Tax Provisions in the CARES Act
The CARES Act, signed by President Trump March 28, 2020, legislates several amendments to the tax code in order to help businesses obtain higher levels of liquidity and give them cash. The relief is extended in hopes that employers who benefit from the emergency rules will be able to keep employees on the payroll during the COVID-19 pandemic. This article provides a top level summary of the various tax incentives targeted at businesses. Except where noted below, these provisions apply equally to companies regardless of how many employees they have.
Delay of Payment of Employer Payroll Taxes
Employers are allowed to delay the deposit and payment of their share of Social Security taxes which would have been due between the date of the enactment of the CARES Act up to January 1, 2021. Under this provision, 50 percent of the deferred employment taxes will now be due December 31, 2021, with the remaining 50 percent not due until December 31, 2022. This provision also applies to those self-employed individuals who would otherwise be required to pay self-employment taxes. In addition, with regard to any self-employment tax underpayment penalties which would otherwise arise during the payroll tax deferral period, only 50 percent of the taxes owed during the period would be included in the penalty calculation. One exception to this provision is that it cannot be used by any taxpayer who has taken advantage of the loan forgiveness features of the Small Business 7(a) Paycheck Loans made possible under the CARES Act. Notably, additional guidance from the Secretary of the Treasury may be forthcoming related to this section, and this may change the details of how the rules apply.
Advance Refunding of Credits (FFCRA)
This provision actually amends the Families First Coronavirus Response Act enacted in early March. It provides a method for the FFCRA payroll tax credits awarded for paid sick leave and paid FMLA leave to be refunded to the employer in advance. In addition, any failure by an employer to make the required payroll tax deposits because they were waiting on the payroll tax credit will be waived. More guidance related to the procedure to obtain these credits will be forthcoming from the Secretary of Treasury.
Employee Retention Credit
This provision provides an employee retention credit for businesses that were operating prior to the pandemic, if the business (1) had to fully or partially close under a government order limiting commerce, travel or group meetings, or (2) saw gross receipts decline 50 percent from the gross receipts received during the same quarter of the prior year, due to the coronavirus pandemic. The credit is based on “qualified wages.” Note that qualified wages for employers with more than 100 employees are only the wages paid to employees who are not able to work due to the pandemic. For employers with 100 or fewer employees, all wages paid during the period where gross receipts declined 50 percent to 80 percent from the prior year are considered qualified wages, regardless of whether the business was operating or not. Up to 50 percent of wages paid to employees are refundable via a tax credit, and the credit is allowed against employment taxes paid for up to $10,000 in wages for each employee. The credit is only applicable to wages paid from March 13, 2020 through December 31, 2020, and the credit shall not exceed the applicable employment taxes reduced by the following: (1) any credits allowed for the employment of veterans; (2) any credits allowed for research expenses; (3) any payroll credit given for required paid sick leave under FFCRA; and (4) any payroll credit given for required paid FMLA leave under FFCRA. Any overpayment of employment taxes net of credits will be refunded to the taxpayer. Cash value is immediately available to employers because they can simply retain the funds they would otherwise have paid to the IRS in payroll taxes. If an employer receives a covered loan through the Small Business 7(a) Paycheck Loans, the employer is not eligible for the credit under this section.
Modifications for Net Operating Losses
This provision amends prior law related to the ability of a business to carry back net operating losses (NOL) incurred in a given year to prior years and the limitations on the amount of the loss that can be utilized. Prior to the CARES Act, NOLs that could be used to offset income could not exceed 80 percent of taxable income. The amendment allows a business to offset taxable income by the entire amount of the NOL, and a NOL occurring in 2018, 2019 or 2020, can now be carried back and utilized to offset taxable income from the prior five years. Utilization of this provision would necessarily require that a business file amended returns for the prior years. Similar amendments were made to the sections of the Tax Code governing the use of NOLs for Real Estate Investment Trusts (REIT) and regulated investment trusts. The deadline for filing an amended return in order to apply a carryback of an NOL applicable to a taxable year beginning before January 1, 2018, and ending after December 31, 2017 is no later than 120 days after the enactment of the CARES Act.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations
The Alternative Minimum Tax (AMT) program was initially created to prevent taxpayers from avoiding paying taxes of at least a minimum amount by taking advantage of tax breaks. The Corporate AMT program was repealed as part of the Tax Cuts and Jobs Act of 2017, but Corporate AMT credits have been revived through the CARES Act for tax years beginning with 2018.
Modification of Limitation on Business Interest
This provision provides a temporary increase in the amount of interest expense that a business can deduct from its taxable income. For tax years beginning in 2019 and 2020 only, a business can deduct its business interest incurred in an amount equal to 50 percent of its adjusted taxable income. This is an increase from the existing limitation of 30 percent. For any taxable year beginning in 2020, a business may elect to substitute the adjusted taxable income for the 2019 taxable year in order to calculate the 2020 deduction.
Technical Amendments Regarding Qualified Improvement Property
Qualified Improvement Property (QIP) is generally defined as “any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.” 26 USC §168 of the Tax Code. QIP does not include an enlargement of the building, adding an elevator or escalator, or changing the internal structural framework of the building. The CARES Act would allow a business to depreciate QIP faster, thereby allowing a greater deduction for expenditures related to covered improvements now, which will provide more liquidity to the business.
Modification of Limitations on Charitable Contributions During 2020
This provision allows a business to increase the amount it can deduct from its taxable income related to charitable contributions. Previously, charitable expense deductions could not exceed ten percent of the taxable income of the donating business. The CARES Act increases the amount allowed for charitable expense deductions to 25 percent of taxable income.
Temporary Exception from Excise Tax for Alcohol Used to Produce Hand Sanitizer
For tax year 2020, there will be no excise tax assessed to any distilled spirits used or contained in hand sanitizer produced and distributed in a manner consistent with guidance by the Food and Drug Administration that is related to the outbreak of virus SARS-CoV-2 or coronavirus disease (COVID-19).