On March 27, 2020, U.S. President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is the largest emergency aid package in American history.
The US$2 trillion dollar law contains numerous relief provisions, including tax code updates and technical corrections, direct payments to individuals, emergency lending to businesses, and other stimulus provisions. The tax code updates provide immediate relief to both businesses and individuals that will potentially decrease current year tax liability as well as give an immediate cash infusion to taxpayers.
We have highlighted the provisions that we think will directly impact Canadian corporations with U.S. operations and Americans living in Canada.
Business tax provisions
Net operating losses
The Tax Cuts and Jobs Act (TCJA) of 2017 limited the amount and manner in which taxpayers could deduct net operating losses (NOL). Prior to the TCJA, taxpayers were allowed to carry back losses two years or carry them forward 20 years. Taxpayers could elect to forgo the carryback, however. The TCJA changed the NOL rules to no longer allow loss carrybacks but instead have an unlimited carryforward period. As well, NOLs arising from tax years beginning in 2018 can only be claimed against 80% of taxable income.
The CARES Act temporarily reverses these changes. For tax years 2018, 2019, and 2020, taxpayers may carry back losses five years. In addition, NOLs can be used to offset up to 100% of taxable income for these three years. In the case of a loss carryback, these provisions will help decrease a taxpayer's overall tax burden by allowing the taxpayer to apply for an immediate refund of prior year taxes paid.
Interest deduction limitation
The TCJA placed limitations on interest deductibility beginning in tax year 2018. Interest deductions are limited to 30% of adjusted taxable income for most U.S. corporate taxpayers. For tax years on or after Dec. 31, 2017 and before Jan. 1, 2022, adjusted taxable income is similar to EBITDA. For tax years beginning after January 1, 2022, adjusted taxable income is similar to EBIT.
The CARES Act temporarily increases the amount of interest that may be deducted by increasing the adjusted taxable income threshold percentage to 50% from 30%. This change is effective for tax years beginning in 2019 and 2020.
AMT credit refund
The TCJA repealed the corporate alternative minimum tax (AMT) for tax years beginning after Dec. 31, 2017. Taxpayers could have any unused AMT credit carryforwards refunded over a four-year period (2018 to 2021). The CARES Act allows taxpayers to immediately claim a refund for any unused AMT credit carryforward during the 2018 and 2019 tax years.
Payroll tax relief
The CARES Act provides for immediate payroll tax relief for corporations by suspending the employer portion of the 6.2% Social Security tax until the end of 2021. Employers will be required to pay 50% of the suspended tax by Dec. 31, 2021 and the other 50% by Dec. 31, 2022.
As well, the CARES Act creates a 50% refundable payroll tax credit on wages up to US$10,000. Employers are eligible for this credit if their business was fully or partially suspended due to a government order or if Q1 2020 gross receipts are 50% less than gross receipts in Q1 2019. Employers are eligible for this credit as long as the business remains suspended due to government order or until gross receipts for a fiscal quarter reach 80% of the prior year amount.
For businesses with more than 100 full-time employees, only wages of employees who are not providing services are eligible. For businesses with less than 100 full-time employees, all wages are eligible for the credit while the business was fully or partially suspended, or during the period of decreased gross receipts.
Qualified leasehold property
The TCJA increased the amount of first-year bonus depreciation that can be taken on qualified property to 100% from 50%. This bonus depreciation applies to any asset with a class life of 15 years or less. Congress intended for this to apply to Qualified Improvement Property (QIP), or any improvement to the interior of a nonresidential building after the building was placed in service by changing the class life to 15 years. However, due to a drafting error in the legislation the class life for QIP remained 39 years and thus remained ineligible for bonus depreciation.
The CARES Act corrects this error by changing the class life for QIP to 15 years. This change was made retroactive to Jan. 1, 2018. Therefore, taxpayers should be eligible to file amended returns to claim bonus depreciation on QIP and claim a refund where applicable.
Personal tax provisions
2020 recovery rebate payments
Eligible individuals are entitled to a payment of US$1,200 (US$2,400 for married couples filing jointly), plus an additional US$500 for each qualifying child (under the child tax credit rules). Eligible individuals do not include (a) those who are nonresident aliens of the U.S., (b) estates or trusts, or (c) those who can be claimed as a dependent by another individual's U.S. income tax return. Social Security Numbers are required for eligible individuals and their dependents.
For eligible individuals with 2020 adjusted gross income (AGI) in excess of certain thresholds (US$75,000 for single taxpayers or married taxpayers filing separately, US$112,500 for head of household filers, and US$150,000 for married taxpayers filing jointly), the payment is reduced by 5% of the amount by which the threshold is exceeded.
Advance payments will be automatically calculated and paid by the Internal Revenue Service (IRS) based on the most recent income information available: one's 2019 income tax return (Form 1040), one's 2018 Form 1040, or one's 2019 Social Security benefits (Form SSA-1099). If the payment calculated based on 2020 AGI yields a higher result, an additional credit can be claimed on one's 2020 Form 1040. However, excess advance payments are not required to be repaid. The IRS intends to issue advance payments to eligible individuals as soon as possible. Payments will be made electronically for those having provided direct deposit information in the recent past while other eligible recipients will receive a cheque in the mail.
Similar to stimulus payments issued by the IRS back in 2008 and 2009, these rebate payments apply to U.S. citizens and green card holders living in Canada. Therefore, such individuals are incentivized to file their U.S. income tax returns to qualify for the payment.
Retirement plan distributions
Relief is available with respect to distributions to qualified individuals of up to US$100,000 during 2020 from qualified retirement plans, including 401(k) plans and Individual Retirement Accounts (IRAs). Qualified individuals are generally those who are (a) stricken with the coronavirus, (b) have a spouse or dependent who is stricken with the coronavirus, or (c) experience adverse financial consequences due to the coronavirus. The relief available is as follows:
- 10% early withdrawal penalties will not apply for distributions prior to age 59 ½.
- The distribution is considered a tax-deferred rollover to the extent that the funds are recontributed to the plan within three years of the distribution.
- Any portion of the distribution that is taxable can be taxed ratably over a three-year period starting in 2020.
Furthermore, required minimum distributions (typically required annually upon attaining the age of 72) generally do not apply for 2020.
This relief is available for all Canadians with U.S. qualified retirement plans, including those who are nonresident aliens of the U.S. and either worked in the U.S. or inherited a plan from someone who did.
The rule limiting the itemized deduction for charitable contributions to 60% of AGI does not apply for 2020. Furthermore, for taxpayers who claim a standard deduction rather than itemize their deductions, a deduction for charitable contributions of up to US$300 is available for 2020.
For U.S. citizens and green card holders living in Canada, this relief applies with respect to contributions to Canadian registered charities and U.S. charities.
The CARES Act provided immediate relief for businesses of all sizes and for individuals. These temporary measures will assist with providing needed liquidity to taxpayers to help maintain business operations and personal liquidity during this trying time.
If you have questions on the provisions of the CARES Act, please contact our U.S. tax practice leaders in Canada: