Business Tax Provisions of the CARES Act

Business Tax Provisions of the CARES Act

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act). The CARES Act contains a few business tax provisions, which are briefly discussed and highlighted as follows.

Employee retention credit for employers

This provision 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 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 available to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
A few important details of this provision include:

  • Wages include health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee.
  • The credit is not available to employers receiving Small Business Interruption Loans.
  • 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.
  • 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 employer credit for paid family and medical leave.
  • 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.

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

Taxpayers can defer paying the employer portion of certain payroll taxes and 50% of self-employed Social Security tax payments through the end of 2020. The deferred payroll taxes would be due and payable over two years on December 31, 2021 and 2022. This deferral of payroll taxes will not apply to any taxpayer that has had indebtedness forgiven under the CARES Act. This provision applies to periods beginning on the date of enactment of the CARES Act.

Temporary repeal of taxable income limitation for net operating losses (NOLs)

The taxable income limitation is temporarily removed to allow an NOL to fully offset income. The amount of the NOL deduction previously allowed was limited to 80% of taxable income.

Modification of rules relating to NOL carrybacks

NOLs arising in a tax year beginning after December 31, 2018 and before January 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. The amendments apply to NOLs arising in tax years beginning after December 31, 2017 and to tax years beginning before, on or after such date to which such NOLs are carried.

Modification of limitation on losses for noncorporate taxpayers

The loss limitation is temporarily modified for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019 and 2020. Business losses were previously limited under prior law generally to the excess of the taxpayer’s aggregate trade or business deductions for the tax year over the sum of the taxpayer’s aggregate trade or business gross income or gain plus $250,000.

Corporate minimum tax credit (MTC) is accelerated

Corporations can claim 100% of MTCs in 2019 or make an election to take the entire refundable credit amount in 2018. A claim for credit or refund where a corporation elects to take the entire refundable credit amount in 2018 must be treated as a tentative carryback refund claim.

Deductibility of interest expense temporarily increased

There is a temporary and retroactive increase in the limitation on the deductibility of business 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 and will apply only in 2020. This increase applies to tax years beginning after December 31, 2018.

Bonus depreciation technical correction for qualified improvement property (QIP)
A technical correction in the CARES Act specifically designates QIP as 15-year property for depreciation purposes. This makes QIP a category eligible for 100% Bonus Depreciation. This correction is effective for property placed in service after December 31, 2017.

Small Business Administration (SBA) Loans and Forgiveness

Small businesses will have access to paycheck protection program loans through June 30. The loans are based upon payroll and are limited to a maximum of $10 million. Additional provisions in the CARES Act provide for possible repayment deferment or forgiveness of these loans. Forgiven debt would be excluded from the borrowers’ gross income for tax purposes.

Disaster Loans

The SBA’s disaster loan program would be expanded from January 1, 2020 through December 31, 2020 for businesses with 500 or fewer employees. The SBA will be authorized to advance as much as $10,000 to eligible disaster loan recipients. Property use advanced funds would not have to be repaid.

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