Senate Majority Leader Mitch McConnell introduced emergency stimulus legislation last week to address the economic fallout from the coronavirus outbreak, the third phase of the legislative response to the pandemic.
Two of the most attractive component of the “phase three” bill for individuals, unveiled by Senate Republicans on Thursday, includes delays to key deadlines and rebates of $1,200 for most Americans who reported less than $75,000 on their 2018 tax returns, or $2,400 per couple who filed their taxes jointly and made less than $150,000. Another $500 would be added for every dependent child. Low-income Americans with at least $2,500 of qualified income, but who do not earn enough to pay income tax, get a smaller benefit of $600, or $1,200 for couples. The payments would be gradually phased out for individuals with income between $75,000 and $99,000, at which point payments cut off.
For businesses proposed legislation postpones estimated tax payments due after the date of enactment until October 15, 2020, without a cap on the amount of tax payments postponed, to provide cash flow necessary that would help businesses maintain operations & continue paying employees during the COVID-19 pandemic. Employers and self-employed individuals would be allowed to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government (employers are responsible for paying a 6.2% Social Security tax on employee wages). The deferred employment tax would be required to be paid over the following two years, with half to be paid by December 31, 2021, and the other half by December 31, 2022.
The limitations on the ability of companies to use net-operating losses (NOLs) from prior years in the current tax year would be relaxed. Currently, they’re subject to a taxable income limitation and they can’t be carried back to reduce income in a prior tax year. This provision would allow losses from 2018, 2019, or 2020 to be carried back five years, and would temporarily remove the taxable income limitation to allow an NOL to fully offset income. These changes would allow companies to utilize losses & amend prior years’ returns to free up cash flow & liquidity during the COVID-19 pandemic and would also be available to pass-through businesses and sole-proprietors. Additionally, this section would:
• Accelerate the ability of companies to recover AMT credits
• Temporarily increase the amount of interest expense businesses can deduct from 30% to 50%
• Enable businesses (especially those in the hospitality industry) to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building
• Allow companies to recover the overpayment of taxes paid on the one-time repatriation toll charge in 2017
The following outlines the proposed provisions in Phase 3 Coronavirus Response legislation:
Recovery Checks & Other Individual Provisions
• 2020 recovery rebates for individuals
• Delay of certain deadlines
• Special rules for use of retirement funds
• Allowance of partial above the line deduction for charitable contributions
• Modification of limitations on charitable contributions during 2020
Business Provisions
• Delay of estimated tax payments for corporations
• Delay of payment of employer payroll taxes
• Modifications for net operating losses
• Modification of limitation on losses for taxpayers other than corporations
• Modification of credit for prior year minimum tax liability of corporations
• Modification of limitation on business interest
• Technical amendment regarding qualified improvement property
• Installments not to prevent credit or refund of overpayments or increase estimated taxes
• Restoration of limitation on downward attribution of stock
Lawmakers may need to avoid lengthy deliberation and move quickly on the third package, instead of waiting to add more in a fourth phase, because it’s unclear how much longer both sides will be able to meet in person. For more details about the proposed provisions in the third package, an excellent summary can be found here: https://www.finance.senate.gov/chairmans-news/senators-recommend-tax-policies-for-phase-3-coronavirus-response
It is important to reiterate that final Phase 3 Coronavirus Response legislation may look very different when it’s passed. Clients are strongly advised to contact their E. Cohen advisor/preparer to learn more about this proposed law and how it might impact your business and/or personal tax situation.
