As most businesses focus on the SBA Economic Injury Disaster Loans and Paycheck Protection Program Loans CARES Act, many overlook the advantages provided by the CARES Act tax provisions. The CARES Act provided several changes to the tax law as well as the Employee Retention Credit which may provide much needed additional financial relief to businesses. Businesses who are ineligible for the SBA Economic Injury Disaster Loans or Paycheck Protection Program Loans should consider utilizing the CARES Act tax provisions and the Employee Retention Credit to the maximum extent possible. Below are descriptions of the CARES Act tax-related provisions that will provide relief for businesses during the COVID-19 pandemic.
Employee Retention Credit
The CARES Act provides eligible employers with a refundable tax credit against the employer portion of social security taxes, equal to 50% of qualified wages paid to an employee between March 12, 2020 and January 1, 2021. The maximum qualified wages includable for any employee is $10,000, resulting in total credits of up to $5,000 per employee for the 2020 year.
“Eligible employers” are employers who carry on a trade or business during the 2020 calendar year, including tax-exempt organizations, that:
fully or partially suspend operations during any calendar quarter of 2020 due to orders from an appropriate government authority due to COVID-19, or
experience a significant decline in gross receipts due to COVID-19.
An employer experiences a significant decline in gross receipts when, during a calendar quarter of 2020, gross receipts are less than 50% of gross receipts for the same calendar quarter of 2019, until gross receipts are greater than 80% of gross receipts for the same calendar quarter of the prior year or the period for the credit expires. This means that an employer who has more than a 50% decline in gross receipts for a 2020 calendar quarter is eligible for this credit from that time until gross receipts are back to 80% of that for the corresponding 2019 quarter.
“Qualified Wages” are wages and compensation, including qualified health plan expenses properly allocable to wages. However, for employers with an average of more than 100 full-time employees during 2019, the term “qualified wages” includes only wages paid to employees who did not work during the relevant quarter due to fully or partially suspended operations or a significant decline in gross receipts. Wages paid to any employee are included in “qualified wages” if the employer had an average of 100 or less employees in 2019.
This credit is claimed on the employer’s federal employment tax returns, usually Form 941, beginning with the second quarter of 2020. Employers can immediately benefit from this credit by applying it against their payroll tax deposits or, if payroll tax deposits are not sufficient, by requesting an advance payment from the IRS by submitting Form 7200.
This credit is not compatible with the Paycheck Protection Program (“PPP”) loans, therefore, an employer who receives a PPP loan should not claim this credit. The incompatibility of the credit with the PPP loan makes it ideal for businesses with more than 500 employees or that otherwise don’t qualify for the PPP loan. Read more about PPP loans here.
Net Operating Losses
The CARES Act allows the carryback of net operating losses (NOLs) arising in taxable years beginning after 12/31/2017 and before 1/1/2021. Losses arising in tax years beginning in 2018 through 2020 may be carried back for the 5 years immediately preceding the taxable year of such loss. The Act does not impact the provisions related to the carryforward of NOLs for those years.
Additionally, the Act removes the 80% taxable income limitation on NOLs that the 2017 Tax Cuts and Jobs Act (TCJA) imposed, allowing NOLs to fully offset taxable income for years beginning before January 1, 2021.
In order to utilize these losses, companies should amend prior year returns.
Business Interest Limitations
For 2019 and 2020, the amount of interest expenses businesses are allowed to deduct is increased from 30% to 50% of adjusted taxable income (ATI). For these years, taxpayers may deduct the sum of (i) business interest income, (ii) 50% of ATI, and (iii) floorplan financing interest expense. Taxpayers may elect not to use the increased limitation. Additionally, since many taxpayers will have significantly less income during 2020 as a result of COVID-19, they may elect to use 2019 adjusted taxable income for 2020 instead.
For partnerships, the increase to ATI only applies to 2020, allowing partners to treat 50% of the 2019 allocable excess business interest expense from the partnership as fully deductible for the 2020 tax year. The other 50% of the excess business interest expense is subject to the normal rules, which suspends use of the excess business interest expense until a later year, when the partnership allocates excess taxable income or excess business interest income to the partner. Partnerships may also elect to substitute their 2019 ATI for 2020 ATI. The election must be made at the partnership level.
Limitation on Losses (Non-Corporate Taxpayers)
For pass-through businesses and sole proprietors, the CARES Act removes the limitation on excess business losses for tax years beginning after December 31, 2017, and before January 1, 2021. This provision allows pass-through businesses to apply their excess business losses to tax years beginning in 2018 through 2020 and utilize the resulting cash-flow for operating expenses. For years after 2021, the excess business loss deduction available to non-corporate taxpayers remains subject to the limitations imposed by the TCJA and must be carried forward as NOLs.
Excess losses for 2018 can be utilized by filing an amended return.
Corporate Alternative Minimum Tax Credit
The corporate alternative minimum tax (AMT) was repealed by the TCJA for tax years beginning on or after January 1, 2018, and any corporate AMT credits from prior were refundable in the 2018 through 2021 tax years. The CARES Act permits companies to claim a refund for any remaining amounts in 2019. Alternatively, corporations may elect to claim the full refund in 2018. Again, this is accomplished by filing an amended return for the 2018 tax year.
Delay of Payment of Employer Payroll Taxes
The CARES Act allows employers and self-employer individuals to defer payment of the employer portion of social security tax. The tax is equal 6.2% of wages. The Act permits employers and self-employer individuals to pay the deferred social security taxes over the following two years. Half of the deferred tax is due by December 31, 2021 and the remaining half is due by December 31, 2022.
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