Background of the CARES Act

1. On March 27, 2020 President Trump signed a $2.2 Trillion Bill into law in order to support the U.S. economy during the pandemic as COVID-19 continued to upend nearly every aspect of life in America. The purpose of the Legislation was to relieve Americans suffering from the economic drought caused by the sudden advance of the pandemic. The Legislation contains provisions which lent billions of dollars to small businesses with a provision which allows these business loans to be forgiven. The Legislation supported small businesses, enhanced unemployment insurance and provided federal loans to industries severely impacted by the COVID-19 pandemic.
2. In addition, the CARES Act legislation provided tax relief and tax incentives for individuals and businesses. The majority of the tax relief was crafted to provide and increase liquidity in the United States economy. This was to be accomplished mainly through the easing of limitations on trade or business deductions, as well as the deferral of taxes and the allowance of business losses. In addition, there was a Recovery Rebate distributed to individuals whether they were required to file an income tax return or not. The IRS refers to the Recovery Rebate as an Economic Impact Payment.

Summary of the Individual Tax Provisions in the CARES Act

1. The CARES Act Legislation impacted most individual taxpayers and some individuals who weren’t even required to file an income tax return. The Legislation addressed the following areas:  

• §6428 Recovery Rebates for Individuals referred to as “Economic Impact Payments” by the IRS (Sec. 2201 of the Act),
• 7508A Filing deadlines for Federal Income Tax Returns and tax payments (IRS Notice 2020-18),
• 62(a)(22) Above-the-line Charitable Contributions for those individual taxpayers who do notelect to itemize deductions on Schedule A of IRS Form 1040 or Form 1040-SR (Sec. 2201 of the Act),
• 170 removal of the 60% Adjusted Gross Income (AGI) limitation for those individual taxpayers who make cash contributions and who do elect to itemize deductions on Schedule A of IRS Form 1040 or Form 1040–SR (Sec. 2205 of the Act),
• 223(c)(1) Health Savings Account (HSA) eligibility opportunities (Sec. 3701 of the Act),
• 223(c)(2) relief for HSA eligibility and High Deductable Health Plan (HDHP) issues (Sec. 3701 of the Act),
• 223(d) Qualified Medical Care Expense availability for the use of the HSA funds (Sec. 3702 of the Act),
• 401 and §402 suspension of the annual Required Minimum Distribution (RMD) requirements (Sec. 2203 of the Act),
• 127 Employer Student Loan Payment exclusion allowance (Sec. 2206 of the Act),
• 221(e) Interest on Education Loans as related to §127 Employer Student Loan Payment Exclusion allowance (Sec. 2206 of the Act),
• 72(t) 10% penalty relief for coronavirus-related distributions from IRAs and pension plans (Sec. 2202 of the Act),
• 72(p) increase in allowable loan amounts from retirement plans for “coronavirus related distribution” issues (Sec. 2202 of the Act), and
• 7508A extended deadlines for IRA and HSA contributions (IRS Notice 2020-18).

Summary of the Business Tax Provisions in the CARES Act

The CARES Act Legislation impacted business provisions as follows:

• 172 Net Operating Losses (Sec. 2303 of the Act),
• 461(l)(1) Excess Business Losses of Noncorporate Taxpayers (Sec. 2304 of the Act),
• 163(j) Business Interest Deduction Limitation for 2019 and 2020 (Sec. 2306 of the Act),
• 168(e) Depreciation of Qualified Improvement Property (QIP) also known as the “retail glitch” (Sec. 2307 of the Act),
• 170 Charitable Contribution Deduction Limitation for Corporations (Sec. 2205(c) of the Act),
• Emergency Relief Loans Made or Guaranteed by the Department of the Treasury (Sec. 4003 of the Act),
• Exclusion of Loan Forgiveness of Small Business loans (Sec. 1106 of the Act),
• 53 Credit for Prior Year Alternative Minimum Tax Liability of Corporations (Sec. 2305 of the Act),
• 6072 Due Dates for Filing Returns and Tax Payments for C Corporations (IRS Notice 2020-18), and
• Employee Retention Credit for employers experiencing economic hardship (Sec. 2301 of the Act).

 Division A of the CARES Act by Titles

1. Division I, Title I is the “Keeping American Workers Paid and Employed Act”. This Title provided emergency economic relief for small businesses to meet their payroll and expenses and to receive education assistance throughout the COVID-19 pandemic.
   1. Sec. 1102 of the Act authorized the SBA to guarantee “paycheck protection program” loans during the period beginning on February 15, 2020 and ending on June 30, 2020. During this period, any business, in addition to small businesses, non-profit organizations, veteran’s organizations or tribal business were eligible to receive a “paycheck protection program” loan if it employed:
      • fewer than 500 employees, or
      • the applicable SBA size standard for the relevant industry.
2. Tax Professional Legislative Update: Under the CARES Act, borrowers had until midnight of Tuesday June 30, 2020 to submit their applications to designated financial institutions. On July 4, 2020, President Trump signed Senate Bill 4116, “Legislation to Extend the Authority for Commitments for the Paycheck Protection Program”, in order to extend the application date until midnight August 8, 2020.
3. In addition, individuals who operated as sole-proprietors or as an independent contractor, were eligible to receive a “paycheck protection program” loan.Tax Professional Note: Individual partners of a partnership were not eligible for a PPP loan.
4. Allowable uses for the “paycheck protection program” loans included:
   a. payroll costs,
   b. continuation of group health care benefits,
   c. employee salaries,
   d. covered rent payments, and
   e. utilities.
5. Sec. 1106 of the Act provided that recipients of “paycheck protection program” “covered loans” were eligible for forgiveness of the amounts expended for:
   a. payroll costs,
   b. payments of interest on mortgage obligations,
   c. covered rent or,
   d. covered utilities.
   Tax Professional Legislative Update: H.R. 7010, the “Paycheck Protection Program Flexibility Act of 2020” was signed into law by President Trump on Friday, June 5, 2020. One of the changes made by the Legislation was the extension of the period beginning on February 15, 2020 and ending on June 30, 2020 to ending on December 31, 2020.Tax Professional Note: The forgivable loans were designed to help support organizations facing economic hardships created by the coronavirus pandemic and assist them in continuing to pay employee salaries. PPP loan recipients can have their loans forgiven in full as long as the funds were properly used for eligible expenses.These qualifying costs are for amounts paid or incurred during the 8 week covered period in the CARES Act or the 24 week covered period in the “Paycheck Protection Program Flexibility Act of 2020”. Sec. 1106(a) provides definitions for each of the terms for items such as “covered loans”, “payroll costs”. “covered period”, etc
6. Sec. 1107(a) of the CARES Act provided that there was an appropriation of $349,000,000,000 for the cost of guaranteed loans added by the Paycheck Protection Program.Tax Professional Legislative Updates: “The Paycheck Protection Program and Health Care Enhancement Act”, H.R. 266 enacted on April 24, 2020 increased the appropriation by another $310,000,000,000 bringing the total appropriation to $659,000,000,000.
7. Sec. 1109 of the Act required the Department of the Treasury to establish criteria to enable insured financial institutions that did not participate in SBA lending programs, to participate in the Paycheck Protection Program (PPP).
8. Sec. 1110 of the Act provided for Economic Impact Disaster Loan (EIDL) Grants and made small businesses and certain other entities eligible for an advance of up to $10,000 on an SBA disaster loan for which they had applied in response to the COVID-19 pandemic. Sec. 1110(a) provided for a covered period for the grants beginning on January 31, 2020 and ending on December 31, 2020. The grant was available to an “eligible entity” which was defined as a business with notmore than 500 employees. It also included any individual who operated under a sole­proprietorship, with or without employees, or as an independent contractor.
9. Sec. 1110(b) provided that an “eligible entity” included notonly a small business concern, but also included private nonprofit organizations and small agricultural cooperatives.
10. Sec. 1110(e) provided for the allowance of an advance in the amount of $10,000 and before the money was disbursed, the SBA Administrator was to verify that the applicant was an “eligible entity” by accepting a “self-certification” from the applicant under penalty of perjury.
11. Sec. 1110(e)(4) provided that an advance could be used to address “allowable purposes” for the loan under section 7(b)(2) of the Small Business Act including:
    a. providing sick leave to employees unable to work due to the direct effect of COVID-19,
    b. maintaining payroll to retain employees during business disruptions or substantial slow downs,
    c. meeting increased costs to obtain materials unavailable from the applicants original source due to interrupted supply chains,
    d. making rent or mortgage payments, and
    e. repaying obligations that could not be met due to revenue losses.
12. Sec. 1110(e)(5) of the CARES Act provided that an applicant shall not be required to repay any amounts of an advance of the $10,000 even if subsequently denied a loan under the EIDL.
13. Sec. 1110(e)(8) provided that the provisions on the EIDL program terminated on December 31, 2020.

Subtitle B: Introduction to Rebates and Other Individual Provisions of the CARES Act

1. Division A, Title II, Subtitle B of the CARES Act allows for individual taxpayers below a certain income level, and their dependent children, a refundable tax credit to compensate for financial losses due to COVID-19.
2. Sec. 2201 of the Act allowed for individual taxpayers to receive a refundable income tax credit of $1,200. This amount was increased to $2,400 for a married couple filing a joint income tax return. In addition, there was an additional $500 credit allowed for each “qualifying child” of the taxpayer.The credit was phased out for those taxpayers whose Adjusted Gross Income (AGI) exceeded a threshold amount based on their filing status. The amount was $75,000 for a single taxpayer and married taxpayers filing a separate return. For a married couple filing a joint return, the amount was $150,000. For those taxpayers with a Head of Household filing status, the amount was $112,500. The “Consolidated Appropriations Act of 2021” retroactively increased the AGI threshold amount for surviving spouses to the same level as a married couple filing joint to $150,000. In order to be eligible for the credit, the taxpayer must have a valid identification number which is a social security number that was entered on their tax returns.
3. Sec.2202 of the Act is Special Rules for Use of Retirement Plans. It permitted penalty free “coronavirus-related distributions” from tax-exempt retirement plans of up to $100,000 in a taxable year. A “coronavirus-related distribution” is defined as any distribution from “an eligible retirement plan” made on or after January 1, 2020 and before December 31, 2020, to an individual who was:
   a. diagnosed with the virus SARS-COV-2,
   b. whose spouse or dependent was diagnosed (as defined under §152 of the Code) with such virus or disease,
   c. who experienced adverse financial consequences from being quarantined, furloughed or laid off work due to such virus or disease, or
   d. unable to work due to lack of child-care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).
4. Sec.2203 of the Act allowed a temporary waiver of the required minimum distribution (RMD) rules for certain retirement plans and accounts only in 2020. This is addressed in §401(a)(9)(I) of the Code.
5. Sec. 2204 of the Act provided under §62(a)(22) and §62(f) for a federal income tax deduction for charitable contributions in tax year 2020 of up to $300 for taxpayers who do notelect to itemize deductions on Schedule A of the 2020 Form 1040 or Form 1040-SR.Tax Professional Legislation Update: The “Consolidated Appropriations Act of 2021” extended the provision to 2021 and increased the amount to $600 for a married joint return. However, for 2021, §62(a)(22) is repealed and therefore the deduction is after the determination of the AGI amount.
6. Sec. 2205 of the Act suspended the 60% AGI limitation on cash contributions for purposes of the charitable contribution tax deduction for 2020 for those taxpayers who do elect to itemize deductions on Schedule A of IRS Form 1040 or Form 1040-SR. The provision was extended for 2021 by the “Consolidated Appropriations Act of 2021”.
7. Sec. 2206 of the Act allowed for an exclusion from an employee’s gross income tax and employment tax of any employer payments of an employee’s student loans made after March 27, 2020 and before January 1, 2021. (§127, §3121, §3306 and §3401 of the Code)Tax Professional Note: The exclusion for employer paid student loans was extended by the by the “Consolidated Appropriations Act of 2021” for 5 years to December 31, 2025.

Subtitle C: Introduction to the Business Provisions of the CARES Act

1. Division A, Title II, Subtitle C of the CARES Act allowed certain employer tax credits and other tax benefits to compensate employers for losses due to COVID-19.
2. Sec. 2301 of the Act allowed employers a payroll tax credit for 50% of the wages paid to employees, of up to $10,000 per employee, during any period in which such employers were required to close their operation due to COVID-19 under a “governmental order” or the taxpayer had a “significant decline in gross receipts”. This credit is known as the Employee Retention Credit. The credit is reported on Form 941 “Employer’s Quarterly Federal Tax Return” and not the entity’s Federal income tax return.Tax Professional Note: Transfers from the general fund of the Treasury to specified Social Security trust funds were authorized to cover any loss in government revenue due to the employee retention tax credit.
3. Sec. 2302 of the Act allows employers to delay payment of payroll tax deposits from the date of enactment, March 27, 2020 until December 31, 2020. The payment of the deferred tax requires 50% to be paid back by December 31, 2021 with the balance due by December 31, 2022.
4. Sec. 2203 of the Act allowed a temporary waiver of the required minimum distribution (RMD) rules for certain retirement plans and accounts only in 2020. This is addressed in §401(a)(9)(I) of the Code.
5. Sec. 2204 of the Act provided under §62(a)(22) and §62(f) for a federal income tax deduction for charitable contributions in tax year 2020 of up to $300 for taxpayers who do notelect to itemize deductions on Schedule A of the 2020 Form 1040 or Form 1040-SR.Tax Professional Legislation Update: The “Consolidated Appropriations Act of 2021” extended the provision to 2021 and increased the amount to $600 for a married joint return. However, for 2021, §62(a)(22) is repealed and therefore the deduction is after the determination of the AGI amount.
6. Sec. 2205 of the Act suspended the 60% AGI limitation on cash contributions for purposes of the charitable contribution tax deduction for 2020 for those taxpayers who do elect to itemize deductions on Schedule A of IRS Form 1040 or Form 1040-SR. The provision was extended for 2021 by the “Consolidated Appropriations Act of 2021”.
7. Sec. 2206 of the Act allowed for an exclusion from an employee’s gross income tax and employment tax of any employer payments of an employee’s student loans made after March 27, 2020 and before January 1, 2021. (§127, §3121, §3306 and §3401 of the Code)Tax Professional Note: The exclusion for employer paid student loans was extended by the by the “Consolidated Appropriations Act of 2021” for 5 years to December 31, 2025.

Subtitle C: Introduction to the Business Provisions of the CARES Act

1. Division A, Title II, Subtitle C of the CARES Act allowed certain employer tax credits and other tax benefits to compensate employers for losses due to COVID-19.
2. Sec. 2301 of the Act allowed employers a payroll tax credit for 50% of the wages paid to employees, of up to $10,000 per employee, during any period in which such employers were required to close their operation due to COVID-19 under a “governmental order” or the taxpayer had a “significant decline in gross receipts”. This credit is known as the Employee Retention Credit. The credit is reported on Form 941 “Employer’s Quarterly Federal Tax Return” and not the entity’s Federal income tax return.
   Tax Professional Note: Transfers from the general fund of the Treasury to specified Social Security trust funds were authorized to cover any loss in government revenue due to the employee retention tax credit.
3. Sec. 2302 of the Act allows employers to delay payment of payroll tax deposits from the date of enactment, March 27, 2020 until December 31, 2020. The payment of the deferred tax requires 50% to be paid back by December 31, 2021 with the balance due by December 31, 2022.
4. Sec. 2203 of the Act modified rules related to Net Operating Losses (NOLs) under §172 of the Code requiring taxpayers to carry back Net Operating Losses (NOLs) in 2018-2020 for up to five years, and to offset 100% of their income with losses in taxable years beginning before 2021. The Act effectively reverses the provisions of the Tax Cuts and Jobs Act (TCJA).
   TAX PROFESSIONAL ALERT: Taxpayers were allowed to elect to forgo the 5 year carryback period by making an election on their 2020 federal income tax returns by attaching a separate statement for each year stating that they were electing the provisions under §172(b)(3). Taxpayers only had until the due date of their 2020 tax return plus extensions to make the election. Therefore, if a calendar year taxpayer did not make the election by October 15, 2021 then the election is no longer available and the loss must be carried back 5 years.
   Tax Professional Reminder: The election is still available for those taxpayers whose extended due date is now January 3, 2022 because they were in a Presidentially Declared Disaster Area in the hurricanes and storms in September 2021. However, the extension is only available to those taxpayers who filed a valid extension by May 17, 2021.

5. Sec. 2304 repeals for 2018-2020, the $250,000/$500,000 limitation on the net business loss of taxpayers other than corporations under §461(l)(1) of the Code. The Act effectively reverses the provision of the Tax Cuts and Jobs Act (TCJA).
   Therefore this allows for amended 2018 returns, and 2019 returns filed in early 2020 before the enactment of the CARES Act.

6. Sec. 2305 modifies the tax credit for the prior year minimum tax liability of corporations to allow immediate refundability of credit amounts under §53(e) of the Code. The Act provides C Corporations the ability to accelerate the use of the AMT credits from pre-2018 tax years by amending 2018 and 2019 returns.
7. Sec. 2306 of the Act increases for taxable year beginning in 2019 and 2020, the limitation on the deductibility of the business interest under §163(j)(10)-(11). The Act provides those businesses that had limitations imposed on their deductible interest expense, to deduct additional interest for post-2017 tax years.
8. Sec 2307 of the Act classifies Qualified Improvement Property (QIP) (certain improvements to the interior of a nonresidential real property) as 15-year property for depreciation purposes, under §168(e)(6) and §168(g)(3)(B) of the Code. This is the technical correction needed from the Tax Cuts and Jobs Act (TCJA) for the “Retail Glitch” denying accelerated depreciation on nonresidential real estate.
   Tax Professional Reminder: All of the above provisions except for item 8 for the Qualified Improvement Property depreciation revert back to the provisions of the Tax Cuts and Jobs Act beginning January 1, 2021.

§72(t) Penalty Waiver Provided for Coronavirus Related Distributions and Waiver of the 60 Day Rollover Rule: Sec. 2202 of the CARES Act.

1. A distribution from a 401(a) qualified retirement plan, a §403(b) tax sheltered annuity plan, a §457(b) eligible deferred compensation plan of a State or local government employer or a §408 Individual Retirement Account (IRA) generally is included in gross income in the year of the distribution. All of these plans are referred to collectively as “eligible retirement plan”.
   Tax Professional Update: The Consolidated Appropriation Act of 2021 included “defined benefit pension plans” as a qualifying plan retroactive to the date of enactment of the CARES Act which was March 27, 2020.
2. In addition, there is a general rule that a distribution from a qualified retirement plan, a 403(b) plan, or an IRA plan, received before the taxpayer reached at 591/2 , is also subject to an additional §72(t) penalty, referred to as the “early withdrawal tax”. It is assessed on the amount which is includible in the taxpayer’s gross income.Tax Professional Education Awareness: The 10%, §72(t) penalty does not apply to distributions from a governmental §457(b) plan.
3. There are exceptions to the general rule for the assessment of the 10%, §72(t) penalty. As a result of the COVID-19 crisis, Sec. 2202(a)(1) of the CARES Act provided relief from the 10%, §72(t) penalty for a “coronavirus-related distribution”. A “coronavirus-related distribution” is defined as a distribution from an “eligible retirement plan” made on or after January 1, 2020 and before December 31, 2020 (Sec. 2202(a)(4)(A) of the CARES Act).
4. In addition, a “coronavirus-related distribution” must be made to an individual:
   a. who was diagnosed with the virus SARS-COV-1, or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), or,
   b. whose spouse or dependent (as defined in §152) was diagnosed with such virus or disease by such a test, or
   c. who experienced “adverse financial consequences” as a result of the coronavirus (Act Sec. 2202(a)(4)(ii)(III) of the CARES Act).
5. Act Sec. 2202(a)(4)(ii)(III) of the CARES Act provides that for the purposes of “adverse financial consequences” it can include consequences from any of the following:
   a. being quarantined,
   b. being furloughed or laid off or having to work hours reduced due to such virus or disease,
   c. being unable to work due to lack of childcare due to such virus or disease,
   d. closing or reducing hours of business owned or operated by the individual due to such virus or disease, or
   e. other factors determined by the Secretary of the Treasury or the Secretary’s designate.
   Tax Professional Awareness: Sec 2202(a)(4)(ii)(III) of the CARES Act provided that an employee could self-certify that the distribution was “coronavirus-related” as follows: “The administrator of an eligible retirement plan” may rely on an employee’s certification that the employee satisfies the conditions in determining whether any distribution is a “coronavirus distribution”.
   Sec. 2202(c)(4)(C) of the CARES Act provides that the term “eligible retirement plan” has the meaning given in §402(c)(8)(B) of the Code, which means that the self-certification rules also pertain to IRA distributions.
6. In addition to waiving the 72(t), 10% penalty, the CARES Act also waived the 60-day rollover rule for “qualified coronavirus distributions”. Under the general rule, distributions from an employer-provided qualified retirement plan are eligible to be rolled over tax free into another employer-provided qualified retirement plan or an IRA plan. This can be achieved by contributing the amount of the distribution to another plan or IRA plan within 60 days of the distribution, or by a “direct rollover” by the plan to another plan or IRA plan.
7. 1. Relief is sometimes provided from certain natural disasters in the form of disaster distributions and loans which allow residents of a Presidentially Declared Disaster Area to borrow or withdraw up to $100,000 to rebuild homes, etc. The same type of relief was provided by the CARES Act. Act Sec. 2202(a)(2)(A) provided that the aggregate amount of distributions received by an individual which may be treated as a “coronavirus-related distribution” shall notexceed $100,000.

   Tax Professional Note: §72(p) provides that the amount of a qualified plan distribution which is eligible for a loan in the lesser of:
   a. one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan, or
   b. $50,000.
   For purposes of a “coronavirus related distribution”, the CARES Act Sec.2202(b) (1)(A) provides that the amount in §72(p)(2)(A)(i) of the Code shall be applied by “substituting $100,000 for $50,000” and also provides that §72(p)(2)(A)(ii) will substitute “the present value of the nonforfeitable accrued benefit of the employee plan “for one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan”.

8. Sec.2202(a)(5) of the CARES Act provides that any amount required to be included in gross income as a result of a “coronavirus-related distribution” is included in income ratably over the three-year-period beginning with the year of the distribution unless the individual electsnot to have the ratable inclusion apply.
9. Any portion of a “coronavirus-related distribution” may, at any time during the three-year period, beginning the date after the date on which the distribution was received, be recontributed in one or more contributions to an eligible retirement plan to which a rollover can be made. Any amount recontributed within the three-year period is treated as a rollover and therefore not includible in the gross income of the recipient.
10. 1. The recontributed amounts are treated as though they were eligible rollover distributions that were transferred in a direct trustee to trustee transfer within 60 days with the result that the original distribution is not includible in gross income. In addition, the receiving plan does not have to be the plan from which the distribution was withdrawn. However, it must be to a plan which a rollover contribution could be made.

    EXAMPLE: If an individual received a “coronavirus-related distribution” in 2020, then under the general rule that amount is included in gross income in the year of the distribution and the following two years in 2021 and 2022 and is not subject to the §72(t), 10% early withdrawal penalty.

    If however in 2022, the amount of the “coronavirus-related distribution” is recontributed in full to an eligible retirement plan, then the individual may file amended returns for 2020 and 2021 in order to file a claim for refund of the tax attributable to the amounts previously included in gross income in 2020 and 2021. In addition, if a portion of the distribution has not yet been included in gross income at the time of recontribution, then that remaining amount is not includible in gross income in that tax year.

    Tax Professional Research Issue: Recontributions of a “coronavirus-related distribution” should be reported on the IRS Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments (Use for Coronavirus-Related Distribution).

    There are 4 parts on the 2020 Form 8915-E as follows:
    1. Part I Total Distributions From all Retirement Plans (Including IRAs)
    2. Part II Qualified 2020 Disaster Distributions From Retirement Plans (Other than IRAs)
    3. Part III Qualified 2020 Disaster Distributions from Traditional, SEP, SIMPLE and Roth IRAs
    4. Part IV Qualified Distributions for the Purchase or Construction of a Main Home in Certain 2020 Disaster Areas (Note: Reserved for Future Use)
    Tax Professional Awareness: The Form 8915-E for 2021 will be updated to report the one-third inclusion amount for 2021 and the recontribution of any coronavirus-related distributions. At the time these materials went to print, the Form 8915-E for 2021 was not available.

§127 Exclusion of Certain Employer Payments of Employee Student Loans: Sec.2206 of the CARES Act

1. §127 provides that an employee may exclude up to $5,250 from gross income for educational assistance provided by an employee’s employer. In addition, §3121(a) provides that the educational assistance is excluded from Social Security and Medicare taxes. §3401(a)(19) provides that the educational assistance is excluded from Unemployment taxes.
2. In order for the exclusion to apply, certain requirements must be satisfied as follows:
   a. the educational assistance must be provided pursuant to a separate written plan of the employer,
   b. the employer’s “educational assistance” program must not discriminate in favor of highly compensated employees, and
   c. no more than 5% of the amounts paid or incurred by the employer during the year for “educational assistance” under a “qualified educational assistance program” may be provided for the class of individuals consisting of:
   (1) more than 5% owners of the employer, and
   (2) the spouses and dependents of such owners.
3. Prior to the CARES Act, §127 provided that for purposes of the exclusion, “educational assistance” meant the payment by an employer of expenses incurred by, or on behalf of, the employee for education of the employee including, but not limited to, tuition, fees and similar payments, books, supplies, and equipment. “Educational assistance” also includes the provision by the employer of courses of instruction for the employee, including books, supplies, and equipment.
4. Reg. §1.127-2(c) states that “educational assistance” does not include payment for or the provision of:
   a. tools or supplies that may be retained by the employee after completion of a course,
   b. meals, lodging or transportation, or,
   c. any education including sports, games, or hobbies. Reg. §1.127-2(c)(4) states that the education need not be job-related or part of a degree program.
   “Educational assistance” qualifies for the exclusion only if the employer does not give the employee a choice between “educational assistance” and other renumeration includible in the employee’s income.
5. The exclusion for employer-provided “educational assistance” applies only with respect to education provided to the employee. The employer’s costs for providing such “educational assistance” are generally deductible as a trade or business expense under §162. The exclusion did not apply, for example, to assistance provided to the spouse or a child of the employee.
6. Deduction for Student Loan Interest: Under 221, certain individual taxpayers may claim an above-the-line deduction for interest paid on student loans. Only interest paid on a “qualified education loan” is eligible for the deduction.§221(d)(1)-(3) provides that a ‘qualified education loan” generally is defined as any indebtedness incurred to pay for the costs of attendance at an “eligible educational institution” on at least a half-time basis. The payments may be for attendance of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred.Tax Professional Reminder: The maximum allowable qualified student loan interest deduction per year is $2,500 per return. The deduction is phased out based on the taxpayer’s modified adjusted gross income and filing status and reduced to zero at the upper threshold levels. Dependents are not eligible to claim the student loan interest deduction.
7. 8. The CARES Act expands the definition of the term “educational assistance” which is excludable from gross income and from wages to include, any payments of principal or interest made by an employer on a “qualified education loan” incurred by an employee of the employer. The term “qualified education loan” is defined in 221(d)(1).

   The exclusion applies to payments made directly to the employee or to a lender. Under the CARES Act the provision did not apply to payments made on or after January 1, 2021.

   Tax Professional Legislative Update: As a result of the “Consolidated Appropriations Act of 2021” enacted on December 27, 2020, the exclusion for employer provided student loan debt assistance has been extended for 5 years for the period of 2021-2025.

   Tax Professional Awareness: §221(d)(1) defines the term “qualified education loan” to mean any indebtedness incurred by the taxpayer solely to pay “qualified higher education expenses” which are:
   a. Incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
   b. Paid or incurred within a reasonable period of time before or after the indebtedness was incurred, and
   c. Attributable to education furnished during a period in which the recipient was an eligible student.
   Therefore, as a result of the CARES Act, an employer could pay the employee’s qualifying debt on education of a spouse or dependent.

8. Payments made under this provision are subject to:
   a. the general requirements of §127, including the $5,250 annual cap,
   b. the requirement that assistance be provided pursuant to a separate written plan of the employer, and
   c. the nondiscrimination requirements.
9. 221(e)(1) as amended by the CARES Act provides that the employee may not claim a deduction on their Form 1040 or Form 1040-SR under §221 for interest paid on student loans on an amount for which an exclusion is allowable under the provision even if the full interest is reported on Form 1098–E. Therefore no double dipping is allowed by the taxpayer.
10.  

Employee Retention Credit for Employers Subject to Closure Due to COVID- 19: Sec. 2301 of the CARES Act.

1. Sec. 2301(a) of the CARES Act provided that in general, in the case of an “eligible employer”, there shall be allowed as a credit against “applicable employment” taxes for each calendar quarter, an amount equal to 50% of the “qualified wages” with respect to each employee of such employer.
2. Sec. 2301(b) of the Act provides for a limitation on the amount of the employee retention credit and also provides that the employee retention credit is refundable as a payroll tax credit on Form 941 and not the employer’s Federal income tax return. Sec. 2301(b)(1) provides that the amount of “qualified wages” with respect to any employee that may be taken into account by the “eligible employer” for all calendar quarters shall notexceed $10,000. Sec. 2301(b)(2) provides that the employee retention credit that is allowed shall notexceed the “applicable employment taxes” on the wages paid with respect to the employment of all employees of the “eligible employer” for such calendar quarter.
3. Under the CARES Act the employee retention credit is taken against either:
   a. the §3111(a) employer’s portion of the Old-Age Survivors and Disability Insurance (OASDI), or
   b. the §3221(a) employer’s portion of the Railroad Retirement Act (RRTA) Tier 1 tax.
   Tax Professional Note: Sec. 2301(b)(2) also provided that the employee retention credit was allowed against §3111 for employment of qualified returns under §3111(e) and §3221(f) for research expenditures for qualified small businesses. However, more importantly, the employee retention credit is reduced by the credits already taken under Sec. 7001 and Sec. 7003 of the “Families First Coronavirus Response Act” (FFCRA). Sec. 7001 is the credit allowed for the “Emergency Paid Sick Leave Act” (EPSLA) and Sec. 7003 is the credit allowed for the “Emergency Family Medical Leave Expansion Act (EFMLEA).
4. Sec. 2301(b)(3) of the Act provides for the refundability of the excess employee retention credit and in general, if the amount of the employee retention credit exceeds the limitation for any calendar quarter, then such excess shall be treated as an overpayment and will be refunded.
   Tax Professional Reminder: The credit is reported on the employer’s quarterly Form 941. It is a payroll tax credit and not an income tax credit.
5. Sec. 2301(c)(2) of the CARES Act defines an “eligible employer” to mean any employer:
   a. which was carrying on a trade or business during 2020, and
   b. with respect to any calendar quarter, for which:
   (1) the operation of the trade or business in 2020 was fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the COVID-19, or
   (2) such calendar quarter is within a period where there was a “significant decline in gross receipts”.Tax Professional Note: For purposes of the definition of an “eligible employer” and the “governmental order test”, examples could include a restaurant in a State under a Statewide order, that restaurants offer only take-out service.Also, a concert venue in a State under a Statewide order limiting gatherings to no more than 10 people, meets the “governmental order test”.Similarly, an accounting firm that is subject to a directive from public health authorities to cease all activities other than minimum basic operations close the office and do not require employees who cannot work from home, to work, (e.g., custodial employees, mail room employees) then they meet the “government order test”.
6. Sec. 2301(c)(2)(B) of the CARES Act describes a “significant decline in gross receipts” as a period:
   a. beginning with the first calendar quarter in 2020 beginning after December 31, 2019, for which gross receipts under §448(c) for the calendar quarter are less than 50% of the gross receipts for the same calendar quarter in 2019, and
   b. ending with the calendar quarter following the first calendar quarter in 2020 beginning after a calendar quarter which was carrying on a trade or business in calendar year 2020, for which gross receipts of such employer are greater than 80% of gross receipts for the same calendar quarter in 2019.Tax Professional Legislative Update: There is a different definition of a “significant decline in gross receipts test” for tax year 2021 as a result of the “Consolidated Appropriations Act of 2021”. For 2021, the taxpayer only needed a decrease of 20% in gross receipts rather than a 50% decrease in gross receipts to attain a “significant decline in gross receipts” and be eligible for the credit. This comparison was made with the 2021 quarter and the corresponding quarter in 2019. The “significant decrease in gross receipts” could be met by an overall decline of 20% in 2021 compared to 2019.EXAMPLE #1:For purposes of the “significant decline in gross receipts test” an employer had gross receipts of $100,000 in each calendar quarter in 2019. However, in 2020 the gross receipts were as follows:

    

   	2019	2020	% of2019
   Quarter 1	$100,000	$100,000	100%
   Quarter 2	$100,000	$40,000	40%
   Quarter 3	$100,000	$90,000	90%
   Quarter 4	$100,000	$100,000	100%

    

   The first calendar quarter beginning after December 31, 2019, for which the gross receipts are less than 50%, is the second quarter of 2020 where the gross receipts are only $40,000.

   This is less than 50% of the $100,000 in the second quarter of 2019. The ending calendar quarter, for which gross receipts of such employer are greater than 80% of gross receipts of the same calendar quarter in 2019, is the third quarter because 2020 gross receipts was $90,000 and that is greater than 80% of the $100,000 in third quarter 2019.

   As a result, the employer is treated as meeting the “significant decline in gross receipts” test in the second and third quarters of 2020.

   EXAMPLE #2: Assume that an “eligible employer” had the following gross receipts in 2019 and 2020:

   	2019	2020	% of2019
   Quarter 1	$210,000	$100,000	48%
   Quarter 2	$230,000	$190,000	83%
   Quarter 3	$250,000	$230,000	92%
   Quarter 4	$250,000	$250,000	100%

    

   The “eligible employer” had a “significant decline in gross receipts” beginning in the first calendar quarter because the gross receipts were less than 50% of the same quarter in 2019 which was 48%. The ending period is the quarter in which the gross receipts are greater than 80% of the same quarter in 2019 which is the second quarter because it is 83% of 2019. Therefore, the employer is eligible for the employee retention credit for the first and second calendar quarters of 2020.

   EXAMPLE #3: Assume an “eligible employer” had the following gross receipts in 2019 and 2020:

   	2019	2020	% of2019
   Quarter 1	$210,000	$66,000	48.9%
   Quarter 2	$230,000	$70,000	48.3%
   Quarter 3	$250,000	$125,000	69.4%
   Quarter 4	$250,000	$145,000	72.5%

    

   The “eligible employer” had a “significant decline in gross receipts” starting in the first calendar quarter because the gross receipts were less than 50% of the same quarter in 2019 which was 48.9%. There is noending period because the eligible employer’s gross receipts are nevergreater than 80% of any quarter in 2019.

   Therefore, the “eligible employer” is eligible for the employee retention credit in each of the four quarterly periods in 2020.

   EXAMPLE #4: In 2021, assume an “eligible employer” had the following gross receipts in 2019 and 2021:

   	2019	2021	% of2019
   Quarter 1	$210,000	$165,900	79%
   Quarter 2	$230,000	$149,500	65%
   Quarter 3	$250,000	$202,500	81%
   Quarter 4	$250,000	$145,000	84%

    

   The eligible employer had a “significant decline in gross receipts” starting in the first quarter 2021 because the gross receipts decreased by 21% which meets the new definition. In addition, the second quarter of 2021 has a decline of 35% which meets the new definition. The third quarter of 2021 also qualifies for the employee retention credit because it is the first quarter where the gross receipts are 80% or more of the corresponding quarter in 2019.

   Therefore, the “eligible employer” is eligible for the employee retention credit in each of the first three quarters in 2021.

7. 2301(c)(3)(A) of the CARES Act provided a definition of “qualified wages”. For 2020 an “eligible employer” that had more than 100 such employees in 2019, “qualified wages” were wages paid by the “eligible employer” with respect to which an employee was not providing services due to circumstances that caused the “eligible employer” to meet either:
   a. the “governmental order” test, or
   b. the “significant decline gross receipts” test.
   EXAMPLE #1: If a restaurant that had a average of 150 full-time employees during 2019 met the “governmental order test” in 2020, and the restaurant continued to pay kitchen employees’ wages as if they were working 40 hours per week but only required them to work 15 hours per week, then the wages paid to the kitchen employees for the 25 hours per week with respect to which the kitchen employees were not providing services were “qualified wages” for purposes of the Employee Retention Credit.However, if the same restaurant reduced kitchen employees’ working hours from 40 hours per week to 15 hours per week and only paid for wages for 15 hours per week, then no wages paid to the kitchen employees are “qualified wages” for purposes of the Employee Retention Credit because the employer was not paying for the hours the employee was not providing services to the employer.Tax Professional Legislative Update: As a result of the “Consolidated Appropriations Act of 2021” the employer with 500 or fewer employees will qualify for the employee retention credit for all the wages paid whether the employee provided services or did not provide services.EXAMPLE #2: In 2020, if an accounting firm that had an average of 500 full-time employees during 2019 met the “governmental order test”, and during the period in which the governmental order was in place, the accounting firm closed its’ office and did not require custodial and mail room employees to work, but continued to pay them their full salaries, then wages paid to those custodial and mail room employees for the time they did not work were “qualified wages” for purposes of the Employee Retention Credit.Similarly, if the accounting firm continued to pay administrative assistants their full salaries butonly required them to work two days per week on a rotating schedule reflecting reduced demand for assistance resulting from the office closure, then the portion of an administrative assistant’s salary attributable to days not worked are “qualified wages” for purposes of the Employee Retention Credit.Tax Professional Legislative Update: Due to changes made by the “Consolidated Appropriations Act of 2021” , in 2021 this same company with 500 or fewer employees during 2019 would be eligible for the credit on all wages paid for employees whether services were provided or not provided by the employees.
8. Sec. 2301(a)(3)(B) of the CARES Act provided that “qualified wages” paid to an employee by an “eligible employer” that had more than 100 full-time employees in 2019 could notexceed the amount of wages such employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period in which the “eligible employer” met either:
   a. the governmental order test, or
   b. the significant decline in gross receipts test.
   EXAMPLE #1: If an “eligible employer” in 2020 subject to this rule paid an employee $15 per hour for all hours worked prior to meeting the “governmental order test”, butduring the period when the eligible employer met the “governmental order test”, paid the same employee only $10 per hour, for hours when the employee was providing services, and $20 per hour when the employee was not providing services, thenonly $15 per hour of the $20 of wages paid when the employee was not providing services were “qualified wages” for purposes of the Employee Retention Credit.EXAMPLE #2: If an “eligible employer” subject to this rule paid an employee $15 per hour for all hours worked prior to meeting the governmental order test, butduring the period when the “eligible employer” met the “governmental order test” paid the same employee $20 per hour (both for hours when the employee was providing services and for hours when the employee did not provide services), then only $15 per hour of wages paid when the employee was not providing services were “qualified wages” for purposes of the Employee Retention Credit.Tax Professional Legislative Update: As a result of the “Consolidated Appropriations Act of 2021” for tax year 2021 all wages paid qualified for the employee retentions credit since they have 500 or fewer employees.
9. Sec. 2301(c)(3)(A)(ii) of the CARES Act addressed the term for “qualified wages” where an “eligible employer had 100 or fewer full-time employees. For an “eligible employer” that had an average of 100 or fewer full-time employees in 2019, “qualified wages” are wages paid to any employee either under:
   a. “governmental order” test, or
   b. during a quarter in which the eligible employer met the “significant decline in gross receipts” test.
   Tax Professional Legislative Update: The “Consolidated Appropriations Act of 2021” amended the CARES Act and increased the definition of an “eligible employer” from 100 or fewer employees to 500 or fewer employees.EXAMPLE #1: If a restaurant that had an average of 45 full-time employees during 2019, met the “governmental order test”, and the restaurant continued to pay kitchen employee’s wages as if they were working 40 hours per week but only required them to work 15 hours per week, thenall of 40 hours of wages paid during the period to which the governmental order applied are “qualified wages” for purposes of the Employee Retention Credit.If the same restaurant responded to the governmental order by reducing the hours of kitchen employees who had previously worked 40 hours per week to 15 hours per week and only pays wages for 15 hours per week, then such wages paid during the period to which the governmental order applied are “qualified wages” for purposes of the Employee Retention Credit.EXAMPLE #2: If a grocery store that had an average of 75 full-time employees during 2019 met the “significant decline in gross receipts test” for the second and third calendar quarters of 2020, thenall wages paid by the grocery store during those quarters are “qualified wages” for purposes of the Employee Retention Credit.Tax Professional Legislative Update: For the purposes of the 100 or less full­time employee test, the “Consolidated Appropriations Act of 2021” changed the rule to be 500 or less full-time employees in order to qualify for the employee retention credit for wages paid to employees for services not provided to the employer.
10. Sec. 2301(c)(3)(C) provides that the term “qualified wages” also include so much of the employer’s “qualified health plan expenses” as are properly allocable to “qualified wages” under the provision. “Qualified health plan expenses” are defined as amounts paid or incurred by the employer to provide and maintain a group health plan as defined in §5000(b)(1) of the Code, butonly to the extent such amounts are excluded from the employees’ income as coverage under an accident or health plan under §106 of the Code.Tax Professional Awareness: §5000(b)(1) provides that the term “group health plan” means a plan (including a self-insured plan) of an employer, or contributed to by an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. §106 covers Contributions by Employer to Accident and Health Plans. Under the general rule, §106(a) provides that except as otherwise provided, gross income of an employee does not include employer provided coverage under an accident or health plan. §106(b) provides that contributions to an Archer MSA shall be treated as employer-provided coverage and §106(d) provides that contributions to a Health Savings Account (HSA) shall be treated as employer- provided coverage not to exceed the annual limitations under §223(b) applicable to each employee. Refer to both §106 and §223.
11. “Qualified health plan expenses” are allocated to “qualified wages” in such manner as the Secretary (or the Secretary’s delegate), may subscribe. Except as otherwise provided by the Secretary (or the Secretary’s delegate) such allocations are treated as properly made if they are made:
    a. pro-rata among coverage employees, and
    b. pro-rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate).
    This broad grant of authority permits the Secretary (or the Secretary’s delegate) to treat “qualified health plan expenses” as “qualified wages” in a situation where no other “qualified wages” are paid by the “eligible employer” or to the particular employee to which such expenses are allocable.
    EXAMPLE: Don owns a business that has been closed since March 31, 2020, under a “governmental order” and has had to lay-off his staff of 25 but, continues to pay the monthly health insurance premiums for all 25 employees. The payment of these premiums are “qualified health plan expenses” and therefore are “qualified wages” for purposes of the Employee Retention Credit.
12. Sec. 2301(d) of the CARES Act provides for an aggregation rule for controlled groups where all persons are treated as a single employer under §52(a) for a controlled group of contributions and §52(b) for common ownership of partnerships and sole-proprietorships.
13. Sec. 2301(d) of the CARES Act provides that the deduction for wages and salaries must be reduced by the amount of the credit. It also provides that the credit cannot be taken where wages are paid to an employee who is:
    a. a relative or dependent of the employer, or
    b. who owns more than 50% of the corporation’s stock or owns more than a 50% interest in the capital assets or the profit interest of the noncorporate entity employer.
    Tax Professional IRS Administrative Update: On Wednesday, August 4, 2021, the IRS issued Notice 2021-49 with new guidance on the employee retention credit as it pertains to owners, spouses and related individuals.The wages paid to individuals who are related parties under §51 are not qualified for the Employee Retention Credit. Wages that do not qualify for the employee retention credit include: majority owners’ family members who are employed, and most spouses.The IRS is using §267 attribution rules to disqualify wages paid to spouses if the owner and/or spouse have any living close relatives, whether the relatives work for the business or not.The only exception to allowing a spouse’s wages to be qualified is where neither the owner nor the spouse have any close living relatives. This prohibition is for majority owners (more than 50%) of corporations and other entities.The following is Example #3 from Notice. 2021-49:Corporation C is owned 100% by John. Corporation C is an eligible employer with respect to the first calendar quarter of 2021.John is married to Karen, and they have no other family members as defined in §267(c)(4). John and Karen are both employees of Corporation C.

     

    Pursuant to the attribution rules of §267(c), Karen is attributed 100% ownership of Corporation C, and both John and Karen are treated as 100% owners.

    However, John and Karen do not have any of the relationships to each other described in §152(d)(2)(A)-(H). Accordingly, wages paid by Corporation C to John and Karen in the first calendar quarter of 2021 may be treated as qualified wages if the amounts satisfy the other requirements to be treated as qualified wages.

    Minority owners can potentially have their wages qualify for the employer retention credit, but again, if they are related to any of the other owners by marriage or blood, then the they could be deemed to be more than 50% owners.

14. Sec. 2301(f) of the CARES Act provides that certain governmental employers are not “eligible employers”. The credit is not available to the Government of the United States, or the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing.
15. Sec. 2301(g) of the CARES Act provides for an election to have the Employee Retention Credit, not apply. The credit shall not apply with respect to any “eligible employer” for any calendar quarter if such employer elects (at such time and in such manner as the Secretary may subscribe) not to take the credit.Tax Professional Note: The election is made by not reporting the credit on Form 941. The taxpayer needs to determine if the employee retention credit or the full wage deduction on the income tax return is more beneficial to their trade or business. The credit is taken into account for the purposes of determining any amount allowable as a payroll tax deduction or deduction for qualified wages on the Federal income tax return.EXAMPLE: Assume that in 2020 an employer pays $25,000 of “qualified wages” for the quarter and claims an employee retention credit of $12,500 (which is the maximum 50% amount for 2020) for the “qualified wages” for the quarter. The §3111(a) OASDI liability is 6.2% x $25,000 = $1,550. Therefore, the employer deducts the payroll tax expense of $1,550 and may only deduct wages of $12,500.Tax Professional Legislative Update: In the above example, if the wages were paid in 2021, the “Consolidated Appropriations Act of 2021” provides that the amount of the credit percentage is 70% of the $10,000 of eligible wages for each employee for each quarter. Therefore, the payroll credit amount would be $7,000 and the allowable deduction on the Federal income tax return would be $3,000. In addition, for quarters beginning after March 31, 2021, the credit is also available for the 1.45% employer Medicare Tax in addition to the 6.2% for the OASDI.
16. Sec. 2301(h) of the CARES Act provides for Special Rules. Sec. 2301(h)(1) provides that the employee retention credit can not be taken for an employee by an employer who is also allowed a credit under the §51 Work Opportunity Credit.Tax Professional Education Awareness: The §51 Work Opportunity Credit allows for a 40% credit on the first $6,000 of qualifying first year wages applicable to 10 specifically targeted groups. The qualifying first year wages are increased for Veterans at 3 different levels and depends on the severity of their disability.
17. Sec. 2301(h)(2) of the CARES Act provides that no credit can be taken if the employer is already allowed a credit under §45S for the “Family and Medical Leave Act” Credit enacted as a result of the TCJA and extended for 2020 by the SECURE Act.Tax Professional Education Awareness: §45S provides for a 12.5% credit of wages paid, if the rate of pay is at least 50% of the regular wages paid. The credit can increase up to 25% as wages exceed 50% of the regular wages.Tax Professional Legislative Update and Alert: The “Consolidated Appropriations Act of 2021” extended the §45S credit for 5 years to December 31, 2025. However, on September 13, 2021, the House Ways and Means Committee submitted a proposal to repeal the §45S “Family and Medical Leave Credit” effective for tax years beginning after December 31, 2023 eliminating 2 years of availability of the credit.
18. Sec. 2301(i) of the CARES Act provides that there will be transfers to the Federal Old-Age and Survivors Disability (OASDI) Insurance Trust Fund from the general fund for the payment of the employee retention credits thereby not impacting any payroll tax fund benefits.
19. Sec. 2301(j) of the CARES Act provides that if an “eligible employer” receives a “covered loan” (Paycheck Protection Programs (PPP) Loan) under Sec. 1102 of the Act, then the employer shall not be eligible for the employee retention credit on the same wages.
20. Sec. 2301(k) of the CARES Act provides for the treatment of payroll tax deposits. The Secretary shall waive any penalty under §6656 for any failure to make a deposit of any “applicable employment taxes” if the Secretary determines that such failure was due to reasonable anticipation of the employee retention credit.
21. Sec. 2301(l) of the CARES Act provides for regulations and guidance. The Act specifically provides that the Secretary shall issue such forms, instructions, regulations, and guidance as is necessary:
    a. to allow the advance payment of the credit subject to the limitations provided in Sec. 2301, based on such information as the Secretary shall require,
    b. to provide for the reconciliation of such advance payment with the amount advanced at the time of filing the return of tax for the applicable calendar quarter or taxable year,
    c. to provide for the recapture of the credit under this section if such credit is allowed to a taxpayer which received a Paycheck Protection Program (PPP) loan during a subsequent quarter,
    d. with respect to the application of the credit to third party payors (including professional employer organizations, certified professional employer organization, or agents under §3504 of the Internal Revenue Code of 1986), including regulations or guidance allowing such payors to submit documentation necessary to substantiate the eligible employer status of employers that use such payors, and
    e. for application of rules for “eligible wages” and the application of the “significant decline in gross receipts” in the case of any employer which was not carrying on a trade or business for all or part of the same calendar quarter in the prior year.
22. Sec. 2301(m) of the CARES Act provided that the employee retention credit shall only apply to wages paid after March 12, 2020, and before January 1, 2021.Tax Professional Legislative Update: The Consolidated Appropriations Act of 2021 enacted on December 27, 2020 and the American Rescue Plan Act of 2021 enacted on March 11, 2021, both made significant changes and updates to the employee retention credit. The “Consolidated Appropriations Act of 2021” extended the availability of the credit to June 30, 2021 and the “American Rescue Plans Act of 2021” further extended the availability of the credit to December 31, 2021. Note that, as of this writing, the proposed legislation on the President Biden’s infrastructure package wanted to end the availability of the credit on September 30, 2021. Since that legislation has not been passed by Congress, the employee retention credit is available until December 31, 2021.There are other changes made to the employee retention credit which are discussed in other chapters in the materials.

Delay of Payment of Employer Payroll Taxes: Sec. 2302 of the CARES Act

1. Sec. 2302(a) of the CARES Act provides a general rule that the payment for “applicable employment taxes” for the “payroll tax deferral period” shall not be due before the “applicable date”.
2. Sec. 2302(a)(2) provide that an employer shall be treated as having made all timely deposits of “applicable employment taxes” that are required to be made for such taxes during the “payroll tax deferral period” if such payments are made notlater than the “applicable date”.
3. Sec. 2302(a)(3) provided an exception to the general rules. The general rules of deferral did not apply to any taxpayer if such taxpayer has had:
   a. indebtedness forgiven under Section 1106 of the CARES Act with respect to a Paycheck Protection Program (PPP) loan received under Section 1102 of the CARES Act, (however, deferral is now allowed as a result of amendments made by the “Payroll Protection Program Flexibility Act of 2020” (PPPFA of 2020), or
   b. indebtedness forgiven under Section 1109 of the CARES Act.
   Tax Professional Awareness: Section 1102 is the loan provided under the SBA, for the Paycheck Protection Program (PPP) and Section 1106 is the forgiveness of the loan if used for the applicable costs for: payroll costs, covered rent, covered utilities, covered mortgage interest. Section 1109 of the CARES Act is the debt forgiven under U.S. Treasury Program Management Authority.
4. Sec. 2302(b) of the CARES Act addresses the Self-Employed Contributions Act (SECA). Sec. 2302(b)(1) provides that in general, the payment for 50% of the taxes imposed under §1401(a) of the Code for the payroll tax deferral period shall not be due before the “applicable date”. “Applicable date” is defined in Item #6 below.
5. Sec. 2302(d) of the CARES Act provides definitions pertaining to the Delay of Payment of Employer Payroll Taxes. Sec. 2302(d)(1) defines the term “applicable employment taxes” to mean the following:
   a. the taxes imposed by §3111(a) (OASDI),
   b. so much of the taxes imposed under §3211(a) as attributable to the rate in effect under §3111(a) (6.2%) of the OASDI, and
   c. so much of the taxes imposed under §3221(a) as attributable to the rate under §3111(a) (6.2%) of RRTA.
6. Sec. 2302(d)(2) defines the term “applicable date” to mean:
   a. December 31, 2021 with respect to 50% of the deferred tax, and
   b. December 31, 2022 with respect to the remaining amounts of the deferred tax.
7. Sec. 2302(d) provides that there has been an appropriation of the Treasury’s general fund for the transfer to the OASDI and RRTA.
8. Sec. 2302(f) provides for the regulatory authority that the Secretary of the Treasury shall issue such regulations and guidances as necessary to carry out the purpose of the delayed payments, including rules for the administration and enforcement for liability of third parties.IRS ADMINISTRATIVE ALERT: On June 21, 2021, the IRS Office of Chief Counsel issued an Internal Revenue Service Memorandum PMTA 2021-07 stating that if any portion of an employer’s §3111(a) taxes, or so much of the tax imposed under §3221(a), is not deposited by the “applicable installment due dates” then the deferral of the deposit due date is invalidated for all of the employer’s deferred taxes under §3111(a) or §3221(a) rather than just the remaining delinquent portion. In addition, the result is that the §6656 penalty for failure to deposit taxes is applicable to the entire deferral amount. The Memorandum provides the following examples:Example #1: If an employer defers the deposit of its’ portion of the §3111(a) tax (the employer’s portion of social security tax) in the amount of $50,000, and deposits and pays $25,000 on December 31, 2021 butfails to make any additional deposits or payments by December 31, 2022, then the employer is liable for a §6656 penalty on the entire $50,000, if there is noexception to the penalty due to reasonable cause. As a result, the deposits are only valid provided “all such deposits are made notlater than the applicable date.” If any portion of the deposit is not made by the applicable date, whether December 31, 2021, as to the first installment, or December 31, 2022, as to the second installment, then the deferral is completely invalid. In that event, the deposits were due on the usual deposit due dates provided in Reg. §31.6302-1 and Reg. §31.6302-2, which would be the due dates used in determining any penalties under §6656.Example #2: Assume that an employer is liable for §3111(a) tax, which is the employer’s share of social security tax. Under CARES Act section 2302(a), these taxes are not due until the “applicable due dates” of December 31, 2021 and December 31, 2022. The employer is also required to deposit these taxes under §6302 and its’ implementing regulations. Assume that any failure to deposit is not due to reasonable cause, and no other exception is applicable.Additionally assume that an employer has deferred, under CARES Act section 2302(a)(2), the deposit for the maximum amount of the employer’s §3111(a) tax for the 2020 tax year allowed to be deferred, and that this maximum amount deferred is a deposit of $50,000 of §3111(a) taxes. As a result, under CARES Act section 2302(d)(3), the employer must deposit $25,000 by December 31, 2021, and the remaining $25,000 by December 31, 2022.If, for the 2020 tax year, the employer deposits $5,000 on December 31, 2021, and makes no other deposits before December 31, 2021, then the 10% penalty under §6656(b)(1)(A)(iii), for failure to deposit tax for more than 15 days, applies to the entire $50,000, and the penalty amount would be $5,000. Because the first installment of $25,000, due on December 31, 2021, was not deposited by that date, the deferral is invalidated as to the entire $50,000. If, on February 7, 2022, the IRS issues a notice demanding payment of the balance of the first installment, and the employer does not pay the full amount demanded by February 17, 2022, then the penalty rate increases to 15%.

   Example #3: If, for the 2020 tax year, the employer deposits $25,000 on December 31, 2021, and deposits the remaining $25,000 on February 28, 2023, then the 10% penalty under §6656(b)(1)(A)(iii), for failure to deposit tax for more than 15 days, applies to the entire $50,000, and the penalty amount would be $5,000. Because the second installment of

   $25,000, due on December 31, 2022, was not timely deposited, the deferral is invalidated as to the entire $50,000. If, on February 6, 2023, the IRS issues a notice demanding payment of the second installment of $25,000, and the employer does not pay the full amount demanded by February 16, 2023, then the penalty rate increases to 15%.

   Tax Professional Awareness: The following statement was at the end of the June 21, 2021 Memorandum:

   “This writing may contain privileged information. Any unauthorized disclosure of this writing may undermine our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this office for our views.”

   Please contact Alexander Wu at (202) 317-6845 or by email if you have any further questions.

   Editor’s Note: The Memorandum was not released publicly until August 23, 2021.

§223 Health Savings Account (HSA) Eligibility

1. A Health Savings Account (HSA) is a trust established for the exclusive purposes of paying for qualified medical expenses of the beneficiary of the account. In order to be eligible for an HSA, an individual must be covered under a high deductible health plan (HDHP). In addition, §223(c)(1)(A) provides that the beneficiary of the plan cannot be covered under any health plan which is not a HDHP and which provides coverage for any benefit which is covered under the HDHP.
2. Various types of coverages are disregarded for purposes of determining whether an individual is covered only by an HDHP. §223(c)(1)(B) provides that disregarded coverage includes coverage for accident, disability, dental care, vision care or long-term care. It also includes certain permitted insurance and coverage under a Health FSA. Such coverage can be provided without having to satisfy a deductible requirement.
3. 1. 223(d)(2) provides that an HSA can make distributions to pay or reimburse “qualified medical expenses” and §223(d)(2)(A) provides that these include a medicine or drug only if it is a prescribed drug or is insulin.

   Tax Professional Note: For purposes of prescribed drugs this rule holds true even if the drug is available without a prescription.

4. As a result of the CARES Act, new subsection 223(c)(2)(E) provides that for plan years beginning on or before December 31, 2021, a plan is treated as a high deductible health plan (HDHP) even if it does not impose a deductible for telehealth or other remote care services.
5. 1. 223(c)(1)(B)(ii) is updated and provides that telehealth and remote care are added to the list of coverage items that are disregarded for determining HDHP deductibles (but only for plan years beginning on or before December 31, 2021).

   Tax Professional Note: Because of the COVID-19 pandemic, people have been, and many will continue to be, physically distancing for a period of time, and being able to visit the doctor’s office will be an issue. As a result, telehealth services and other remote care services permit patients and medical practitioners to interact electronically rather than face to face for providing medical care. In addition, telehealth services are generally less costly than actual office visits. While telehealth services are eligible expenses for use with an HSA plan, the CARES Act provides temporary relief from any requirement that a plan participant must meet the minimum deductible before the expenses can be covered by the HSA plan.

6. IRS Notice 2020-15 provides additional relief for using the HSA plan by providing relief for an HSA to cover expenses related to COVID-19. Health plans that otherwise qualify as HDHPs will not lose that status merely because they cover costs of testing for treatment of COVID-19 before the plan deductible amount has been met. In addition, any vaccination costs counts as preventative care and can be paid for by an HDHP.
7. The effective date of the amendments to 223 are effective on March 27, 2020, the enactment date of the CARES Act.Tax Professional Awareness: On May 12, 2020, the IRS issued two separate Notices addressing HSA plans and High Deductible Health Care (HDHC) plans. They are Notice 2020-29 and Notice 2020-30.The Notices discuss issues addressing telehealth and other remote care services before satisfying the HDHP deductible or despite receiving coverage for services outside of the HDHP. In addition, the Notices address qualified expenses which may be reimbursed for HSAs, Archer MSAs, Health FSAs and HRAs and the allowance of menstrual care product reimbursements.

3702 of the CARES Act: Inclusion of Certain Over-the-Counter (OTC) Medical Products as Qualified Medical Expenses

1. The Internal Revenue Code has specified provisions for medical care expenses that are eligible for use, distribution or reimbursement from plans classified as:
   a. Health Savings Accounts (HSA),
   b. Archer Medical Savings Accounts (Archer MSA),
   c. Health Reimbursement Arrangements (HRA), and
   d. Flexible Spending Account (FSA).
2. §105(b) provides that amounts received as reimbursements for medical care are excluded from gross income. Under pre-CARES Act legislation §106(f) provided that these amounts for medical expenses included the costs of medicine, but reimbursements for medicines or drugs only met the definition of medical expenses if the medicine or drug was a prescribed drug or insulin. As a result, this meant that reimbursements by FSAs, HRAs and other employer health plans for the cost of nonprescription drugs were notexcludable from gross income.
3. As a result of amendments made by the CARES Act, §106(f), §220(d)(2)(A) and §223(d)(2)(A) provide that over-the-counter medicines, drugs and menstrual care products are now treated as medical expenses. Therefore, the requirement that individuals obtain a prescription in order to be reimbursed for over-the-counter medicines and drugs has been eliminated for amounts paid or incurred after December 31, 2019 for:
   a. Health Savings Accounts, (HSAs),
   b. Archer Medical Savings Accounts (Archer MSAs),
   c. Health Flexible Spending Accounts (FSAs), and
   d. Health Reimbursement Arrangements (HRAs).
   Tax Professional Note: The provisions allowing the use of these plans for over- the-counter medication as qualified medical expenses as well as the inclusion of menstrual care products as qualified medical expenses are permanent changes and appear not specifically related to providing taxpayer relief due to the COVID-19.
4. Menstrual care products paid or incurred after December 31, 2019, are now treated as “qualified medical expenses” for use with HSAs, Archer MSAs, a Health FSA and HRAs. Menstrual care products are defined as a tampon, pad, liner, cup, sponge or similar product used by individuals with respect to menstruation or other genital-tract secretions.
5. Sec. 3702(d) of the CARES Act provides for effective dates. Sec. 3702(d)(1) provides for Distributions From Savings Accounts and the effective date shall apply for amounts paid after December 31, 2019. Sec. 3702(d)(2) provides for reimbursements and the effective date shall apply to expenses incurred after December 31, 2019.

§172 Modification of Net Operating Losses (NOLs): Sec. 2303 of the CARES Act

1. Prior to the “Tax Cuts and Jobs Act” (TCJA), §172 provided that a Net Operating Loss (NOL) was allowed in computing taxable income for a tax year in an amount equal to the aggregate in that tax year of the:
   a. NOL carryover, and
   b. NOL carrybacks.
2. Also prior to TCJA, the NOL was not subject to a limitation based on taxable income.
3. For tax years beginning after December 31, 2017, the “Tax Cuts and Jobs Act” limits the NOL deduction to 80% of taxable income, determined without regard to the NOL deduction itself. Carryovers to other years are adjusted to take the 80% limitation into account. Specifically, under the “Tax Cuts and Jobs Act”, §172(a) provides that a deduction is allowed for the tax year for an amount equal to the lesser of:
   a. the §172(a)(1) aggregate amount of the NOL carryovers to that year, plus the NOL carrybacks to that year, or
   b. the §172(a)(2) amount which is 80% of the current year’s taxable income, computed without regard to the NOL deduction.
   Tax Professional Note: This TCJA provision limits the value of NOLs, because they can no longer completely eliminate the taxable income in the year to which they are carried. Although the unused NOL deduction can be carried forward indefinitely, the carryover is worth less than a current year deduction.
4. The TCJA Legislation also repealed the two-year carry-back period. In the case of certain farming losses, the provision shortened the carry-back period from five years to two years.
5. NOLs arising in taxable years beginning before January 1, 2018, remain subject to prior TCJA Accordingly, such NOLs are not subject to the 80% limitation, and remain subject to the 20-year carryover limitation and to the prior-law 2-year carry­back rules. Post-2017 NOLs are not subject to the 20-year carryforward rule and can carryover forever.TAX PROFESSIONAL ALERT: On May 28, 2019, the IRS Chief Counsel issued Chief Counsel Advice Memorandum 201919012. The Memorandum reminded taxpayers that the election available under §172(b)(3) to forgo the NOL carryback period must be made by the due date (including extensions). The election is irrevocable and must be made on a timely filed return. The IRS cannot allow a taxpayer to make a §172(b)(3) election filed more than 6 months after the due date of the tax return. However, under Reg. §1.9100-2, a taxpayer is allowed an automatic 6-month extension from the due date of the return (excluding extensions) to make a statutory election up to the due date of the return including extensions, provided the taxpayer timely files the return for the year the election should have been made, and the taxpayer takes corrective action within the 6-month extension period.
6. Sec. 2303(b)(1)(D) of the CARES Act temporarily suspended the 80% limitation of taxable income provision for taxable years beginning after December 31, 2017, and before January 1, 2021. It therefore reversed the changes made by TCJA. In addition, the provision modified the rules relating to carrybacks, from no carryback period to a 5-year carryback period for all taxpayers.
7. The 5-year carryback period was allowed to be waived by making a 172(b)(3) election for any NOLs the taxpayer incurred in tax years beginning in 2018 or 2019. The time that §172(b)(1)(D)(v)(II) provided for making the waiver election was extended to the due date for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020.
   Therefore, April 15, 2021 was the date the election was required to be made plus extensions. For a calendar year taxpayer the date was October 15, 2021. If the election was not made then the loss must be carried back 5 years.Normally, the election to waive the carryback period is required to be performed by the due date of the return for the tax year in which the NOL arose.Tax Professional Note: The election that must be made in order to waive the carryback period includes the date up to the normal 6 month extension period. Therefore, individual and calendar year corporate taxpayers with a due date of April 15, 2021only had until October 15,2021 to make the election. Therefore, the election is no longer available and they are now required to carry the loss back 5 years.
8. For purposes of taxpayers in 2018 and 2019, the IRS issued Revenue Procedure 2020-24. Revenue Procedure 2020-24 provides guidance regarding elections related to 172(b)(1)(D). In Section 4, under Application Under Time and Manner of Filing the Election to Waive the Carryback, the IRS specifically addresses NOLs arising in taxable years beginning in 2018 and 2019.It states that a taxpayer within the scope of the revenue procedure may elect under §172(b)(3) to waive the carryback period for an NOL arising in a taxable year beginning in 2018 and 2019. Such an election must be made no later than the due date, including extensions, for filing the taxpayer’s Federal income tax return for the first taxable year ending after March 27, 2020.
9. A taxpayer had to make an election by attaching to its’ Federal income tax return filed for the first taxable year ending after March 27, 2020, a separate statement for each of the taxable years 2018 and/or 2019 for which the taxpayer intended to make the election. The election statement had to state that the taxpayer was electing to apply 172(b)(3) under Revenue Procedure 2020-24 and the taxable year to which the statement applies. Once made, the election is irrevocable.Tax Professional Note: The fact that Revenue Procedure 2020-24 specifically states that the election to forgo the 5-year carryback period is to be made on a Federal income tax return filed for the first taxable year ending after March 27, 2020, means that a NOL for 2018 and/or 2019, the election statement should have been attached to the 2020 tax return. Therefore, amended returns were not filed for 2018 or 2019.Tax Professional Awareness: At this point any December 31, 2020 returns are past the allowable date to make the election for their 2018-2020 returns. There is an exception for those corporate taxpayers who filed a valid extension by April 15, 2021 and those individual taxpayers who filed a valid extension by May 17, 2021 and who have been granted additional time to file as a result of being in a Presidentially Declared Disaster Area. These taxpayers now have until Monday, January 3, 2022 to file their 2020 returns and make the election to forgo any NOL carryback for 2018-2020.

461(l)(1)(B) Limitation on Excess Business Losses for Taxpayers Other Than Corporations: Sec. 2304 of the CARES Act

1. §461(a) provides a general rule that the amount of any deduction or credit allowed for the imposition of income tax shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.
2. Prior to the “Tax Cuts and Jobs Act” (TCJA), the Statute did not have a provision which limited the excess business losses of noncorporate taxpayers.
3. As a result of the TCJA, 461(l)(1)(B) provides for a limitation on an excess business loss of the taxpayer for the taxable year.
4. An excess business loss is defined as the excess of the aggregate deductions which are attributable to the trade or business over the sum of:
   a. the aggregate gross income or gain attributable to such trade or business, plus
   b. §250,000 or $500,000 in the case of a married joint return.
   Tax Professional Awareness: The addition of this provision led to the IRS to create Form 461 Limitation on Business Losses.
5. As a result of the CARES Act, the provision had been suspended retroactively for tax years beginning in 2018, 2019 and 2020. The limitation will now apply to tax years beginning after December 31, 2020 and before January 1, 2026.Tax Professional Awareness: Taxpayers who were impacted by the limitation, need to amend their 2018 and 2019 tax returns in order to receive a refund or credit or a carryback adjustment of an NOL if the returns were already filed prior to the enactment of the CARES Act.
6.  
7. Any excess disallowed loss shall be treated as a Net Operating Loss (NOL) under §172 in the subsequent tax year. If the taxpayer did have an excess amount disallowed in 2018 and it was carried into 2019 as an NOL, and the 2019 had already been filed before the enactment of the CARES Act, then the taxpayer will have to amend both the 2018 return for the §461(l) limitation and claim a refund or a credit for 2018 and will also need to amend the 2019 return in order to reduce the NOL amount which could generate an additional amount of tax liability for 2019 and impact the amount of NOL carryforward to 2020 and beyond.
   Tax Professional Note: The limitation under §461(l)(1)(B) is indexed annually to inflation in $1,000 increments for tax years beginning after December 31, 2018. For 2019 the amounts were increased to $510,000 for married joint returns and $255,000 for all other taxpayers. In 2020, the amounts were $518,000 and $259,000 respectfully. If the losses are from a pass-through entity, then the limitations are applied at the partner or S Corporation shareholder level. For 2021 the amounts are $524,000 and $262,000 respectfully. The projected amounts for 2022 are $540,000 and $270,000 respectfully.

    

   §461(l)(1)(B) Limitation Amounts:
   Tax Year	Married Joint	All Others
   2018	$500,000	$250,000
   2019	$510,000	$255,000
   2020	$518,000	$259,000
   2021	$524,000	$262,000
   2022	$540,000	$270,000

    

163(j) Modification on Limitations of Business Interest Expense: Sec. 2306 of the CARES Act

1. §163(a) provides a general rule that interest that is paid or accrued by a business is an allowable deduction. Prior to the “Tax Cuts and Jobs Act” (TCJA) the Statute did not provide for a limitation on the deduction of business interest.
2. TCJA created §163(j) Net Business Interest Deduction which provides for a limitation of 30% of the adjusted taxable income (ATI) for businesses with gross receipts greater than $25M during the 3 prior years under the provisions of §448(c). The $25M is indexed annually to inflation in $1M increments and is $26M in 2019 through 2022.
3. Any interest not allowed as a deduction in a current tax year is allowed as a carryforward in the subsequent tax year subject to the same limitations.
4. The limitation is calculated and reported on IRS Form 8990 Limitation on Business Interest Expense under §163(j).
5. The limitation under TCJA is effective for tax years beginning after December 31, 2017. However, the CARES Act increased the business interest deduction limitation from 30% to 50% of the taxpayer’s adjusted taxable income (ATI) for 2019 and 2020 tax years.
6. §163(j)(10)(A)(iii) provides that a taxpayer may electnot to have the increased 50% limitation apply in 2019 and 2020. If the election is made, then it can only be revoked with the consent of the IRS.
7. 1. 163(j)(10)(B) provides an election by the taxpayer to elect for any tax year beginning in 2020 to use the Adjusted Taxable Income (ATI) from the 2019 tax year in order to calculate the §163(j) limitation. Several tax policy analyst note that because it is likely that the 2020 ATI was lower than 2019 ATI, by using the 2019 ATI amount, taxpayers will have had a greater §163(j) limitation, thereby increasing the amount of deductible interest in 2020.

   Tax Professional Legislation Awareness: On September 13, 2021, the House Ways and Means Committee submitted a proposal to further decrease the availability of allowable business interest expense for larger businesses effective for tax years beginning after December 31, 2021.

168(e)(6) Technical Amendments Regarding Qualified Improvement Property (QIP): Sec. 2307 of the CARES Act

1. §168(d)(5)(E)(viii) provides that “qualified improvement property” (QIP) is 15- year MACRS property for purposes of capitalization and depreciation.
2. 168(d)(6)(A) provides that in general the term “qualified improvement property” means any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.Tax Professional Note: The requirement that the building was first placed in service prevents the construction of the improvement from being treated as 15-year property. Nonresidential real estate is 39-year MACRS property.
3. §168(d)(6)(B) provides that certain improvements are not included in the definition of QIP. Such term shall not include any improvement for which the expenditure is attributable to:
   a. the enlargement of the building,
   b. any elevator or escalator, or
   c. the internal structural framework of the building.
4. “Qualified improvement property” (QIP) placed in service after December 31, 2017, is generally depreciable over 15 years. This rule expresses Congress’s intent as reported in the Committee Reports in TCJA but was omitted from the Legislation. §168(b)(3)(G) provided that QIP is depreciated using a straight-line method and has a half-year convention.
   
   Tax Professional Reminder: QIP is generally eligible for additional first-year depreciation deduction under §168(k). §179(e)(1) provides that QIP is also eligible for §179 expensing. Reg. §1.168(k)-1(a)(2)(iii) (bonus depreciation) states that the amount of the additional first-year depreciation is determined after making any basis adjustments for any §179 expensing.
5. The amendment made by the CARES Act clarifies that QIP is 15-year property under MACRS and 20-year property under ADS.Tax Professional Note: The amendment reverses T.D. 9874 with the result that “qualified improvement property” (QIP) may be eligible for additional first-year depreciation under §168(k).If QIP placed in-service after 2017 was improperly depreciated as a 39-year property (40 under ADS) then the taxpayer may be eligible to file an amended return, or file an administrative judgment under §6227, or file IRS Form 3115 “Application in Change in Accounting Method” to a change to properly treat such property as 15-year property (20 year ADS).In addition, a taxpayer wanting to make, revoke, or withdraw an election for such property under §168(g)(7) for an election under ADS, or §168(k)(7) for an election out of the first-year depreciation deduction under §168(k) or §168(k)(10) for an election to use 50% allowance under §168(k) for certain property placed in service during certain periods, may be eligible to do so by filing an amended return, or filing an administrative adjustment request, or filing IRS Form 3115 (§446(e), Rev. Proc. 2020-25 and Section 6 of Rev. Proc 2019-43, 2019-48 I.R.B. 1107, as modified by Rev. Proc. 2020-25).
6. The CARES Act amendment also clarifies that 15-year MACRS (20-year ADS) recovery property only applies if the QIP is made by the taxpayer. 168(d)(6)(A) provides that if a taxpayer purchases a building in a taxable transaction, then any QIP previously placed in service by the seller with respect to such building does not qualify as “qualified improvement property” for the purchaser. Therefore, the purchaser has 39-year property.Tax Professional Note: The amendment made for QIP was known as the “retail glitch” after the enactment of the “Tax Cuts and Jobs Act” (TCJA). It specifically includes restaurants, retail establishments and tenant spaces which have all been hit severely by the coronavirus crisis.It also provided faster depreciation going into 2020 as the 39 year life is cut down almost by 2/3 to 15 years. The principal item to remember is that landlords are not eligible for §179 deductions because they are not in the trade or business of resale to customers; whereas the tenant is, and therefore qualifies for §179 expensing deduction and bonus depreciation. Landlords could qualify for bonus depreciation depending on the improvement.

§53 Modification of Credit for Prior Year Minimum Tax Liability of Corporations: Sec. 2305 of the CARES Act

1. The “Tax Cuts and Jobs Act” (TCJA) repealed the corporate alternative minimum tax (AMT) for taxable years beginning after December 31, 2017. If a corporation had been subject to an AMT in a taxable year beginning before January 1, 2018, then the amount of AMT was allowed as a credit in any subsequent taxable year to the extent that the corporation’s regular income tax liability was greater than the tentative minimum tax in the subsequent year.
2. For taxable years beginning after December 31, 2017, a minimum tax credit may offset a corporation’s entire regular tax liability for a taxable year. Corporate AMT credits were made available as refundable credits after 2017 and ending in 2021.
3. §53(d)(2) provides that the tentative minimum tax shall be zero beginning in 2018. As a result, a minimum tax credit claimed by a corporation beginning after 2017 is generally limited to the taxpayer’s regular tax liability, reduced by other nonrefundable credits. §53(e) provides that the minimum tax credit is the corporation’s AMT liability from tax years prior to the repeal and carried over to tax years after 2017.
4. §53(e) also provides that any unused AMT credit is refunded and will be fully recovered in tax years 2018-2021. Prior to the changes made by the CARES Act, the refundable credit amount was equal to 50% of the excess of the minimum tax credit for the tax year over the amount allowable for the year against the regular tax liability for years 2018-2020. For 2021, the refundable credit is 100% of the excess of the AMT credit over the regular income tax liability.
5. As a result of the CARES Act, updated §53(d)(1) provides that in the case of any taxable year of a corporation, beginning in 2018 or in 2019, a corporation may re­recover refundable AMT credits. §53(e)(2) provides that the refundable credit amount is equal to 50% for 2018 and 100% in 2019, or the excess of the AMT credit over the amount allowable for the year against the regular income tax liability.
6. 53(e)(5) provides a special rule that a corporation may elect to take the entire refundable credit amount in tax years beginning in 2018.Tax Professional Awareness: The purpose of the change was to allow the taxpayer the ability to get a refund by allowing the use of the refundable credit immediately to assist with cash flow needs during the crisis caused by COVID-19.