Major Tax Provisions of the CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was a legislative response to the economic fallout from the COVID-19 pandemic. This law was designed to deliver financial assistance to both American families and businesses. It introduced a wide array of temporary tax provisions aimed at increasing cash flow and providing stability during a period of widespread economic disruption. The measures ranged from direct payments and modifications to retirement savings rules for individuals to substantial payroll support and income tax adjustments for businesses. As these were temporary provisions, most have since expired.

Recovery Rebates for Individuals

A centerpiece of the CARES Act’s relief for individuals was the provision for Recovery Rebates, which were advance payments of a one-time 2020 tax credit. These payments, commonly referred to as stimulus checks, were sent directly to eligible Americans to provide immediate financial support. The full credit amount was $1,200 for an eligible individual and $2,400 for married couples filing a joint tax return. An additional $500 was provided for each qualifying child under the age of 17.

Eligibility for the full payment was determined by a taxpayer’s Adjusted Gross Income (AGI). The rebate amounts began to phase out for individuals with an AGI above $75,000, heads of household with an AGI above $112,500, and married couples with an AGI above $150,000. The payment was reduced by 5% of the income exceeding these thresholds, meaning it was gradually eliminated for higher-income individuals. To be eligible, individuals needed a work-eligible Social Security number and could not be claimed as a dependent by another taxpayer.

The IRS used taxpayers’ 2019 tax returns to calculate and issue the advance payments. If a 2019 return had not yet been filed, the agency used information from the 2018 return instead. This process was designed to be automatic for most people, requiring no action on their part to receive the funds.

A critical aspect of this program was its structure as a tax credit for the 2020 tax year. This meant that if an individual did not receive the advance payment, or received an amount less than what they were entitled to based on their 2020 income, they could claim the difference as the Recovery Rebate Credit on their 2020 Form 1040.

Modifications to Retirement Account Rules

The CARES Act introduced temporary changes to the rules governing retirement accounts to provide individuals with greater financial flexibility. These modifications allowed easier access to retirement funds for those affected by the pandemic and paused certain mandatory withdrawal requirements. The provisions were specifically targeted to help households manage unexpected financial distress without incurring the usual tax penalties associated with early access to savings.

Coronavirus-Related Distributions (CRDs)

One of the provisions allowed for “coronavirus-related distributions” (CRDs) from eligible retirement plans. This rule permitted qualified individuals to withdraw up to $100,000 in aggregate from their IRAs and employer-sponsored retirement plans, such as 401(k)s, without being subject to the standard 10% early withdrawal penalty. This provision applied only to distributions made during the 2020 calendar year.

To take a CRD, an individual had to meet specific criteria related to the pandemic. This included those who were diagnosed with COVID-19, whose spouse or dependent was diagnosed, or who experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced.

The CARES Act provided special tax treatment for these distributions. Individuals could choose to include the withdrawn amount in their gross income ratably over a three-year period—2020, 2021, and 2022. Furthermore, the law allowed individuals to recontribute the funds back into an eligible retirement plan within three years from the day after the distribution was received.

Increased Retirement Plan Loans

The legislation also temporarily enhanced the rules for loans from qualified employer plans. For 180 days following the law’s enactment on March 27, 2020, the maximum loan amount was increased from $50,000 to $100,000 for eligible individuals. In addition to the higher loan limit, the CARES Act provided relief for loan repayments. For any participant with an outstanding loan, any repayment due between March 27, 2020, and December 31, 2020, could be delayed for up to one year.

Waiver of Required Minimum Distributions (RMDs)

The CARES Act also provided relief for retirees by waiving Required Minimum Distributions (RMDs) for the 2020 calendar year. RMDs are amounts that owners of most retirement plans and IRAs must withdraw annually starting at a certain age. The waiver applied to most defined contribution plans, including 401(k)s, as well as traditional IRAs. This waiver allowed individuals to keep funds invested in their retirement accounts without being forced to take a distribution during a period of significant market volatility. The RMD waiver was for 2020 only, and the normal RMD requirements resumed in subsequent years.

Key Payroll Credits and Deferrals for Employers

To help businesses retain employees and manage cash flow during the economic downturn, the CARES Act established two major programs focused on payroll. These provisions offered a refundable tax credit for keeping employees on the payroll and allowed for the deferral of certain employer-side payroll taxes.

Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) was a refundable tax credit available to eligible employers to encourage them to keep employees on their payroll. For 2020, the credit was equal to 50% of up to $10,000 in qualified wages paid to an employee for the entire year, capping the credit at $5,000 per employee.

An employer qualified for the ERC if its operations were fully or partially suspended due to a government order or if it experienced a significant decline in gross receipts. For 2020, this was defined as a quarter where gross receipts were less than 50% of what they were in the same quarter of 2019. The definition of “qualified wages” depended on whether the business had more or fewer than 100 employees.

A notable restriction in the original CARES Act was that employers who received a Paycheck Protection Program (PPP) loan were not eligible for the ERC. Subsequent legislation changed this rule and also extended a modified version of the ERC through most of 2021.

Deferral of Employer Social Security Taxes

The CARES Act also allowed employers to defer the payment of their 6.2% share of Social Security taxes on employee wages paid from March 27, 2020, through December 31, 2020. This measure was intended to improve immediate cash flow for businesses. The deferred taxes were not forgiven and had to be repaid on a specific schedule. The law required that 50% of the deferred amount be paid by December 31, 2021, with the remaining 50% due by December 31, 2022. These repayment deadlines have passed, and the deferred taxes should have been fully repaid.

Business Income and Deduction Adjustments

The CARES Act included several temporary modifications to business income tax rules, providing retroactive relief and enhancing deductions to help companies improve their financial standing. These changes temporarily altered provisions that had been established by the Tax Cuts and Jobs Act of 2017 (TCJA).

Net Operating Loss (NOL) Modifications

The law significantly changed the treatment of Net Operating Losses (NOLs). The CARES Act temporarily allowed businesses to carry back NOLs generated in the 2018, 2019, and 2020 tax years for up to five years, enabling companies to receive refunds for taxes paid in prior profitable years. The act also temporarily suspended a limitation that prevented NOLs from offsetting more than 80% of taxable income. These favorable NOL rules have since expired, and the previous limitations are generally back in effect.

Increased Business Interest Expense Limitation

Another change involved the limitation on the deduction for business interest expense. The CARES Act temporarily increased this limit from 30% to 50% of a business’s adjusted taxable income (ATI) for the 2019 and 2020 tax years, allowing companies to deduct a larger portion of their interest costs. The law also permitted businesses to elect to use their 2019 ATI to calculate their 2020 limitation, which was helpful if their income had declined. After 2020, the deduction limit reverted to 30% of ATI.

Qualified Improvement Property (QIP) Technical Correction

The CARES Act also delivered a technical correction related to Qualified Improvement Property (QIP), which includes most interior improvements to nonresidential buildings. A drafting error in the TCJA had incorrectly given QIP a 39-year depreciation life, making it ineligible for 100% bonus depreciation. The CARES Act fixed this error by assigning QIP the intended 15-year recovery period, making it eligible for full bonus depreciation. This change was permanent and made retroactive to January 1, 2018. This allowed businesses to amend their 2018 and 2019 tax returns to claim significant refunds, a process that is now complete for most taxpayers.