CARES Act: Business Tax Provisions
briefing by David Kaplan,CPA; Ron Kuyath, CPA and Jill Clark, CPA
Coronavirus Aid, Relief, and Economic Security Act
On Friday, March 27, 2020, President Trump signed the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) into law. This law marks the single largest economic stimulus package in history and is intended to provide relief to the many businesses and individuals impacted by COVID-19.
There are a number of different components of the law, including several significant changes to the tax law as well as additional guidance and clarity related to some of the provisions of the recently enacted Families First Coronavirus Response Act (FFCRA). Below is a summary of the tax law provisions that impact businesses as well as an overview of some of the provisions related to the FFCRA.
We will be continually monitoring additional guidance as it is released and will provide updated information on this page as it becomes available, so please check back often. In addition, please feel to reach out to your BRC tax advisor with any questions you may have.
Business Tax Provisions
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
- Unlike many provisions under the recently passed legislation aimed at helping business weather the impacts of COVID-19, this credit is available to any size employer (i.e., not limited based on employer’s size/# of employees, etc.), including tax-exempt organizations.
- However, this credit is NOT available to:
- Employers receiving a Paycheck Protection Program (PPP) loan,
- Governmental employers, or
- Self-employed individuals.
- Eligible employers will receive a fully refundable credit against their applicable employment taxes (employer’s share of Social Security taxes – 6.2%) equal to 50% of qualified wages paid to each employee during a calendar quarter.
- The maximum amount of qualified wages that may be taken into account for each employee for all calendar quarters is $10,000, so the maximum credit for qualified wages to any one employee is capped at $5,000.
- This credit is only available for wages paid after March 12, 2020 and before January 1, 2021.
- The allowable credit is refundable to the extent it exceeds the employer’s payroll tax liability.
- Eligible employers are defined as an employer that:
- was carrying on a trade or business during calendar year 2020 and
- during any calendar quarter the operation of such trade or business is fully or partially suspended due to government orders that limit commerce, travel or group meetings due to COVID-19 or for a period beginning in any calendar quarter in which the gross receipts of such employer are less than 50% of the gross receipts for the same calendar quarter in the prior year and ending in the calendar quarter following the calendar quarter in which gross receipts exceed 80% of gross receipts for the same calendar quarter in the prior year. Additional guidance will have to be provided for employers not in business during the applicable 2019 periods.
Qualified wages are defined as follows:
- For employers with greater than **100 full-time employees during 2019 – wages paid by the employer to an employee that is not providing services due to either of the circumstances listed for an eligible employer above.
- For employers with less than **100 full time employees during 2019 and such employer has had to reduce or cease operations due to a government order – wages paid by the employer to an employee during any period of time during such reduction/closure.
- For employers with less than **100 full time employees during 2019 and such employer meets the requirements related to the 50% reduction in gross receipts (discussed fully above) – wages paid by the employer to an employee during the calendar quarter within the eligible period.
** Average number of full-time employees during 2019 (taking into account full-time equivalent rules under IRC 4980H) – must include “related employers” when making this determination.
- Qualified wages include costs incurred by the employer for qualified health plan expenses allocable to such eligible wages.
- Qualified wages exclude the following amounts:
- Wages required to be paid under the “Sick Leave” and “Family and Medical Leave” provisions of the Families First Coronavirus Relief Act (FFCRA)
- Wages for which a Work Opportunity Tax Credit (WOTC) are claimed.
- Wages for which a Family and Medical Leave Credit are claimed.
- Wages paid to anyone owning more than 50% of the stock of a corporation or more than 50% of the capital or profits of a partnership (after applying IRC 267 attribution rules).
- Employers can reduce the amount of their otherwise required federal employment tax deposit (including amounts withheld from employees for federal income taxes, employees and employers share of Social Security and Medicare taxes) by the amount of anticipate credit under this provision.
- If the anticipated credit exceeds the otherwise required federal employment tax deposit, an employer may request an advance of their excess anticipated credit using IRS Form 7200 (Instructions).
- Amounts not deposited and/or received through an advanced credit request will have to be taken into account when filing Form(s) 941.
- Wage deductions of the employer must be reduced by an amount equal to the credit claimed.
- Click – IRS FAQ’s on the Employee Retention Credit
Delay of Payment of Employer Payroll Taxes
- Eligible employers may defer the payment of their (employer’s) portion of applicable payroll taxes (Social Security) otherwise due between the date the law is enacted and before January 1, 2021.
- The amounts deferred will be due as follows: (a) 50% due by December 31, 2021 and (b) 50% due by December 31, 2022.
- These provisions are not applicable to taxpayers that have debt forgiven related to the separate provisions of this law under section 7(a) of the Small Business Act.
- The law also provides relief to self-employed individuals by allowing those taxpayers the ability to defer 50% of the taxes imposed under IRC 1401(a) (Social Security) on self-employed income earned during the period beginning March 27, 2020 and ending December 31, 2020 to the deferral dates available to employers provided above.
Modification of Limitations on Charitable Contributions During 2020
- The taxable income limit on a corporation’s ability to deduct charitable contributions has been increased from 10% to 25% for qualifying contributions made during 2020.
- To qualify the contributions must be cash contributions made during calendar year 2020 to an eligible public charity.
- Qualifying contributions are those made to organizations listed in Internal Revenue Code Section 170(b)(1)(A), excluding contributions to donor advised funds and 509(a)(3) supporting organizations.
- The law also increases the income limits on contributions of wholesome food inventory made during 2020 from 15% to 25%.
- Contributions made in excess of the allowable amounts will be carried over to the taxpayer’s subsequent tax year and will be subject to the limitations in place under the existing laws.
Modifications for Net Operating Losses
- For taxpayers that incur a net operating loss in taxable years beginning after December 31, 2017 and before January 1, 2021, they may carryback these losses to each of the 5 taxable years preceding the taxable year of the loss. Taxpayer’s that do not wish to carryback losses generated in 2018 and/or 2019 must make an election to forego the carryback periods by the due date (including extensions) of their return for the first taxable year ending after March 27, 2020.
- The law removes the 80% taxable income limitations and allows for taxpayers to fully offset their taxable income for tax years beginning before January 1, 2021.
- For fiscal year-end corporations who incurred an NOL during their tax year beginning in 2017 and ending in 2018, the law provides a technical correction allowing for a 2-year carryback of such NOL. The law also provides the deadlines for filing these carryback claims and associated elections.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations
- The law allows corporations the ability to accelerate the receipt of any remaining AMT credits still available that would otherwise have been credited in tax years 2020 and 2021. This can be done by claiming these credits in their entirety on the corporation’s 2019 tax return.
- The law states that corporations may elect to file an application for a tentative refund to claim a refund of any remaining amounts on their 2018 tax return.
Modification of Limitation on Business Interest
- For tax years beginning in 2019 and 2020, taxpayers (see exception below for 2019 partnership returns) subject to the interest expense limitation rules will be allowed to deduct interest expense up to 50% of their adjusted taxable income (versus the previous 30% limitation), in addition to any other amounts considered deductible under the previous law.
- For tax years beginning in 2020, taxpayers may elect to use their 2019 adjusted taxable income amounts instead of their 2020 calculated amounts when determining their allowable 2020 interest deduction.
- For tax years beginning in 2019, partnerships must still apply the 30% limit, however; unless a partner elects out, the partner shall be allowed to deduct 50% of any “excess business interest expense” which they have been allocated on their first tax return beginning in the tax year 2020. This was carved out due to the complexities and limitations around a partnership’s ability to amended their returns under the new audit regime rules.
Technical Amendments Regarding Qualified Improvement Property
- This provision provides a technical correction related to an oversight made when the TCJA of 2017 was passed and carves out “qualified improvement property” and allows for this type of property to be depreciated over a 15-year period (versus 39 years).
- This gives a taxpayer the ability to take 100% bonus depreciation on property that meets this definition.
- This correction is retroactive, meaning taxpayers that placed this type of property into service during their 2018 and/or 2019 tax years will have the ability to make corrections to how they have depreciated this type of property. Additional IRS guidance is needed to determine the proper method for making adjustments on tax returns that have already been filed using the now superseded rules.
Temporary Exception from Excise Tax for Alcohol Used to Produce Hand Sanitizer
- The law temporarily exempts any distilled spirits used in hand sanitizer products in a manner consistent with FDA guidelines between January 1, 2020 and December 31, 2020 from being subject to otherwise applicable excise taxes.
This section of the CARES Act provides clarification on some of the previous legislation passed, as well as specific rules for certain government employers. Below are the key points from this section that apply to most taxpayers:
- The law provides clarification that the wage limitations provided in the Required Sick Leave and Family and Medical Leave Act under the FFCRA are for each employee that receives wages under either of these leave provisions.
- Paid leave now includes rehired employees if they were laid off by the employer not earlier than March 1, 2020 and worked at least 30 of the last 60 days prior to the employee being laid off and are rehired by the employer.
- Unemployment insurance application and assistance needs to be accessible and provided in at least 2 of the following methods: in person, by phone, or online.
- The law provides a waiver of the failure to make deposit penalty for payroll taxes if it was in anticipation of receiving the credit under the provisions of the recently enacted laws.
Ron Kuyath Tax Partner, CPA
Ron is a tax partner with over 37 years of experience in public accounting. Ron has been serving clients in various industries, including affordable housing, commercial real estate, manufacturing and distribution (consumer products, industrial controls, plastic molding and extrusion, textiles). He has consulted on numerous merger and acquisition transactions, assisted with tax accounting method changes and represented clients […]