qualifying child. The Final Bill retains the phase-out thresholds. Specifically, the amount of the credit will be reduced (but not below zero) by 5 percent (i.e., by $5 for every $100) of the taxpayer’s adjusted gross income (AGI) that exceeds:
- $150,000 if the taxpayer’s status is MFJ, with a complete phase out if their AGI is $198,000;
- $112,500 if the taxpayer’s status is Head of Household, with a complete phase out if their AGI is $136,500; and
- $75,000 for all other taxpayer’s, with a complete phase out if their AGI is $99,000.
Lastly, the IRS is instructed to issue refund payments as quickly as possible, either by mailing taxpayers a check or electronically via direct deposit to any account which a taxpayer has previously authorized the delivery of a refund of taxes. The refund will be based on a taxpayer’s 2019 tax return if filed, or in the alternative their 2018 return.
Section 382 Relief
The Final Bill instructs Treasury to provide guidance that ownership interests arising from loans and loan guarantees provided by the federal government under the CARES Act do not trigger a change in ownership for section 382 purposes.
Alvarez and Marsal Taxand Says:
The highlights listed above cover just a few of the items within the Final Bill. As noted above, the Final Bill is largely based on the last Senate bill that was circulated but does have a few interesting modifications. Once this bill is passed by the House and signed into law, taxpayers will have an opportunity to increase their liquidity by filing amended returns to obtain refunds of taxes previously paid. However, some taxpayers may not be able to take full advantage of the proposed rules. In particular, the benefit of loss carrybacks may be limited for taxpayers with international operations. Additionally, taxpayers will have to determine whether it is more beneficial to obtain the employee retention credit or a Small Business Interruption Loan, or whether to make certain elections. Please contact your A&M professional if you have any questions regarding the Final Bill, including how it applies to your particular situations. For some of the relief proposed to be provided in the Final Bill, time is of the essence.