Tax Cuts for Businesses Created by CARES
Author:
Nicole Bodoh, Esq.
April 1, 2020
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the “
CARES Act”) which contains several tax relief provisions for businesses. Included among these provisions is an employee retention credit, the delay in payment of payroll taxes for certain employers and the lifting of many limitations on business deductions imposed by the 2017 Tax Cuts and Jobs Act (the “
TCJA”). The highlights of the tax cuts for businesses created by CARES include the following provisions:
Employee Retention Credit for Employers Subject to Closure due to COVID-19
Under Cares, employers whose trade or business has been fully or partially suspended due to a COVID-19-related governmental order or whose gross receipts (beginning with the first quarter of 2020) have decreased by more than fifty percent (50%) in comparison to the same quarter of the prior year, may be eligible for the employee retention credit. The credit applies to “applicable employment taxes” (generally, the employer portion of Social Security (6.2%) under Sections 3111(a) and 3221(a) of the Internal Revenue Code of 1986, as amended (the “Code”)) and is “refundable,” meaning that if it exceeds the actual tax liability, the employer may apply for a refund of the excess in addition to the actual taxes paid. The retention credit is calculated as fifty percent (50%) of “qualified wages” up to $10,000 per year paid to each employee from March 13, 2020 through the end of this year. Thus, the maximum credit per employee is $5,000.
For employers with more than 100 employees, “qualified wages” are wages paid to the extent the employee is not performing services due to a suspension of business or a decrease in gross receipts. For employers with fewer than 100 employees, qualified wages are any wages paid while business is suspended or during a decline in gross receipts, even if the employee continued to provide services during that time. Qualified wages also include the pre-tax portion of payments made by the employer to maintain a group health plan, which is generally allocated among the employees on a pro rata basis.
Notably qualified wages do not include qualified sick or family leave under the Families First Coronavirus Response Act and, with respect to an employee, they may not exceed the amount such employee would have been paid for working an equal number of hours during the thirty (30) days immediately preceding the period of calculation. Also, an employer taking a small business interruption loan under Section 1102 of the CARES Act is not eligible for the credit.
Delay of Payment of Employer Payroll Taxes
In addition to the employee retention credit, the CARES Act also permits many employers to delay paying the employer portion of Social Security taxes due on wages paid between March 27, 2020 and January 1, 2021. One-half of the delayed payroll taxes will be due no later than December 31, 2021 and the remaining half will be due by December 31, 2022. The same deferral opportunity is available for fifty percent (50%) of the Social Security taxes imposed under the Self-Employed Contributions Act (SECA) paid by self-employed individuals. Employers whose loans under Section 1105 (the Paycheck Protection Loan Program)or Section 1109 of the CARES Act are forgiven are not eligible to defer the applicable payroll taxes.
Modifications for Net Operating Losses
Prior to the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”), corporations were generally permitted to carry back net operating losses (“NOLs”) for the prior two years and receive a corresponding refund of the overpaid taxes for those years. Any NOL not used to offset a prior year’s income was permitted to be carried forward and used to offset income for 20 years. The NOL provisions under the TCJA eliminated the ability to carry back NOLs altogether and permitted NOLs arising after December 31, 2017 to be carried forward indefinitely but limited the offset to 80% of the taxpayer’s income, with certain exceptions.. The CARES Act amends Section 172 of the Code to permits corporate taxpayers to carry back NOLS arising in 2018, 2019 and 2020 for up to five years to offset income during those years and to claim a tax refund of previously paid income taxes. As under the TCJA, corporate taxpayers may continue to carry forward NOLs indefinitely, limited to eighty percent (80%) of the taxpayer’s income. However, for 2020 and prior tax years, corporations and pass-through entities (such as limited liability companies) may now use carrybacks and carryforwards to offset one hundred percent (100%) of their income with NOLs. The rule current rule that corporate capital losses may be carried back three years and carried forward for five tax years remains unchanged.
Modification of Limitation on Losses for Taxpayers other than Corporations
Section 2304 of the CARES Act suspends additional limitations on the deduction of losses imposed under the TCJA. Under the TCJA, during the tax years beginning after December 31, 2017 and ending by December 31, 2025, the ability of a non-corporate taxpayer (such as a partnership or limited liability company) to deduct “excess business losses” was limited to the amount by which the total deductions attributable to all of the taxpayer’s trades or businesses exceed such taxpayer’s gross income and gains attributable to those trades or businesses, plus $250,000 ($500,000 if filing jointly). As a result of the CARES Act, the foregoing limitation will only apply to tax years beginning after December 31, 2020. As a result, deductions for excess business losses which previously would have been disallowed for tax years 2018, 2019 and 2020 are now permitted to be taken.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations
The CARES Act permits corporations to now accelerate refundable credits of the corporate alternative minimum tax (the “AMT”) under section 53 of the Code that otherwise could have been claimed in 2020 and 2021 to 2018 and 2019. The TCJA repealed the AMT but permitted a credit of the AMT paid in prior years to be used to offset taxes owed by a corporation in 2018, 2019, 2020 and 2021. The CARES Act treats the AMT credit as fully refundable beginning with the 2019 tax year (rather than the 2021 tax year, as provided under the TCJA). In addition, a corporate taxpayer may elect to file a claim for a refund of the entire refundable amount in the 2018 tax year so long as the refund claim is filed before December 31, 2020. Such refund claims must be filed and processed consistent with section 6411 of the Code (which provides for NOL carryback adjustments of prior years’ returns) and the IRS must review and process the claims within ninety (90) days of the filing date.
Modifications of Limitation on Business Interest
For tax years beginning in 2019 and 2020, taxpayers may deduct interest payments up to the sum of fifty percent (50%) of their adjusted taxable income plus business interest income. Under the TCJA, deductions of interest payments were limited to thirty percent (30%) of that income. As before, disallowed interest is considered paid in the following year and may be carried forward indefinitely, with some exceptions. There are special rules that apply to partnerships with respect to the modifications of the limitation on business interest deductions. For example, the increase from thirty percent (30%) to fifty percent (50%) is only permitted for the partnership’s taxable year beginning in 2020 and there are special rules for allocating excess business interest among the partners for taxable years beginning in 2019. For this reason, partnerships are permitted to elect out of the increase for either 2019 or 2020. Partnerships should consult with their tax advisors as to whether an election out of the modifications is advisable.
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