On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748). This blog post summarizes the tax provisions of the CARES Act, and has been updated to reflect subsequent guidance from the Internal Revenue Service (“IRS”) on these provisions.
Economic Impact Payments. The CARES Act provides a refundable tax credit for 2020 of $1,200 to individual filers with adjusted gross incomes of $75,000 or less (or $112,500 or less for a head of household), and $2,400 to married couples filing jointly with adjusted gross incomes of $150,000 or less. For individuals, heads of households, and married couples with adjusted gross income of $75,000/$112,500/$150,000 or less, there is an additional $500 refundable credit for each of their “qualifying children”. Although the credit is for 2020, the CARES Act treats the taxpayer as if he or she had overpaid an amount equal to the credit in 2019 (or if the taxpayer has not yet filed a 2019 tax return, 2018) so that the taxpayer is eligible to receive his or her refund immediately. No minimum income is necessary to receive the credit. For taxpayers with incomes over the $75,000/$112,500/$150,000 threshold, the credit is reduced by 5% of the taxpayer’s adjusted gross income over $75,000/$112,500/$150,000. This results in a complete phase out for taxpayers who in 2019 made more than $99,000 (individuals), $146,500 (heads of households), and $198,000 (joint filers). Taxpayers who have not filed a 2018 or 2019 tax return because they were not required to do so, but who are otherwise eligible to receive an economic impact payment (i.e., U.S. citizens or residents with a valid social security number who satisfy the requirements above and have not been claimed as a dependent of another taxpayer), may provide the necessary information on the IRS website to receive their payment.
50% Employee Retention Credit for Employers Closed Due to Covid-19. The CARES Act provides an eligible employer with a refundable payroll tax credit equal to 50% of certain “qualified wages” (including certain health plan expenses) paid to its employees beginning March 13, 2020 through December 31, 2020 if the employer is engaged in a trade or business in 2020 and the wages are paid (i) while operation of that trade or business is fully or partially suspended due to a governmental order related to COVID-19 or (ii) during the period beginning in the first quarter in which gross receipts for that trade or business are less than 50% of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019. The employee retention credit can be used to offset all federal payroll taxes, including federal withholding tax, and the employer’s and employee’s share of social security tax and Medicare, but not the federal unemployment tax (“FUTA”).
The IRS has not issued guidance on how to determine whether an employer’s trade or business has been “partially suspended” due to a governmental order related to COVID-19. It would appear that any business, including a business providing essential services, such as an oil and gas company, is eligible for the credit if it can demonstrate that some portion of the operation of its trade or business has been suspended on account of a COVID-19-related governmental order. It is less clear that an employer can qualify if it continues to provide all services to all customers, even if it is unable to generate the same level of new business.
For employers with more than 100 full-time employees, the CARES Act provides that the credit is available only with respect to wages paid to an employee who is “not providing services” due to the circumstances described in (i) or (ii) above. These words imply a “cliff”—if an employee is providing any amount of services, then wages paid to the employee would not qualify for purposes of the credit. Further guidance in a Treasury fact sheet and an IRS news release provide that the credit is available only with respect to wages paid to employees “who did not work”, also implying a cliff. However, the IRS also posted a series of frequently asked questions (the “FAQ”) stating that the credit is available for wages paid to an employee “for time that the employee is not providing services”. These words suggest that an employer is entitled to employee retention credits for the portion of the employee’s time that the employee is not working. The Senate Committee on Finance has also stated that no cliff was intended. Accordingly, if an employee is working 25% of a pay period, under the FAQ interpretation, wages eligible for the credit would appear to include the wages paid to employee for 75% of the period during which the employee is not providing services. Policy reasons support the FAQ interpretation. If the statute imposed a cliff effect, employers would be discouraged from having employees perform any services so as to benefit from tax credits. The FAQ interpretation enables an employer to use employees as necessary for its business operations (and relieves the government of providing tax credits with respect to that use), without penalizing the employer by denying credits for qualified wages paid to the employee during the period he or she was not providing services. In addition, the FAQ was issued later in time and provides a more extensive interpretation of the employee retention credit rules.
All persons treated as a single employer under section 52(a) or (b) or section 414(m) or (o) are treated as one employer for all purposes of the credit, including for purposes of determining whether they exceed the 100 full-time employee threshold. First, companies related through greater than 50% ownership (by vote or value) are treated as one employer for purposes of the 100 full-time employee threshold. Second, chains of organizations (whether or not incorporated) conducting trades or businesses may be treated as one employer if they are common control. The test for common control depends on the types of organizations in the chain of ownership, but generally requires that corporations be connected through ownership of greater than 50% of the vote or value of each corporation and partnerships be connected through ownership of more than 50% of profits or capital. In Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, 724 F.3d 129 (1st. Cir. 2013), the First District Court of Appeals held that a private equity fund would typically be treated as conducting a trade or business for purposes of a control test under section 414 that is similar to the rule in section 52(b) unless the fund can establish that its investment is truly passive, which is a high bar. Therefore, under the court’s holding, two corporations more than 50% of the vote or value of each of which is owned by a private equity fund would be treated as a single employer for purposes of the 100 full-time employee rule. In Sun Capital, the court treated parallel funds as one entity for tax purposes where the funds were run by the same sponsor, shared a single general partner, and invested nearly identically. Therefore, under Sun Capital, if two parallel funds each own 50% or less of two corporations, but the funds in the aggregate own more than 50% of each corporation, both corporations would be treated as a single employer. However, under a second Sun Capital case, where a single sponsor managed two funds that did not invest in parallel, the holdings of the two funds were not aggregated. Finally, section 414(m) contains special rules for “affiliated service groups”.
The credit is capped at $5,000 (50% of $10,000 qualified wages) per employee for all calendar quarters. Section 501(c) tax-exempt organizations are eligible for the credit, but governmental entities and companies receiving loans under the CARES Act as part of the Small Business Administration’s Paycheck Protection Program (the “PPP”) are not. If a company receives a PPP loan, all other persons that are treated as one employer with that company under the rules described above are ineligible for the credit.
Small Business Loan Forgiveness Does Not Give Rise To Cancellation of Indebtedness Income. The CARES Act includes a loan forgiveness program under the PPP. Any cancellation of debt income under the PPP is tax-free (i.e., excluded from income), and does not result in a loss of tax attributes. An employer that receives a PPP loan is not eligible for the social security tax deferral once it receives notice from a lender that the loan is forgiven. However, the employer may continue to defer any payroll tax that it deferred prior to the loan forgiveness in accordance with the CARES act rules, as described below.. Some commentators have questioned whether businesses having loans forgiven could be denied deductions relating to that forgiveness (such as deductions for wages) under section 265, which denies deductions for expenses allocable to exempt income.
Tax Treatment of Economic Stabilization Investments. The CARES Act authorizes the Treasury to make or guarantee up to $500 billion in debt and equity investments in businesses, states, and municipalities affected by COVID-19. The CARES Act directs the IRS to issue guidance providing that the acquisition of warrants, stock options, common or preferred stock or other equity under the program does not result in an ownership change for purposes of section 382. While the CARES Act does not by its terms prevent investments from contributing to a section 382 ownership change, it appears consistent with the intent of the legislation for the IRS to entirely disregard investments for purposes of determining whether a taxpayer has experienced a section 382 ownership change. Any loans made or guaranteed by the Treasury under the program are treated for tax purposes as debt issued at par, and stated interest on these loans is treated as qualified stated interest. As a result, loans issued or guaranteed under the program are not treated as issued with original issue discount for tax purposes, and cash basis taxpayers are not permitted to deduct interest on the loans until that interest is paid.
The CARES Act Does Not Repeal Downward Attribution. The CARES Act does not contain the provision in the March 16 version that would have restored section 958(b)(4). (Before its removal as part of the 2017 Tax Cuts and Jobs Act (the “TCJA”), section 958(b)(4) prevented a United States person from being treated as owning the stock owned by its foreign owner.)
NOLs; Excess Business Losses. The CARES Act allows a corporation’s losses from 2018, 2019, and 2020 to be carried back for five years, and allows corporate NOLs to fully reduce taxable income (rather than only 80% of taxable income under current law). A REIT is not permitted to carry back losses. These provisions temporarily reverse certain changes made by the TCJA. However, the CARES Act effectively prevents the use of NOL carrybacks to offset income includible under section 965 (the deemed repatriation provision enacted in the TCJA). The CARES Act allows corporate taxpayers that may be able to carryback losses a 120-day period to make certain important elections, including the election to forego the carryback. The CARES Act also retroactively suspends the excess business loss provision of section 461(l)(1) (which disallows business losses in excess of $250,000 for a single taxpayer and $500,000 for a married couple filing jointly) for 2018 through 2020.
Increase the Section 163(j) Limitation on Business Interest Expense Deduction From 30% to 50%. The CARES Act retroactively increases the section 163(j) limitation on business interest expense deductions from 30% to 50% for 2019 and 2020. Taxpayers may elect to use their 2019 adjusted taxable income for purposes of calculating their section 163(j) limitation for 2020. Taxpayers may also elect out of the increase (for example, to defer the deduction and avoid generating or increasing a net operating loss which will again be usable only to the extent of 80% of taxable income beginning in 2021; or to minimize the amount of interest subject to the base erosion and anti-abuse tax or the “BEAT”). The CARES Act also provides that the increase in the limitation applies to partners in partnerships only in 2020 (and not in 2019) but, for partners that do not elect out of the provision, 50% of the business interest of a partner that is accrued in 2019 is deemed to accrue in 2020 and is not subject to any limitation in 2020.
Filing and Payment Extensions.
Deferral of Employer’s Share of Social Security. The CARES Act permits employers and self-employed individuals to delay payment of the 6.2% employer share of the social security tax (but not the employer’s share of FUTA or the 1.45% employer share of the Medicare tax) from the date of enactment through the end of 2020. The tax is payable over the following two years with half due by December 31, 2021 and the other half by December 31, 2022. These provisions are available to everyone, regardless of income. An employer that receives a PPP loan is not eligible for the social security tax deferral once it receives notice from a lender that the loan is forgiven. However, the employer may continue to defer any social security tax that it deferred prior to the loan forgiveness in accordance with the rules described above.
First and Second Quarter Estimated Tax Payments; Other Extensions. The Treasury and the IRS extended the due dates for the first quarter estimated tax payments and the April 15 filing date to July 15, 2020. Notice 2020-23 applies this extension to a variety of taxpayer deadlines and due dates for other filings and time-sensitive actions that fall between April 1, 2020 and July 15, 2020. Although Notice 2020-23 extends the due date for self-employed individuals required to make second quarter estimated tax payments, it does not do so for employers required to deposit second quarter estimated tax payments for payroll taxes.
Like-Kind Exchanges. For example, if the last day of either the 45-day period to identify replacement property for a section 1031 like-kind exchange or the 180-day period to close on replacement property falls on or after April 1, 2020 and before July 15, 2020, then the applicable period is extended to at least July 15, 2020. Although Notice 2020-23 references Revenue Procedure 2018-58, which extends these periods to the later of (i) 120 days or (ii) the last date of the extension period for a federally declared disaster (i.e., July 15, 2020 for the COVID-19 emergency), it is not clear that Notice 2020-23 extends the time period beyond July 15, 2020.
Qualified Opportunity Zone Funds. In addition, Notice 2020-23 provides that if the last day of the 180-day period for a taxpayer to invest eligible gain in a qualified opportunity zone fund falls on or after April 1, 2020 and before July 15, 2020, the taxpayer has until July 15, 2020 to make the investment. The final opportunity zone regulations provide that if a qualified opportunity zone business (a “QOZB”) is located in a “qualified opportunity zone” within a federally declared disaster, the QOZB may receive up to an additional 24 months to consume its working capital assets as long as it otherwise satisfies the requirements of the working capital safe harbor. A federally declared disaster includes a disaster or emergency declared under the Stafford Disaster Relief and Emergency Assistance Act, Pub. L. 100-107 (the “Stafford Act”). On March 13, 2020, the President issued a letter declaring an “emergency” under the Stafford Act and has subsequently declared a disaster in every state. The Preamble to the final opportunity zone regulations provides that the extension is available only if the QOZB is delayed in using working capital assets due to the disaster, so a QOZB should keep careful records of any delays to document how the COVID-19 pandemic has impacted its ability to use working capital assets.
Partnership Audit Rules. IRS guidance also permits partnerships that (i) are subject to the centralized audit and (ii) have already filed a Form 1065 and provided Schedules K-1 to their partners to file an amended partnership return for 2018 or 2019 so that they can benefit from the provisions in the CARES Act that provide tax relief in response to the COVID-19 pandemic. Partnerships that are eligible to amend their returns must do so and furnish corresponding Schedules K-1 to their partners by September 30, 2020.
Waiver of 10% Early Withdrawal Penalty for Distributions of Up to $100,000 From Retirement Funds for Affected Individuals. The CARES Act allows an individual to withdraw up to $100,000 from a qualified retirement account without incurring the 10% penalty for early withdrawals if (1) they are diagnosed with COVID-19, (2) their spouse or dependent is diagnosed with COVID-19, or (3) they experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19 or other factors as determined by the IRS. This provision applies to distributions from January 1, 2020 (rather than the date of enactment of the CARES Act) through December 31, 2020. Income attributable to the withdrawal will be taxable over three years (unless the taxpayer elects otherwise) and the taxpayer may recontribute the amount within three years without regard to the cap on contributions. The CARES Act also increases the maximum amount that an individual may borrow from a qualified plan from $50,000 to $100,000, allows an individual to borrow up to the present value of the employee’s nonforfeitable accrued benefit (rather than merely one-half of that amount, as under current law), and if the loan matures between the date of enactment and December 31, 2020, allows up to an additional year to repay the loan.
$300 Above the Line Charitable Contribution Deduction; Relaxation of the Charitable Contribution Limitation. The CARES Act allows a permanent “above the line” charitable contribution deduction for up to $300 of cash contributions to certain section 501(c)(3) public charities beginning in 2020, even if the individual takes the standard deduction. The CARES Act also suspends the 50% adjusted gross income limitation for charitable contributions by individuals in 2020 (so that individuals can receive a charitable contribution deduction for up to 100% of their 2020 adjusted gross income), and increases the 10% taxable income limitation on charitable contribution deductions for corporations to 25%. Finally, the CARES Act temporarily increases the cap on deductions for charitable contributions of food inventory in 2020 from 15% to 25% of taxable income (in the case of a C corporation) or aggregate net income for all relevant trades or businesses (in the case of an individual).
Immediate Expensing of Costs Associated With Improving Qualified Improvement Property. The CARES Act corrects an error in the TCJA that prevented businesses from expensing certain costs for improvements to “qualified improvement property”, and required the costs to be depreciated over the 39-year life of the building. Qualified improvement property is any improvement to the interior of a nonresidential building that is placed in service after the building is first placed in service. Qualified improvement property does not include improvements that are attributable to the enlargement of the building, elevators or escalators, or the internal structural framework of the building. The change is retroactive to the date of enactment of the TCJA.
Acceleration of Alternative Minimum Tax (AMT) Credits. The TCJA repealed the corporate AMT and allowed corporations to claim corporate AMT credits over several years until 2021. The CARES Act allows corporations with outstanding AMT credits to claim their credits immediately.
Tax-Free Employer Repayment of Employee Student Loans. Under the CARES Act, an employer’s repayment of up to $5,250 of an employee’s student loan debt is tax-free to the employee if made after the enactment of the CARES Act and before January 1, 2021 (i.e., the repayment is excluded from the employee’s income). The $5,250 cap applies to the total employer educational assistance provided to an employee under current law (e.g., tuition, fees, and books), including the new provision in the CARES Act.
 In a series of frequently asked questions on the employee retention credit, the Senate Committee stated that “[i]f an employee is performing services on a reduced schedule, wages paid to the employee are only treated as qualified wages if they exceed what the employee would have otherwise been paid for the services performed. In that case, employers will receive a credit for the difference between the total wages paid to the employee and the amount the employer would have paid for the reduced hours or services actually provided by the employee.” “CARES Act: Employee Retention Credit FAQ”, United States Senate Committee on Finance (Mar. 31, 2020), https://www.finance.senate.gov/chairmans-news/cares-act-employee-retention-credit-faq.
 All section references are to the U.S. Internal Revenue Code or the Treasury regulations promulgated thereunder, unless otherwise specified.
 One of the funds at issue in the Sun Capital case was actually comprised of two parallel funds, which the court treated as a single entity. See footnote 3 of Sun Capital Partners III, 724 F.3d at 133 n.3; Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, 943 F.3d 49, 52 n.1 (1st. Cir. 2019).
 Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, 943 F.3d 49 (1st. Cir. 2019).
 IRS News Release, “Deferral of employment tax deposits and payments through December 31, 2020,” (Apr. 16, 2020), https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020. The IRS also confirmed that relief from penalties for failure to deposit and pay the employer’s share of social security taxes is in addition to penalty relief under Notice 2020-22, which provides relief from penalties for failure to deposit employment taxes, including taxes withheld from employees, in anticipation of paid leave credits under the FFCRA and the employee retention credit under the CARES Act. For more details on these credits, please see our prior posts, here and here.
 Treas. Reg. § 1.1400Z-2(d)(3)(v)(D).
 Rev. Rul. 2003-29.
 Jason Hoffman, “For the first time in US history, every state is under a disaster declaration simultaneously,” CNN (Apr. 11, 2020), https://www.cnn.com/world/live-news/coronavirus-pandemic-04-11-20/h_a72269d9659294b60f09c1eb6acec702.
 Partnerships that file an amended return under the IRS guidance must do so by filing a new Form 1065 with the “Amended Return” box checked and indicate that the return is being amended pursuant to the guidance (Revenue Procedure 2020-23).