On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus (COVID-19). The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top business provisions in the new legislation below, with more detailed alerts to follow.
Payroll Tax Deferral
Companies and self-employed individuals looking for immediate cash can now delay the timing of the required federal tax deposits for certain employer payroll taxes and self-employment taxes incurred between March 27, 2020 (the date of enactment) and December 31, 2020. Amounts will be considered timely paid if 50 percent of the deferred amount is paid by December 31, 2021, and the remainder by December 31, 2022.
Applicable employment taxes include in the loan:
- The employer's share of Social Security Tax, which is 6.2 percent of wages up to the wage base ($137,700 in 2020)
- For self-employed individuals, the equivalent amount of Self-Employment Contributions Act (SECA) tax due on net earnings from self-employment (i.e., 50 percent of the 12.4 percent tax), which would similarly be exempt from estimated tax payments
In addition, the payroll tax deferral is not available to a taxpayer that obtains a Small Business Act loan under the Paycheck Protection Program established by the CARES Act if the loan is later forgiven.
Observations: This incentive provides companies and self-employed individual an interest-free loan during the 2020 calendar year to assist and provide flexibility for managing the economic recovery caused by COVID-19. Additional guidance is expected from the IRS on the forms and procedures for how to participate in this program.
Employee Retention Credit
This provision provides a refundable payroll tax credit for 50 percent of wages paid by eligible employers to certain employees during the COVID-19 crisis. Wages include qualified health plan expenses paid by the employer and are excluded from the employee’s income. The wage limit is capped at $10,000, which makes the maximum credit $5,000 per employee. The effective date of the credit applies to wages paid after March 12, 2020 and before Jan. 1, 2021.
The credit is available to employers, including any non-profits under 501(c), whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers that have experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis.
For employers that had an average number of full-time employees of 100 or fewer in 2019, all employee wages are eligible, regardless of whether the employee is furloughed during the impacted quarter. For employers that had an average number of full-time employees greater than 100 in 2019, only the wages of employees who are not working or face reduced hours as a result of their employer’s closure or reduced gross receipts are eligible for the credit during the impacted quarter.
Observations: This credit is not available to employers receiving Small Business Interruption Loans. Therefore, businesses will need to conduct an analysis to determine the more favorable outcome between the two programs. Also, this credit provides relief to certain 501(c) non-profit organizations that can’t participate in the Small Business Interruption Loans program.
Technical Correction to Qualified Improvement Property
The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100 percent bonus depreciation. This will provide immediate cash flow benefits and relief to taxpayers, especially those businesses that have recently completed interior improvements to their facilities.
Taxpayers that placed QIP into service in 2019 can claim 100 percent bonus depreciation on their 2019 return. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible.
Observations: Taxpayers that have recently invested in their building facilities should go back and review their previously filed tax returns to determine whether there are any refund claim opportunities. Taxpayers that have not yet filed their 2019 return should closely review their fixed asset additions to determine any costs that will now qualify for bonus depreciation, which will help to lower their 2019 tax bill.
Anticipated Business Losses
Many businesses are anticipating taxable losses in 2020 as a result of the COVID-19 crisis. Under previous law, losses from S-corporations, Partnerships, and other unincorporated businesses were limited to $500,000 for married filing jointly returns and $250,000 for all other returns. The CARES act eliminated this limitation, which now allows owners of these business to deduct more of a loss on their individual tax returns.
The CARES act also changed the rules on net operating losses (“NOLs”) to provide for an elective five-year carryback of NOLs. In addition, the 80 percent limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has been temporarily pushed to taxable years beginning after December 31, 2020.
In addition, the CARES Act amends the business interest limitation rules solely for taxable years beginning in 2019 and 2020. With the exception of partnerships (special rules apply), taxpayers may deduct business interest expense up to 50 percent of their adjusted taxable income (ATI) – an increase from 30 percent of ATI under the old law – unless an election is made to use the lower limitation for any taxable year. Additionally, for any taxable year beginning in 2020, the taxpayer may elect to use its 2019 ATI for purposes of computing its 2020 business interest limitation. This will benefit taxpayers that face reduced 2020 earnings as a result of the business implications of COVID-19. As such, taxpayers should be mindful of elections on their 2019 return that could impact their 2019 and 2020 business interest expense deductions.
Observations: These new provisions provide business owners with more opportunity to deduct business losses on their tax returns and also provide options for them to carryback any excess losses to previous years for a cash refund claim. Business owners should be mindful of anticipated losses that may occur in 2020 and begin to adjust their estimated tax payments accordingly.
Within the coming weeks we expect additional guidance to come out around these new tax law changes. This will help to provide more clarity and direction on CARES Act accounting and on how some of these new programs are to be implemented. Until then, we will need to plan accordingly in anticipation of this guidance.
We are also regularly updating our COVID-19 Resource Center, which you can access here. If you have any questions about these or any other matters, please do not hesitate to contact your Kreischer Miller professional or any member of our team.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.