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The CARES Act – The US rescue package

The USA ushered in the “Coronavirus Aid, Relief and Economic Security Act“ (CARES Act) on 27.3.2020. The aid package comprises a volume of approx. two trillion dollars (in the meanwhile, a further USD 500 bn has been added) and is intended to mitigate the economic consequences of the coronavirus crisis. In the following section you will find an overview of the general tax changes and the specific relief available to employers as laid down in the CARES Act.

General tax amending provisions

Far reaching loss carryback

The limitation for loss deductions has been temporarily repealed. Losses from assessment periods starting after 31.12.2017 and before 1.1.2020 can be carried back for five years. As a result, tax payments from the period prior to the tax reform can be refunded – these had been based on a considerably higher tax rate.

Refunds of tax credits

Companies with alternative minimum tax credits that were unused prior to the tax reform can offset these immediately against taxes for the assessment periods commencing 2018 and 2019. If the value of the alternative minimum tax credits is greater than the tax liability then, upon application, the respective amount will be paid out by the fiscal authorities.

Raising the interest barrier

The barrier for the deductible amount of interest expense will be raised from 30% of EBITDA to 50% for the assessment periods commencing in 2019 and 2020. Furthermore, the rules also provide the option of using the EBITDA applied in 2019 also to calculate the interest barrier for assessment periods commencing in 2020.

Please note: This option will benefit the presumably large number of businesses whose EBITDA in 2020 will be lower than the one reported for 2019.

Increased charitable deductions

For corporations, the limit on the deduction for charitable contributions has gone up from 10% to 25% and for private individuals from 50% to 100% of adjusted gross income, for which an additional calculation has to be provided.

Early distributions from existing annuity and retirement savings plans

For withdrawals of up to USD 100,000 the generally applicable ten percent tax penalty will not apply. Furthermore, the income tax associated with such distributions may be paid over a three-year period. If the withdrawn funds are recontributed within the next three years then the distributions that were made will not be taxed.

Please note: Relaxed rules also apply to loans taken from specific retirement savings plans.

Measures for private individuals

Besides increasing the amount of deductible charitable contributions as well as the analogous relief on restrictions for loss deductions, one-off direct payments are also planned. US citizens who have a social security number will receive a one-off payment of USD 1,200 if they are individual taxpayers, while joint taxpayers will receive USD 2,400. Moreover, there is also an entitlement to an additional payment in the amount of of USD 500 for each child.

Please note: The one-off payments will be reduced or will not be distributed to those who exceed certain income thresholds.

Specific relief for employers

Paycheck Protection Program (PPP)

For many companies as well as the self-employed the most interesting element of the government aid package is likely to be the so-called Paycheck Protection Program (PPP). As a consequence of this it should be possible to ensure that employees continue to be paid wages and salaries and, ultimately, to avoid mass redundancies and insolvencies. As part of this measure, companies may, under certain conditions, apply for a loan of up to USD 10 million in order to be able to continue paying salaries, health care benefits, interest on real estate loans, rent, utilities and interest on other debt obligations. The exact amount of the loan will depend, in particular, on the total amount of payroll expenses.

A special feature of the loan is that under certain conditions it may be forgiven, if, among other things, employees continue to be employed or paid, at least until the end of June, without a major reduction in their salaries. Loans that cannot be forgiven will have to be repaid over a period of up to 10 years at a reduced rate of interest. Loan amounts that have been forgiven should not be included in the calculation of taxable income. In that case, according to the applicable rules, the corresponding expenses would not be deductible either.

Please note: At present, there is no comment from the fiscal authorities on the question of the extent to which, in view of the current situation, exceptions will be made to the application of the rules on the deduction of the corresponding expenses.

Employment Retention Credit (ERP)

Employers whose businesses fully or partially suspended operations due to a governmental order, in the course of the coronavirus crisis, and who refrained from laying off their employees can receive a refundable payroll tax credit equal to 50% of the wages and salaries that were paid to these employees during the coronavirus crisis. The tax credit will be granted for a maximum amount of wages and salaries paid of USD 10,000 per employee.

Please note: This programme will not available if the company has availed itself of a PPP loan and the loan has been issued.

Payroll Tax Deferral (PTD)

The PTD provisions allow employers to defer the payment of social security contributions that fall due between 27.3.2020 and 31.12.2020. 50% of the contributions for this period will fall due on 31.12.2021. The remaining amount will have to be paid on 31.12.2022. There is no requirement to provide documentary evidence that the company has been directly affected by the coronavirus pandemic.

Please note: This programme would likewise not be available if the company has availed itself of a PPP loan and the loan has been issued.

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