On Friday, March 27, 2020, the Federal government enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to provide economic relief for the devastation resulting from the current COVID-19 pandemic. The largest spending law in US history, the CARES Act includes provisions that directly impact individuals and businesses on numerous levels. This overview presents our interpretation of the Act’s various business provisions.
Employee Retention Credit for Employers
The CARES Act provides eligible employers with a refundable credit against employment (FICA) taxes equal to 50% of qualified wages paid to employees for a calendar quarter. Thus, eligible employers can offset their employment tax liability and can also obtain a refund from the IRS to the extent the retention credit exceeds the employment tax liability. A maximum of $10,000 of wages per employee for all quarters are considered for purposes of this credit.
To be eligible, employers must operate a trade or business in calendar year 2020 that either: (i) is suspended during a calendar quarter due to orders from a governmental authority limiting commerce on account of COVID-19; or (ii) suffers a 50% decline in gross receipts during any calendar quarter beginning after December 31, 2019 as compared to the same calendar quarter in the prior year.
The definition of “qualified wages” varies depending upon the number of employees. For eligible employers with greater than 100 full-time employees, “qualified wages” applies to wages to which an employee is not providing services due an order of a governmental authority or due to a 50% decrease in business. For eligible employers with less than 100 full time employees, any wages paid during the applicable period or quarter will apply irrespective of whether or not the employee is providing services. Qualified wages do not include paid sick leave or paid expanded family and medical leave (for which separate tax credits are provided) under the Families First Coronavirus Response Act. The Employee Retention Credit is not available to employers who receive a covered loan under the Paycheck Protection Program of the CARES Act.
Payroll Tax Deferral
Generally, employers will be able to defer the payment of quarterly employment (FICA) taxes applicable to tax year 2020 until December 31, 2021 (50% of total) and December 31, 2022 (50% of total).
Exception: the payroll tax deferral does not apply to small employers with less than 500 employees who have had loans granted and forgiven under other provisions of the CARES Act.
Modification of Rules Governing Utilization of Net Operating Losses
Five-year carryback of certain NOLs – For net operating losses (NOLs) arising in tax years 2018, 2019 and 2020, individual and corporate taxpayers can now carry back NOLs to the five tax years preceding the loss year. This presents taxpayers who have incurred NOLs in tax years 2018 and/or 2019 with an opportunity to seek a refund of federal income tax and in certain cases a refund of state income paid in prior tax years.
Elimination of 80% taxable income limit on Utilization of NOLs for tax years beginning before January 1, 2021 – The CARES Act eliminates the 80% taxable income limitation on the deduction of NOLs for tax years beginning prior to tax year 2021. Therefore, NOLS carried to any year prior to tax year 2021 can be deducted for regular tax purposes without regard to a taxpayer’s net income in the year of deduction.
Modification of Limitation on Losses for Taxpayers Other than Corporations
For taxpayers other than corporations, the 2017 Tax Cuts and Jobs Act (“2017 tax act”) contained limitations on the utilization of excess business losses (business losses in excess of $500,000 for a married couple) from a trade or business against a taxpayer’s nonbusiness income arising in the same tax year. This limitation has been eliminated under the CARES Act for tax years beginning before December 31, 2020. For taxpayers affected by this rule for tax year 2018, a potential opportunity for a refund may exist.
Modification of Credit for Prior Year Alternative Minimum Tax Liability of Corporations
Corporations possessing an Alternative Minimum Tax (AMT) credit that were previously eligible under the 2017 tax act to take a refundable AMT credit spread over tax years 2018 through 2021 are now eligible under the CARES Act to take its entire refundable AMT credit in tax year 2019. If the corporation so elects, it can choose to take its entire AMT refundable credit in tax year 2018. Taxpayers making an election to take the AMT refundable tax credit in tax year 2018 can file an application for a tentative refund prior to December 31, 2020.
Technical Amendments Regarding Qualified Improvement Property
Taxpayers that make improvements to the interior of a nonresidential building after it is placed in service (other than structural improvements or improvements to elevators or escalators), referred to as “qualified improvement property,” can now take an immediate write-off of the cost of such improvements under the bonus depreciation provisions. Alternatively, taxpayers can elect to depreciate qualified improvement property over 15 years. This technical correction to the 2017 tax act applies retroactively as if initially included the 2017 tax act. We are anticipating that the IRS will issue guidance as to the procedures to implement this new technical amendment with regard to qualified improvement property placed in service in tax year 2018 and depreciated over 39 years.
Modifications of Limitation on Business Interest
For taxpayers subject to the limitations on the deductibility of business interest expense applicable to taxpayers with average annual gross receipts in excess of $25 million, the CARES Act modifies certain elements taken into account in determining the limitation.
- For tax years beginning in 2019 and 2020, the percentage of adjusted taxable income considered in determining the amount of the deduction for business interest expense is increased from 30% to 50%.
- Special rules changes apply to partnerships:
- For tax year 2019, the percentage of adjusted taxable income considered for purposes of the deduction for business interest expense remains at 30%.
- Partners that receive an allocation of excess business interest in tax year 2019 can treat 50% of this amount as business interest paid in tax year 2020, while the other 50% remains subject to the limitations governing the carryover of excess business interest set forth under section 163(j)(4)(B).