The Congress recently passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the COVID-19 pandemic. The CARES Act is designed to stimulate the economy with over $2 trillion in relief and provide support for taxpayers. Below are certain CARES Act highlights, tax law changes, and Frequently Asked Questions with respect to businesses.
Employee Retention Credit:
Certain employers may receive a refundable payroll tax credit for 50-percent of qualified wages paid to employees during the COVID-19 crisis. Businesses are eligible if (1) operations were fully or partially suspended due to a COVID-19-related shutdown order, or (2) they remained open and gross receipts declined by more than 50-percent compared to the same quarter in the prior year.
- For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to a shutdown (#1).
- For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business but suffered a sharp decline in receipts (#2), or were subject to a shut-down order (#1).
- The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee from March 13, 2020 through December 31, 2020. The business will receive a credit against its 6.2% share of social security payroll taxes. If the credit exceeds the business’s payroll tax liability it is refundable.
- Employers receiving a small business interruption loan under Section 7(a) of the Small Business Act (Payroll Protection Loan Program) are not eligible for the credit.
Delayed Employer Payroll Tax Payments:
Employers and self-employed individuals may defer the employer share of Social Security tax (6.2%) from date of enactment to December 31, 2020. The deferred taxes must be paid one-half by December 31, 2021 with the remainder paid by December 31, 2022. If an employer receives an approval for a forgiveness amount under the Paycheck Protection loan program, then the employer must cease deferring the payments at that time. The amounts previously deferred will follow the 2021 and 2022 payments schedule.
The refundable portion of the AMT credit carry forward has been accelerated to provide for refunds with the 2019 income tax filing.
Qualified Improvement Property & Bonus Depreciation:
Qualified improvement property (QIP) is now eligible for 100% bonus depreciation. QIP is generally defined as any improvement made to the interior portion of a nonresidential building after the building was placed in service. A much anticipated technical amendment fixes the useful life of QIP to be treated as 15 year property (from 39 year property) and corrects a drafting error from the Tax Cuts and Jobs Act (TCJA), retroactive to a placed in service date after 12/31/2017. Please speak with your accountant or tax advisor to discuss taking advantage of this correction.
Business Interest Expense Deduction:
Modifications were made to ease limitations on a taxpayer’s ability to deduct business interest expense. For taxpayers subject to these rules, the business interest limitation percentage changed from 30% to 50% of adjusted taxable income (ATI) for tax years 2019 and 2020, respectively, with special rules for partnerships. Businesses may also elect to use their 2019 ATI in computing the 2020 limitation. Small businesses are exempt from these limitations. For more information on the business interest expense limitation, please visit the IRS website:
Net Operating Losses:
Net operating losses (NOLs) generated in 2018 through 2020 may be carried back five years and are no longer subject to the 80% income limitation enacted under the TCJA. Taxpayers will be able to amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carryback. This applies to NOLs of businesses and individuals.
Excess Business Losses:
The CARES Act retroactively suspends the excess business loss provision which disallows business losses in excess of $250,000 for a single taxpayer and $500,000 for a married couple filing jointly for tax years 2018 through 2020.
Frequently Asked Questions for Business Provisions:
Q. What years does the Qualified Improvement Property (QIP) technical amendment relate to?
A. The CARES Act changed QIP’s useful life from 39 years to 15 years, now making it eligible for 100% bonus depreciation. This change is retroactive to 2018 when QIP provisions became law under the TCJA. Client’s should weigh the cost/benefit of amending prior year returns to reflect this change.
Q. How does the interplay between QIP, now eligible for 100% bonus depreciation, and the deduction of business interest limitation deduction rules under Section 163j, affect my return?
A. If a business’s interest deduction is limited under section 163(j) and it has the ability to elect out of those rules as a qualifying real property trade or business, the business can make the election and must switch depreciation to ADS prospectively. ADS does not allow for the use of bonus depreciation on nonresidential real property, residential rental property or qualified improvement property. Under current law, the election to use ADS is irrevocable. Current thinking is that taxpayers are not allowed to amend prior returns to take advantage of 100% bonus depreciation on QIP if a prior election was made to opt out of the section 163j rules as a qualifying real property trade or business, since depreciation is already reported on ADS and the election was irrevocable. We will monitor this issue in hopes the Treasury Department or IRS will provide relief.
Q. What is happening with Net Operating Losses generated after 2017?
A. TCJA changed the NOL rules. Generally TCJA disallowed all carrybacks related to post-2017 NOLs, provided for an indefinite carryforward period and limiting the utilization of the loss in a given year to 80% of taxable income. CARES Act temporarily reversed the TCJA changes. Now losses from 2018, 2019 and 2020 are permitted to be carried back for up to 5 five years. Taxpayers will be permitted to forgo the carryback and instead carryforward the NOL. Additionally, the 80% limit of taxable income rule goes away for 2019 and 2020 returns.
Q. Excess business losses rules are removed?
A. Yes, the excess business loss rules under section 461(l) are temporarily and retroactively removed from 2018 – 2020. A taxpayer who had a loss limited by this provision in 2018 or 2019 can file an amended return to claim a refund. This provision is expected to turn back on in 2021 and beyond.
How can TBC help?
Please consult with your advisor at TBC how these changes may impact your business. We can assist you by:
- Analyzing the impact of new legislation on business projections from a financial and tax perspective.
- Amending or modifying prior year and current tax returns to help obtain timely relief.
- Implementing tax planning strategies given the recent development to federal and state income tax laws.
Disclaimer: This post was current as of the date of posting. Any changes made to the law or regulations since original posting has not been incorporated. Please view the recent postings for current information or contact us directly with any questions.