CARES Act Provides Tax Relief for Businesses
The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, marks the largest economic relief package in U.S. history, providing tax relief and other help for both businesses and individuals. For businesses, the CARES Act contains tax provisions intended to improve cash flow and liquidity by relaxing net operating loss rules and several other deduction limitations implemented by the Tax Cuts and Jobs Act (the “TCJA”), providing refundable tax credits against employment taxes for certain employers, allowing for deferral of certain payroll tax liabilities and providing additional business loan programs (see our earlier article, “What Businesses Should Know About Business Loans Available Under the New CARES Act”, March 27, 2020).
The CARES Act follows the earlier coronavirus-related Act passed by the U.S. Congress - the Families First Coronavirus Response Act - which includes the provision of paid sick leave, paid family and medical leave, refundable tax credits for employers that must offer family medical leave or paid sick leave, and expanded unemployment benefits, among other relief provisions. See our recent article “Federal and New York State Coronavirus Legislation Require Paid Leave for Employees”, March 18, 2020.
The following contains a brief overview of the tax provisions of the CARES Act which apply to businesses.
Refundable Employee Retention Payroll Tax Credit
The CARES Act grants certain eligible employers a refundable payroll tax credit equal to up to 50% of “qualifying wages” paid to employees after March 12, 2020 and before January 1, 2021. The credit is available to employers (i) whose operations are fully or partially suspended due to a COVID-19 related shutdown order or (ii) who incur a significant decline in gross receipts. The maximum amount of qualifying wages taken into account for each employee for all calendar quarters is $10,000, resulting in a maximum credit per employee of $5,000.
For eligible employers with 100 or fewer employees, all employee wages paid are qualifying wages for the purpose of the payroll tax credit, whether the business is subject to a shutdown order or is open during the covered time period during which there is a significant decline in gross receipts. For eligible employers that have more than 100 employees, only wages paid to employees when they are not providing services due to a COVID-19 related shut-down order or a significant decline in gross receipts are eligible for the payroll tax credit.
A significant decline in gross receipts takes place during any quarter (beginning with the first quarter of 2020) where gross receipts for that quarter are less than 50% for the same quarter in the prior year and continues until gross receipts exceed 80% of gross receipts for the same calendar quarter in the prior year.
Special rules apply where qualifying wages are taken into account under other provisions of the CARES Act to avoid obtaining a double tax benefit. If the employer participates in the small business loan program added by the CARES Act, such employer is not eligible for the employee retention credit. Also, no credit is available for any employee for which the employer is also allowed a Work Opportunity Credit (Code Section 21).
Employer Payroll Tax Deferral
The CARES Act allows (i) employers to defer 100% of the employer portion of payroll taxes (attributable to Social Security taxes) and (ii) self-employed individuals to defer 50% of the Social Security portion of their self-employment taxes. This deferral applies to such payroll taxes and self-employment taxes due for the period beginning on March 27, 2020 and ending on December 31, 2020. Half of the deferred payroll taxes are due on December 31, 2021 with the other half due on December 31, 2022.
Taxpayers who have part or all of their payroll interruption loans forgiven pursuant to the program added by the CARES Act are not entitled to utilize this payroll tax deferral benefit.
Modifications for Net Operating Losses
Prior to 2018, net operating losses (“NOLs”) could be carried back two years and carried forward for twenty years. Under the TCJA, starting in 2018, NOLs could no longer be carried back, could be carried forward indefinitely, and were deductible only to the extent of 80% of a taxpayer’s taxable income.
The CARES Act provides taxpayers with the ability to carryback NOLs arising in 2018, 2019, and 2020 to the prior five tax years and continue to carry forward the NOLs indefinitely, with the ability to offset 100% of taxable income for the 2018, 2019 and 2020 tax years. Accordingly, NOLs on previously filed 2018 tax returns can be carried back to the 2013-2017 tax years for a refund, and if such NOLs were limited to 80% of taxable income in 2018, such returns can be amended to take advantage of this provision.
Modifications of Limitations on Losses for Non-Corporate Taxpayers
For 2018 through 2025, the TCJA imposed a new limitation on deductions for “excess business losses” (i.e., the excess of a taxpayer’s aggregate deductions from trades or businesses over the taxpayer’s aggregate business income and gains) which limited the amount of excess business losses that can be deducted in any one year to (in 2019) $510,000 for taxpayers filing joint returns and $255,000 for single taxpayers, indexed for inflation for future years.
The CARES Act temporarily suspends this loss limitation for tax years beginning in 2018 through December 31, 2020. Losses generated between 2018 and 2020 would be subject to the new NOL provisions discussed above (i.e., could be carried back five years and carried forward with the ability to offset 100% of taxable income in 2018, 2019 and 2020).
Increased Business Interest Expense Deductions
The TCJA generally limited the deduction for business interest for every type of business, regardless of structure, to 30% of “adjusted taxable income.” Adjusted taxable income is determined at the entity level for entities treated as partnerships and S corporations and generally is earnings before interest, taxes, depreciation, and amortization or depletion (EBITDA) for tax years beginning before 2022.
The CARES Act increases the interest expense limitation in two ways. The CARES Act increases the 30% limitation amount for 2019 and 2020 to 50% of adjusted taxable income. In addition, in calculating this limitation for 2020, taxpayers can elect to use adjusted taxable income for 2019, thereby potentially allowing a taxpayer to deduct additional interest expense in the event that its adjusted taxable income decreases from 2019 to 2020.
Special rules apply to interest deductions for partnerships. A partnership is not able to use the increased 50% limitation for 2019. Instead, any interest disallowed at the partnership level is passed out to the partners, and is suspended at the partner level under the existing rules. In 2020, 50% of this suspended interest will be fully deductible, while the other 50% will remain suspended until the partnership allocates excess taxable income to the partner (i.e., such remaining 50% will be subject to the general interest deduction rules implemented under the TCJA).
Bonus Depreciation for Qualified Improvement Property
The TCJA allowed for 100% bonus depreciation on assets with a recovery period of 20 years or less. Prior to 2018, qualified improvement property (qualified leasehold, retail, and restaurant improvements) had a recovery period of 15 years. A well-known drafting error in the TCJA resulted in the classification of qualified improvement property as 39-year property, rather than its intended 15-year treatment. The CARES Act corrects this oversight by defining qualified improvement property as 15-year property, allowing this type of property to be eligible for bonus depreciation and a shorter recovery period. This change is effective for property acquired and placed in service after September 27, 2017, providing taxpayers with the chance to amend prior year returns.
Acceleration of AMT Credit for Corporations
The TCJA eliminated the corporate alternative minimum tax (“AMT”) for corporations for tax years after 2017. Under the AMT, a corporation received tax credits for the amount of AMT previously paid pre-TCJA. The TCJA permitted a corporation to carryforward its AMT credits to offset taxable income and for up to 50% of unused AMT credit carryforwards at the end of each of 2018, 2019 and 2020. Any remaining AMT tax credit carryforwards were refundable at the end of 2021.
The CARES Act permits taxpayers to accelerate their ability to claim AMT tax credits to offset tax liability in 2018 and 2019, or to elect to claim the full refundable minimum tax credits in 2018. Corporations can utilize the Quick Refund Claims procedures to process these refund claims to receive refunds within 90 days.
Modification of Limitation on Charitable Contributions During 2020
The CARES Act expanded the threshold for corporations making charitable contributions to 25% from 10% of corporate taxable income for taxable years beginning after Dec. 31, 2019.
Further coronavirus relief is anticipated to be enacted by Congress this year. We will keep you posted on future developments.
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