By: Peter Beach
March 30, 2020
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. This article discusses the tax relief provisions for businesses that are contained in the Act.
Employee retention credit for employers
The CARES Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to employers, including non-profits, 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 who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. The credit is not available to employers receiving Small Business Interruption Loans under the Act.
For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers’ closure or reduced gross receipts are eligible for the credit. No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee.
The term “wages” includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee. Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus Act, nor for wages taken into account for the Code Sec. 45S employer credit for paid family and medical leave.
The IRS is granted authority to advance payments to eligible employers and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
Delay of payment of employer payroll taxes
Employers are required to withhold social security taxes from wages paid to employees, and self-employed individuals are subject to self-employment tax. The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. Half of the deferred amount must be paid by December 31, 2021 and the other half by December 31, 2022. An employer will be treated as having timely made all deposits of applicable employment taxes required to be made during the payroll tax deferral period if all such deposits are made not later than the deferral dates. Similarly, a self-employed taxpayers can defer paying half of their self-employment tax (the equivalent of the employer’s portion of payroll taxes) that would be due from March 27, 2020 through the end of 2020. Half of the deferred amount must be paid by December 31, 2021 and the other half by December 31, 2022. This deferral is not available to any business that takes out a payroll protection loan forgiven under the CARES Act.
Temporary repeal of taxable income limitation for net operating losses (NOLs) and Modification of rules relating to net operating loss (NOL) carrybacks
Under existing law, the amount of the net operating loss deduction is equal to the lesser of (i) the aggregate of the NOL carryovers to such year and NOL carrybacks to such year, or (ii) 80% of taxable income computed without regard to the deduction allowable in this section. Thus, NOLs are currently subject to a taxable-income limitation and can’t fully offset income. The CARES Act removes the taxable income limitation to allow NOLs carried to 2019 and 2020 to offset 100% of taxable income.
Existing law also provides that, except for farming losses and losses of property and casualty insurance companies, an NOL for any tax year is carried forward to each tax year following the tax year of the loss but isn’t carried back to any tax year preceding the tax year of the loss. The CARES Act provides that NOLs arising in 2018, 2019 and 2020 can be carried back to each of the five tax years preceding the tax year of such loss. And as was previously the case, a taxpayer will be permitted to forgo the carryback, and instead carry the loss forward.
Modification of limitation on losses for noncorporate taxpayers
Existing law disallows the deduction of excess business losses by noncorporate taxpayers for tax years beginning after Dec. 31, 2017 and ending before Jan. 1, 2026. Generally, an “excess business loss” is the excess of (i) the taxpayer’s aggregate trade or business deductions for the tax year over (ii) the sum of the taxpayer’s aggregate trade or business gross income or gain plus $250,000 (as adjusted for inflation). The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020.
Corporate minimum tax credit (MTC) is accelerated
Corporations (for which the alternative minimum tax was repealed for tax years after 2017) may claim outstanding MTCs (subject to limits) for tax years before 2021, at which time any remaining MTC may be claimed as fully refundable. Thus, the MTC is refundable for any tax year beginning in 2018, 2019, 2020, or 2021, in an amount equal to 50% (100% for tax years beginning in 2021) of the excess MTC for the tax year, over the amount of the credit allowable for the year against regular tax liability. The CARES Act changes ”2018, 2019, 2020, or 2021” to ”2018 or 2019,” and changes “(100% for tax years beginning in 2021)” to “(100% for tax years beginning in 2019)”. That means that the CARES Act allows corporations to claim 100% of AMT credits in 2019 and to elect to take the entire refundable credit amount in 2018.
Deductibility of interest expense temporarily increased
Existing law generally limits the amount of business interest allowed as a deduction to 30% of adjusted taxable income. The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. Under a special rule for partnerships, the increase in the limitation will not apply to partners in partnerships for 2019 (it applies only in 2020). Taxpayers may elect out of the increase, for any tax year, in the time and manner IRS prescribes. Once made, the election can be revoked only with IRS consent. In addition, taxpayers can elect to calculate the interest limitation for their tax year beginning in 2020 using the adjusted taxable income for their last tax year beginning in 2019 as the relevant base.
Bonus depreciation technical correction for qualified improvement property
Existing law allows 100% additional first-year depreciation deductions (“100% Bonus Depreciation”) for certain qualified property, but through a drafting error that Congress had previously been able to correct (i) qualified leasehold improvement property, (ii) qualified restaurant property, and (iii) qualified retail improvement property had been excluded and instead subject to the 39-year recovery period for nonresidential rental property and was therefore ineligible for 100% Bonus Depreciation. The CARES Act provides a technical correction to prior law and specifically designates these types of property as 15-year property for depreciation purposes. This makes them eligible for 100% Bonus Depreciation retroactive to January 1, 2018.
Modification of limitations on corporate cash charitable contributions during 2020
A corporation’s charitable deduction cannot exceed 10% of its taxable income, as computed with certain modifications. If a corporation’s charitable contributions for a year exceed the 10% limitation, the excess is carried over and deducted for each of the five succeeding years in order of time, to the extent the sum of carryovers and contributions for each of those years does not exceed 10% of taxable income. The CARES Act provides that qualified contributions are disregarded in applying the 10% limit on charitable contributions of corporations and the rules on carryovers of excess contributions. Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of 25% (instead of 10%) of the corporation’s taxable income over the amount of all other charitable contributions allowed to the corporation as deductions for the contribution year.
Increase in limits on contributions of food inventory
A donation of food inventory to a charitable organization that will use it for the care of the ill, the needy, or infants is deductible in an amount up to basis plus half the gain that would be realized on the sale of the food (not to exceed twice the basis). In the case of a C corporation, the deduction cannot exceed 15% of the corporation’s income. In the case of a taxpayer other than a C corporation, the deduction cannot exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer’s charitable deductions for the year. Under the CARES Act, in the case of any charitable contribution of food during 2020, the taxable income limits are 25% rather than 15%.