CARES Act Tax Relief for Businesses
Business Tax Relief under the CARES Act
BUSINESS TAX RELIEF
Qualified Improvement Property
- The CARES Act defines qualified improvement property as 15-year property and allows 100 percent of improvements to be deducted in the year incurred (bonus depreciation). The change is effective for property acquired and placed in service after September 27, 2017.
- Amended tax returns can be filed since the change is retroactive for property acquired and placed in service after 9/27/17.
- Prior to the CARES Act, qualified improvement property placed in service after 9/27/17 was depreciated as 39-year property and not qualified for bonus depreciation.
- We may be able to file an accounting method change (Form 3115) to “catch up” the bonus depreciation on their 2019 return.
- Taxpayers may also be able to amend their 2018 return to claim bonus (under the “one-year depreciable property” rule). Certain partnerships are restricted from amending returns under the centralized partnership audit regime (CPAR) rules.
- The QIP change does not help real property trades or businesses that previously elected out of section 163(j). Taxpayers that made the irrevocable real property trade or business election to opt out of the business interest expense limitation must depreciate nonresidential real property, residential real property and QIP under the alternative depreciation system (ADS). ADS property is not eligible for bonus depreciation. Unless Congress changes this rule to provide retroactive relief, electing real property trades or businesses cannot take bonus on QIP. Congress may address this issue in the next round of coronavirus legislation.
Employee Retention Credit
- The CARES Act grants eligible employers a credit against employment taxes equal to 50 percent of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business or a significant decline in gross receipts.
- The credit is available to be claimed on a quarterly basis, but the amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters.
- The provision contains several requirements defining qualified wages, qualified employees, and qualified employers. The credit applies to wages paid after March 12, 2020, and before January 1, 2021.
- Most significantly, neither the employee nor the employer have to be directly impacted by infection.
- An eligible employer is one with operations suspended by orders issued in response to COVID-19 or has suffered a significant decline (more than 50% decrease year over year) in gross receipts during the quarters that begin with the quarter in which gross receipts declined by more than 50% and ending with the quarter in which gross receipts have recovered by more 80%.
- An Eligible Employer may not receive the Employee Retention Credit if the Eligible Employer receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act (“Paycheck Protection Loan”). An Eligible Employer that receives a paycheck protection loan should not claim Employee Retention Credits.
- New IRS Form 7200 Advance Payment of Employer Credits Due to COVID-19can be used to obtain an advance payment of the Employee Retention Credit. There must be a reconciliation of any advanced credits and reduced deposits on the employment tax returns filed in 2020. The employer should request the advance only for the anticipated excess credit and should be reducing the available deposits which would be made for the quarter.
The IRS has provided penalty relief for failure to deposit employment taxes. The relief is provided to the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the Families First Act and the CARES Act.
The relief applies to deposits of employment taxes reduced in anticipation of:
- The credits for qualified leave wages paid with respect to the period beginning April 1, 2020, and ending December 31, 2020; and
- The credits for qualified retention wages paid with respect to the period beginning on March 13, 2020, and ending December 31, 2020.
Payroll Tax Deferral
- In order to free up employers’ cash flow and retain employees during times of quarantine or shutdown, the CARES Act defers the payment of payroll taxes.
- Employers and self-employed individuals will be able to defer payments of the employer share (6.2% of employee wages) of Social Security payroll taxes that would have otherwise been owed from the date of enactment of the legislation of March 27th through December 31, 2020.
- The entirety of payroll taxes incurred by employers, and 50 percent of payroll taxes incurred by self-employed persons qualify for the deferral.
- The provision requires that the deferred taxes be paid over a two-year period, with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
Net Operating Losses
- The bill allows for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business.
- Businesses will be able to amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carryback.
- The Tax Cuts and Jobs Act (TCJA) eliminated the carryback of NOLs for tax years ending after 2017 and allowed for the indefinite carry forward for NOLs.
- The bill also eliminates loss limitation rules applicable to sole proprietors and pass-through entities to allow them to take advantage of the NOL carryback. NOL relief is extended to pass-through and sole proprietors by allowing excess business losses under Section 461for taxable years before 2021 and will allow carryover losses into subsequent taxable years as a technical correction to Section 461(l)(2) enacted by the TCJA.
- The TCJA amended Sec. 461 to include a subsection (l), which disallows excess business losses of noncorporate taxpayers if the amount of the loss is in excess of $250,000 ($500,000 in the case of a joint return). The disallowed amount is carried forward as a net operating loss (NOL) to the following tax year under Sec. 461(l) (2), thus eliminating the need for a separate carryback
- Additionally, the bill allows for NOLs arising before January 1, 2021, to fully offset income. Under current law, NOLs are limited to 80 percent of taxable income.
Minimum Tax Credits
- The Act accelerates the year for which a fully refundable credit can be claimed to 2019 and allows corporations to elect to claim the fully refundable minimum tax credits in 2018.
- The TCJA eliminated the alternative minimum tax for corporations for tax years after 2017, but allowed corporations to claim a refundable portion of any unused minimum tax credits through 2021. The amount of the refundable credit is limited to 50 percent of any excess minimum tax in 2018 through 2020, before being fully refundable in 2021.
Business Interest Expense Limitation
- The Act increases the limitation amount to 50 percent of the taxpayer’s adjusted taxable income for 2019 and 2020. In calculating the limitation for 2020, the taxpayer may elect to use adjusted taxable income for 2019.
- The option to use 2019 adjusted taxable income in calculating the limitation is meant to counteract the likelihood that incomes will not be higher in 2020 because of the economic environment, whereas 2019 was generally a very high revenue year for businesses.
- The TCJA limited the amount of allowable deductions for business interest (regardless of the type of entity) for tax years beginning after 2017.
- The limitation is generally the amount of business interest income for the year plus 30 percent of the taxpayer’s adjusted taxable income for the year.
- The limitation does not apply to taxpayers with average annual gross receipts for the prior three year below an inflation-adjusted amount. For 2020, this amount is $26 million or less.
Unemployment & Paid Leave
Pandemic Unemployment Assistance
- The ACT provides an additional $600 per week in “federal pandemic unemployment compensation” to individuals receiving unemployment benefits. The extra payment would remain available through July 31, 2020. It would be excluded when determining eligibility for Medicaid and the Children’s Health Insurance Program (CHIP).
- The measure would allow individuals affected by the coronavirus to receive pandemic unemployment assistance for as long as 39 weeks, which would include any week for which they receive regular compensation or extended benefits.
- Unemployment benefits under that program would be available to individuals who are in quarantine, caring for a diagnosed family member, or out of work because their employer closed due to the coronavirus. It also would be available to those who are self-employed, have limited work history, or otherwise wouldn’t qualify for unemployment benefits. Benefits wouldn’t be provided to individuals who can telework with pay or who are receiving other paid leave benefits.
- The benefit provisions would apply retroactively to Jan. 27 and remain in place through Dec. 31. Compensation would be provided without any waiting period.
- The measure also would provide an additional 13 weeks of pandemic emergency unemployment compensation to individuals who have exhausted regular benefits. Emergency benefits would remain available through Dec. 31.
- States would be paid 100% of the total amount of unemployment benefits they provide, including administrative costs in certain cases.
- The measure also would fully reimburse states for providing compensation the first week of unemployment, without a waiting period.
- In addition, states would receive funding to reimburse nonprofits and government agencies for half of their costs of providing unemployment benefits.
- The measure would provide similar additional unemployment benefits to railroad workers. It would appropriate $425 million for the enhanced benefits.
Leave Program Modifications
- The measure would amend the emergency sick leave program enacted under the second coronavirus response measure.
- Certain workers laid off on or after March 1, 2020, would be eligible to receive family leave benefits if they’re rehired.
- The measure would apply the same caps on the amount employers would be required to pay per employee for the leave programs, which are:
- $200 per day, or $10,000 total, for family leave related to care for a child whose school or day care has closed because of the coronavirus.
- $511 per day, or $5,100 total, for sick leave related to a worker’s quarantine or diagnosis.
- $200 per day, or $2,000 total, for sick leave related to caregiving for another quarantined individual or child whose school or day care has closed.
- Federal agencies could use funds, subject to appropriations, to reimburse federal contractors for providing paid leave to its employees or subcontractors through Sept. 30, 2020. The provision would apply to contractors who can’t work on-site or remotely because of the coronavirus. Such payments would be reduced by applicable tax credits available to the employer.
Student Loans Paid by Employers
- An exclusion of up to $5,250 from income for payments of an employee’s education loans by employers.
- Exclusion applies if the loan was incurred by the employee for the education of the employee (The loan must not have been incurred to pay for the education of the employee’s child).
- The payment can be made to the employee or directly to the lender. The exclusion only applies for payments made by an employer after the date of enactment of March 27th and before January 1, 2021.
- The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, and books) provided by the employee.