On March 27, 2020, the US President signed into law the third COVID-19-related stimulus package, called the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act.1 The CARES Act is of historic magnitude: approximately $2.2 trillion of fiscal stimulus supporting individuals, the medical industry, and businesses in the United States to fight against the virus and the damage it has inflicted on the economy. The new law is not primarily tax legislation, but it does contain some significant US federal tax relief for both businesses and individuals. As discussed in more detail below, the key business tax takeaways are:

  • For taxable years beginning in 2019 or 2020, net operating loss carryovers (“NOLs”) are no longer subject to an 80% taxable income limitation, and NOLs from 2018, 2019, or 2020 can be carried back five years;
  • For taxable years beginning in 2019 or 2020, the interest expense limitation in Code section 163(j)2 is increased to 50%, and taxpayers can use 2019’s adjusted taxable income for purposes of the 2020 calculation;
  • Corporate AMT credits are 100% refundable in 2018 and 2019; and
  • The creation of an employee retention credit of up to $10,000 per employee (subject to certain limitations).

In this Legal Update, we discuss these changes along with the other US federal tax provisions that have now become law.3 Some of these provisions will impact state and local tax calculations as well, and we highlight certain considerations below. We will issue a separate alert to address measures that states are taking in response to the crisis.

Modifications for NOLs

After the Tax Cuts and Jobs Act (the “TCJA”), effective for taxable years beginning after December 31, 2017, NOLs were allowed to offset only 80% of a corporation’s taxable income, and loss carrybacks were not allowed.4 The CARES Act provides that, in the case of a taxable year beginning before January 1, 2021, the 80% taxable income limit does not apply, so taxpayers may use NOLs to fully offset their taxable income. Also, taxpayers may carryback NOLs earned in 2018, 2019, or 2020 up to five years. Taxpayers desiring to take advantage of these loosened rules will, in many cases, be required to file amended income tax returns.

Special rules apply for specific types of corporate taxpayers. The CARES Act also modifies the loss limitation applicable to pass-through businesses and sole proprietors. The NOL relief provided by the CARES Act may ultimately come in the form of a refund for an amended 2018 tax return. For a more detailed summary of the NOL provisions, and the mechanics and hurdles of applying for a refund with respect to 2018, please see our Legal Update, entitled “CARES Act Adds Five-Year Carryback Period and Suspends 80% Limitation for 2018, 2019 and 2020 Net Operating Losses.”

Few states conform fully to federal NOL provisions. Many states that use federal taxable income as a starting point require that NOLs be added back to taxable income, even if they subsequently offer their own NOL deduction or calculation. Examples of such states include New York and California. For states that do conform to the Code’s NOL provisions, they must conform on a rolling basis for the changes in the CARES Act to automatically apply. For example, Florida conforms to the Code, but only as in effect as of January 1, 2019.

Amendments to Code Section 163(j)

The TCJA radically amended Code section 163(j). As amended, Code section 163(j) generally disallows the deduction of a taxpayer’s business interest expense to the extent it exceeds the sum of business interest income and 30% of the taxpayer’s adjusted taxable income. In an effort to provide businesses additional relief, the CARES Act amends Code section 163(j) to temporarily increase this limitation to 50%, for taxable years beginning in 2019 and 2020. This change could incentivize taxpayers to pursue short-term borrowing in 2020 to take advantage of the increased limitation, although taxpayers would need to be certain that short-term loans could be repaid by year-end. Otherwise, the debt would be outstanding in 2021 and be subject to the TCJA business interest income and 30% Code section 163(j) limitation.

Code section 163(j) generally “silos” partnerships, treating business interest expense as deductible to the extent the partnership has sufficient business interest income and adjusted taxable income. The CARES Act allows a partnership to elect to partially suspend this treatment for 2019. Under the temporary rule, the partnership first nets its 2019 business interest expense against business interest income and 30% of the partnership’s adjusted taxable income. Then, 50% of any excess business interest expense is treated as paid or accrued by the partner in 2020, and that amount may be deducted without being subject to limitation under Code section 163(j). The remaining 50% remains subject to the “silo” rules for partnerships under Code section 163(j).

A taxpayer may elect to not apply this increased limitation, but once such an election is made it can only be revoked by the consent of the Secretary. For partnerships, such an election is be made by the partnership and may be made only for the 2020 tax year. This ability to stay with the current regime will be very helpful for taxpayers grappling with strategies to minimize their liability for the base erosion and anti-avoidance tax (“BEAT”) imposed by Code section 59A. By keeping deductible interest expense paid to affiliates low, taxpayers subject to the BEAT can avoid the BEAT minimum tax on such amounts and avoid having to waive the deduction to minimize their BEAT liability. (Amounts subject to disallowance under Code section 163(j) carry forward indefinitely.)

The Act also affords taxpayers the ability to elect to use their 2019 adjusted taxable income for purposes of computing their 2020 taxable year interest expense limitation. The policy behind this election is that because of COVID-19, taxpayers are likely to derive less income in tax year 2020 than 2019. Accordingly, by permitting the use of 2019 adjusted taxable income, taxpayers that use 2019’s adjusted taxable income for purposes of their Code section 163(j) limitation are likely to further increasing the amount of deductible interest. Again, the ability to elect not to use 2019 adjusted taxable income may assist with BEAT planning.

The effect of Code section 163(j) on state tax calculations has been a source of confusion since the TCJA’s enactment. On a practical level, the CARES Act’s modifications to Code section 163(j), only apply to a state if it conforms to the Code on a “rolling” basis, meaning that it automatically incorporates amendments to the Code. But, even then, some rolling conformity states have elected to decouple from Code section 163(j) to avoid the complications and adverse consequences that it can cause taxpayers at the state level; those states include Connecticut, South Carolina, and Tennessee among others. Fixed or “static” conformity states, like Arizona, tie themselves to the Code as enacted on a specific date, and will need to enact specific legislation to conform to the CARES Act’s changes to Code section 163(j). California is a static conformity state and has not yet conformed to Code section 163(j) in the first place.

Credit for Corporate AMT

Prior to the TCJA, when a corporation paid the alternative minimum tax (“AMT”), the amount of AMT paid was allowed as a credit in a subsequent taxable year. Effectively, the AMT was a prepayment of corporate taxes. The TCJA repealed the AMT for corporations for taxable years beginning after December 31, 2017, and modified Code section 53 to treat 50% of any AMT credit as refundable in 2018, 2019, 2020, and 100% as refundable in 2021. The CARES Act makes the AMT credit 100% refundable for taxable years beginning in 2018 and 2019. Accordingly, the new law provides relief to corporate taxpayers with non-refunded AMT credits in 2018, as they can generally amend their 2018 returns and be refunded those amounts. These refunds are generally to be paid within 90 days of the date of the refund request.

Employee Retention Credit for COVID-19 Closures

A key consideration underlying the CARES Act is the strong desire to maintain employment levels. The CARES Act aims to achieve this goal by providing “eligible employers” with a refundable credit against applicable employment taxes5 for each calendar quarter in an amount equal to 50% of the “qualified wages,” with respect to each employee of such employer for such calendar quarter. The credit is available for qualified wages paid or incurred from March 13, 2020 until December 31, 2020, and the maximum amount of qualified wages that may be taken into account for purposes of the credit for all calendar quarters is $10,000. The credit itself is subject to certain further limitations specified in the statute.6 The credit can be applied to the first $10,000 of compensation, including health benefits, paid to an eligible employee, i.e., it need not be spread over the entire applicable period from March 13, 2020 until December 31, 2020.

To be an “eligible employer” with respect to a calendar quarter, an employer must have been carrying on a trade or business during the 2020 calendar year and (i) have operations that were fully or partially suspended during such calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19, or (ii) have gross receipts for such calendar quarter below certain levels specified in the statute (very generally less than 50% of gross receipts for the same calendar quarter in the prior year).

For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services as a result of the conditions described above (i.e., suspension of operations or with business fallen below the 50% test). For eligible employers with 100 or fewer full-time employees, all wages paid by such eligible employer with respect to an employee (up to the applicable limits) during a quarter or period when the conditions described above apply, constitute qualified wages even if the employee is performing services. (Note that certain aggregation rules apply for purposes of applying these rules). Qualified wages include so much of an eligible employer’s qualified health plan expenses (i.e., amounts paid or incurred by such employer to provide and maintain a group health plan that are excluded from employees’ gross income under Code section 106(a)) as are properly allocable to such wages.

Certain limitations apply with respect to qualifying for the credit. Specifically, any eligible employers that receive a covered loan under the Small Business Act, as amended by the CARES Act are not eligible for this credit. Further, if an employer is allowed a credit under Code section 51 with respect to an employee, then that employee is not included for purposes of this credit for any period with respect to the employer.

Federal tax credits do not automatically apply at the state level. States will therefore be required to enact changes on a state-by-state basis if they wish to provide similar benefits to state taxpayers.

Employer Payroll Taxes Delayed

Generally, employers must pay a 6.2% social security tax on employee wages. To provide some relief during the COVID-19 pandemic, the CARES Act allows certain employers7 to defer applicable employment taxes (and deposits with respect to such taxes) arising during the period beginning on the date the CARES Act is enacted and ending before January 1, 2021 (the “tax deferral period”). Half the deferred amounts must be paid by December 31, 2021 and the other half by December 31, 2022.

For purposes of this provision, the term “applicable employment taxes” includes the taxes imposed under Code section 3111(a) and those imposed under Code sections 3211(a) and 3221(a), in both cases, attributable to the rate in effect under Code section 3111(a), and 50% of the taxes imposed under Code section 1401(a).

Employers that receive a loan under the Small Business Act (as amended) that is forgiven pursuant to the CARES Act are not be eligible for this credit. Special rules apply if the employer uses an agent and certified professional employer organizations, and Treasury Regulations that address the implementation of these rules are forthcoming. In addition, we expect states to enact similar relief and will provide updates in a separate alert.

Tax Treatment of CARES Act Loans

To provide additional liquidity to eligible businesses, states, and municipalities struggling to fight the economic threats posed by COVID-19, the Cares Act authorizes the Secretary to make certain loans, loan guarantees, and other investments of up to $500 billion to such institutions. The exact terms of these loans, loan guarantees, and other investments are yet to be determined and appear to generally remain in the discretion of the Secretary, although the Act does set forth certain parameters for the loans. The Secretary is authorized to enter into contracts under which the Federal Government would participate in the gains of eligible business through the use of financial instruments such as warrants, stock options, common or preferred stock, or other types of equity instruments, provided the Secretary does not exercise voting rights for any common stock acquired. To remove uncertainty as to the US federal tax characterization of these loans, the CARES Act provides that any loan made by or guaranteed by the Department of Treasury under the Act will be treated as indebtedness for US federal income tax purposes as a matter of law, will be treated as issued for its stated principal amount, and stated interest on such loans shall be treated as qualified stated interest. Thus, interest payments on such loans are generally eligible to be deducted. The new law provides US Treasury with authority to prescribe regulations and other guidance to carry out the new provision, including guidance providing that any equity acquired by the Government will not result in a Code section 382 ownership change.

Small Business Relief from Cancellation of Indebtedness

The CARES Act expands the Small Business Act to authorize $349 billion in additional lending to small businesses and certain nonprofits during the period from February 15, 2020 through June 30, 2020, generally to allow such businesses to pay expenses such as salaries, sick leave, mortgage, rent and utility payments (defined as “covered loans”). The Act provides that certain of these loans may be eligible for forgiveness, and that loans forgiven pursuant to the Act are not treated as resulting in cancellation of indebtedness income.

TCJA Technical Correction for Depreciation

The TCJA erroneously defined the term “qualified improvement property” in a manner that prevented such property from being eligible for 100% bonus depreciation. Qualified improvement property is generally defined as any improvement to an interior of a nonresidential building that is placed in service after the building was placed in service. Congress intended qualified improvement property to be eligible for 100% bonus depreciation, but a drafting error left such property ineligible. The CARES Act makes a technical amendment to Code section 168(e)(3)(E) correcting this error by including qualified improvement property as “15-year property” (which previously had a recovery period of 39 years). This amendment is retroactively effective and applies to property placed in service after September 27, 2017.

A majority of states, such as California, Florida, New York, and Texas, do not conform to the federal allowance for bonus depreciation. Other states, including Colorado, Illinois, and Michigan all conform to federal bonus depreciation rules on a rolling basis, and this change for qualified improvement property will automatically make it eligible for bonus depreciation at the state level in those jurisdictions.

Aviation Excise Tax Relief

The CARES ACT temporarily relieves taxpayers from payment of the federal excise tax on air transportation of passengers and property under Code sections 4261 and 4271 (including any amount treated as paid for transportation by air under Code section 4261(e)(3)) until January 1, 2021. Moreover, the Act relieves taxpayers of amounts otherwise imposed on the use of kerosene in commercial aviation pursuant to Code sections 4041(c) and 4081 (other than at the rate provided in the Leaking Underground Storage Tank Trust Fund tax of Code section 4081(a)(2)(B)) until January 1, 2021. The Act further deems the use of kerosene in commercial aviation as a nontaxable use for purposes of Code section 6427(l) and that such relief under Code section 6427(l) is applied without regard to the limitations imposed under Code section 6427(l)(4)(A)(ii). These provisions provide some limited relief to the airline industry.

Checks in the Mail?

The CARES Act provides for direct financial assistance to certain individuals, using a fairly complex method to assess eligibility. Pursuant to newly added Code section 6428, “eligible individuals” with a valid social security or adoption taxpayer identification number will be entitled to receive a credit for their 2020 taxable year equal to $1,200 ($2,400 in the case of joint returns), plus $500 per each “qualifying child,” reduced (but not below zero) by 5% of the amount of the taxpayer’s adjusted gross income that exceeds $150,000 (in the case of taxpayers filing a joint return), $112,500 (in the case of a taxpayer treated as a head of household), or $75,000 in all other cases (the “2020 Credit”). As a result, the 2020 Credit is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children. Resident aliens that do not possess a social security or adoption taxpayer identification number are not entitled to the aforementioned assistance.

The 2020 Credit may be applied to an eligible individual’s 2019 tax liability such that the value of the 2020 Credit may reduce 2019 tax liability and any remaining credit may be refunded to the eligible individual in the same manner as such person’s tax refund (e.g., direct deposit or by paper check).

Individuals that do not follow a calendar tax year or did not file a tax return for such individual’s first taxable year beginning in 2018 may still qualify for the benefits of the CARES Act by either substituting “2018” for “2019” or, in the case of an individual filing their first return, by providing Form SSA-1099, Social Security Benefit Statement with respect to such individual for calendar year 2019.

As a final point, it is important to note that no interest shall be allowed on any overpayment attributable to the 2019 Payment, and that, with certain exceptions under the CARES Act, any credit or refund allowed or made to any taxpayer pursuant to the above provisions shall not be reduced or offset by other assessed Federal taxes that would otherwise be subject to collection.

Charitable Contribution Limits Lifted

The CARES Act includes a temporary suspension of the limitations for individuals and corporations on certain cash contributions achieved by disregarding certain “qualified contributions” for purposes of applying the percentage limitations and carryover excess limitations contained in Code section 170(b) and (d).

As a result, under the temporary suspension, individuals can deduct the amount of any “qualified contribution” to the extent that the aggregate of such contributions does not exceed the excess of the taxpayer’s adjusted gross income (as defined in Code section 170(b)(1)(H)) over the amount of all other charitable contributions allowed under Code section 170(b)(1), with any excess being added to the excess described in Code section 170(b)(1)(G)(ii).8

In the case of corporations, any qualified contribution shall be allowed as a deduction only to the extent that the aggregate of such contributions does not exceed the excess of 25% of the taxpayer’s taxable income over the amount of all other charitable contributions so allowed, with any excess generally rolling forward five years.

In addition, the CARES Act increases the limitation in respect of contributions of food inventory under Code section 170(e)(3)(C) from 15% to 25% during the 2020 calendar year.

The CARES Act also amends Code section 62(a) in order to allow taxpayers who do not itemize to reduce their “adjusted gross income,” for taxable years beginning in 2020 by the amount of “qualified charitable contributions” made during the taxable year up to $300.

Relief for Retirement Fund Distributions

Generally, early distributions from certain qualified retirement plans (e.g., IRAs) are subject to a 10% addition tax. The CARES Act lifts this additional tax for coronavirus-related distributions, up to $100,000. To be “coronavirus-related,” the distribution must generally be during 2020 and to a person (i) who has COVID-19, (ii) whose spouse or dependent has COVID-19, or (iii) experiences adverse financial consequences as a result of the pandemic. Income attributable to such distribution would be subject to tax over three years and the taxpayer can recontribute those funds within the three-year period without regard to the annual contribution cap.

Looking Ahead

The Internal Revenue Service will likely issue guidance implementing the CARES Act and may issue other guidance to provide relief to businesses in distress. In addition, it is anticipated that additional stimulus legislation will be forthcoming as the COVID-19 pandemic continues. We will continue to monitor and provide updates on developments as they arise.



1 H.R. 748.

2 All section references herein are to the Internal Revenue Code of 1986, as amended (the “Code”).

3 Mayer Brown is monitoring legal developments in other industries and legal areas as well. Please visit our COVID-19 Portal ( to view our other updates and insights.

4 For a summary of the TCJA as well as details of developments on the implantation of the same, please see our US Tax Reform Roadmap, available at

5 Applicable employment taxes include taxes imposed under Code section 3111(a) and taxes imposed under Code section 3221(a) as are attributable to the rate in effect under Code section 3111(a).

6 The credit allowed with respect to any calendar quarter shall not exceed the applicable employment taxes (reduced by any credits allowed under subsection (e) and (f) of Code section 3111 and sections 7001 and 7003 of the Families First Coronavirus Response Act) on the wages paid with respect to the employment of all the employees of the eligible employer for such calendar quarter. If the amount of the credit exceeds the limitation outlined in the previous sentence for any calendar quarter, such excess shall be treated as an overpayment that will be refunded pursuant to Code sections 6402(a) and 6413(b).

7 The deferral does not apply to a taxpayer that had indebtedness forgiven under paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)) or indebtedness forgiven under section 2019 of this CARES Act. See Code section 2301(a)(3).

8 For purposes of the temporary suspension, the term “qualified contributions” means any charitable contribution, provided that (i) such contribution is paid in cash during the 2020 calendar year to an organization described in Code section 170(b)(1)(A), and (ii) for which a taxpayer (or each partner, in the case of a partnership, or shareholder, in the case of an S corporation) has elected to apply the temporary suspension provisions described herein. The term “qualified contributions” shall not include a contribution made by a donor to an organization described in Code section 509(a)(3) or for the establishment of a new, or to an existing, donor advised fund.

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