The CARES Act Business Tax Provisions
The Senate has unanimously approved the Coronavirus Aid Relief, and Economic Security Act, or the CARES Act. At this writing, the CARES Act is still awaiting House approval and the President’s signature, which is expected shortly.
Business Income Tax Provisions of the CARES Act
Refundable Employee Retention Credit
The CARES Act provides for a refundable tax credit for employers, computed on a calendar-quarter basis, against the 6.2% employer’s share of Social Security payroll tax, in an amount equal to 50% of qualified wages. This provision is applicable to employers carrying on a trade or business in 2020, which either:
- Fully or partially suspend operations due to a governmental order due to COVID-19, or
- Which sustain a significant decline in gross receipts.
A significant decline in gross receipts is defined as the first calendar-quarter after December 31, 2019, for which gross receipts are less than 50% of the amount of gross receipts in the corresponding prior calendar-quarter.
The credit is not available for governmental employers at the federal, state and local level, but is available to certain tax-exempt organizations, including all organization described in Section 501(c) of the Internal Revenue Code. Eligible employers may also elect out of this refundable credit provision.
The credit is based on 50% of “qualified wages” (up to $10,000 per employee) paid to each employee and must be reduced by any credits claimed under the Families First Coronavirus Response Act relating to the credits available under that law by certain employers which provide paid sick leave and paid family and medical leave. In addition, if an employer takes out a payroll protection loan under Section 7(a) of the Small Business Loan Act, no employee retention credit will be available.
The computation of wages varies slightly depending upon whether the employer’s average number of full-time employees during 2019 were more or less than 100 and factors in any tax excluded health plan expenses allocable to such wages.
The legislation includes aggregation rules for eligible employers and provides for broad authority to the Treasury to issue any necessary guidance.
Effective Date: The employee retention credit applies to wages paid after March 12, 2020 and before January 1, 2021.
Delay of Payroll Tax Payments
The CARES Act includes a provision that would allow employers (and self-employed individuals) to defer payment of the employer’s share of the 6.2% Social Security payroll tax. The provision is effective for wages paid between the date of enactment of the CARES Act and December 31, 2020. Payment is ultimately due for these delayed payroll taxes 50% on December 31, 2021, and 50% on December 31, 2022.
Note that there is no guidance as to how the deduction for one-half of self-employment tax will be affected by self-employed individuals deferring said payments. The deduction itself is a product of the self-employment tax calculation on Schedule SE and is not based on amounts actually paid in the current tax year so it may be unaffected by the deferral.
Effective Date: The provisions of the payroll tax payment delay applies to periods beginning on the date of the enactment of the CARES Act.
Modification of Net Operating Losses
Prior to the TCJA, net operating losses incurred prior to 2018 for businesses and individuals could be carried back 2 years and forward 20 years, and when carried forward could offset 100% of taxable income. The TCJA changed these rules by disallowing all carrybacks related to post-2017 losses, providing for an indefinite carryforward period, and limiting the use of post-2017 losses when carried forward to 80% of taxable income. The CARES Act temporarily reverses these changes made by the TCJA, as follows:
- Losses from 2018, 2019 and 2020, will be allowed to be carried back for up to five (5) years. As under prior law the taxpayer will be required to elect to forgo the loss carryback to instead carry the losses forward.
- Losses carried to 2019 and 2020 will be permitted to offset 100% of taxable income, instead of 80% under the TCJA.
Effective Date: The amendments to the NOL rules apply to tax years beginning after December 31, 2017, and to tax years beginning on or before December 31, 2017, to which NOLs arising in tax years beginning after December 31, 2017 are carried.
Modification of Limitation on Losses for Taxpayers other than Corporations
Under the TCJA, the so-called “excess business loss” rule generally limits certain losses attributable to trades or businesses for noncorporate taxpayers to $250,000 ($500,000 for joint filers). The CARES Act basically shuts off this loss limitation rule for tax years beginning after December 31, 2017 and before December 31, 2020. As a result, taxpayers who find a loss limited by these rules in 2018 or 2019 can file an amended return to claim the refund.
Effective Date: This amendment to the excess business loss provision applies to tax years beginning after December 31, 2017.
Modification of Prior Year AMT Credit for Corporations
The TCNJ repealed the corporate alternative minimum tax (“AMT”) but enabled corporations to recover previously generated AMT credits against regular tax (or, if in excess of regular tax, as refundable credits) after 2017 and before 2022. The CARES Act generally enables corporations to accelerate any remaining AMT credits that have not yet been utilized into 2019. The CARES Act also provides for a mechanism by which a taxpayer can elect to take the entire remaining refundable credit amount in 2018.
If a corporation elects to take the entire refundable credit amount in 2018, it must file an application for a tentative refund. The application must be filed before December 31, 2020.
Effective Date: These amendments to the prior year AMT credits for corporations apply to tax years beginning after December 31, 2017.
Modifications of Limitation on Business Interest
The CARES Act provides taxpayers much-needed relief from the business interest expense limitations rules enacted under the TCJA. Taxpayers subject to this limitation will be able to deduct interest expense of up to 50% of their “adjusted taxable income” compared to the current limitation of 30% under the TCJA. This relief will be applicable for tax years 2019 and 2020 for most taxpayers.
In addition, taxpayers can elect to use their 2019 adjusted taxable income in computing its 2020 limitation (this is a significant benefit considering most taxpayers will not have taxable income in 2020). Special rules apply to Partnership as they will be able to utilize 50% of adjusted taxable income for only 2020.
Effective Date: The modifications made to the business interest limitation provisions apply to tax years after December 31, 2018.
Technical Amendments regarding Qualified Improvement Property
The CARES Act fixes an unintended glitch in the TCJA related to qualified improvement property, known as the “retail glitch.” The Cares Act provides the much-needed technical correction by reducing the depreciable life for qualified improvement property from 39 to 15 years under MACRS. This change also makes qualified improvement property eligible for 100 percent bonus depreciation.
The change applies retroactively to property placed in service after December 31, 2017. However, there is no express mechanism for applying this technical correction to previously filed returns for 2018 and 2019. We expect guidance from the Treasury providing for a mechanism that would allow a taxpayer to take the retroactive benefit without filing an amended return through a change in accounting method.
Effective Date: The technical corrections regarding qualified improvement property are effective for property placed in service after December 31, 2017.
If you have any questions or comments regarding any of the business income tax provisions discussed above, please direct those questions to me.
My contact information is as follows:
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