The Coronavirus Aid, Relief and Economic Security (CARES) Act, the third item of federal legislation enacted in response to the unprecedented COVID-19 pandemic, was passed by Congress on March 27th and swiftly signed into law the same day.
The scope of the relief bill is far-reaching, providing financial assistance through channels ranging from additional funding for medical institutions to emergency grants for small businesses to targeted relief via federal tax law changes. These tax law changes, many of which were given retroactive effect, will help taxpayers and businesses cope with cash flow issues over the coming weeks and months by reducing the tax burden and/or providing a larger refund than would be allowed under pre-CARES Act law.
In this article, we are focusing on some of the business provisions within the law.
Payroll Tax Due Date Delays
The CARES Act delays the due date for the employer's share of Social Security taxes. Under the Act 50% of the employer's share of Social Security taxes may be deferred until December 31, 2021, and the other half may be deferred until December 31, 2022. Similarly, for self-employed taxpayers, the Act delays payment of 50% of 2020 self-employment taxes until 2021 and 2022. The relief isn't available if the taxpayer has had debt forgiveness for certain loans under the Small Business Act as modified by the CARES Act.
Taxpayers can carryback 100% of net operating losses (NOLs) realized in 2018, 2019, and 2020, to the prior five years. Such carryback had been eliminated by the Tax Cuts and Jobs Act of 2017 ("TCJA"). The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit).
As a result of the CARES Act changes there are now three different NOL regimes:
1. NOLs generated on or before December 31, 2017
- Two-year carryback
- 20- year carryforward
- Eligible to offset 100% of taxable income
2. NOLs beginning after December 31, 2017 and before January 1, 2021
- Five-year carryback
- Indefinite carryforward
- Eligible to offset 100% of taxable income prior to 2021 and 80% of taxable income after 2020
3. NOLs beginning on or after January 1, 2021
- No carryback
- Indefinite carryforward
- Eligible to offset 80% of taxable income
The CARES Act temporarily increases the net interest deduction limitation to 50% of adjusted taxable income (ATI) (previously limited to 30%). The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation. There is a special carve out rule for partnerships so that a partnership may not use the increased limitation in 2019, thereby deferring any potential benefit from the 50% threshold to 2020.
Deprecation of QIP
The CARES Act corrects an error in the TCJA by decreasing the depreciation life of "qualified improvement property" to 15 years, thus making such property eligible for 100% bonus depreciation. QIP is defined as any improvement made by the taxpayer to the interior of a non-residential building that is placed in service after the building's initial placed in service date other than improvements attributable to elevators, escalators, building enlargements, or the building's internal structural framework. In giving QIP 15-year MACRS status, it restores the 15-year MACRS write-off, making it eligible for 100% bonus depreciation.
This correction is retroactive to January 1, 2018. Taxpayers may change their depreciation of QIP by filing an automatic accounting method change with the IRS, though, if a QIP asset was only depreciated on a single tax return—e.g., it was placed in service in 2018 and the 2019 return has not yet been filed—the taxpayer may change the asset's depreciation method by filing an amended income tax return
Charitable Contribution Deductions
The limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn't apply to qualifying contributions made in 2020. Instead, a corporation's qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
Student Loan Payments Permitted
For employers with qualified educational assistance programs under Internal Revenue Code Section 127, the CARES Act provides a much sought-after change to permit employers to pay employees up to $5,250 per year on a tax-free basis for student loan debt expenses. Importantly, this change only applies for payments made between March 27, 2020, and December 31, 2020. Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principal and interest on any qualified higher education loan for the education of the employee but not of a spouse or dependent.
Employers with qualified educational assistance programs must amend their plans to permit these tax-free student loan payments. Employers who do not currently maintain a qualified educational assistance program may adopt such a program, but to be qualified, the program must be maintained under a written plan document and otherwise be compliant with Code Section 127. We recommend consulting with your employee benefits counsel before adopting a qualified educational assistance program to ensure compliance with the Code.
Employee Retention Credit
Eligible employers (including non-profits) may qualify for an employee retention credit equal to 50% of qualified wages paid to employees beginning March 12, 2020, through December 31, 2020, up to $10,000 per employee. Thus the maximum credit is $5,000 per employee. The tax credit is applied against the employer's Social Security payroll tax obligation but is reduced by any credits the employer receives under the Families First Coronavirus Response Act (FFCRA).
If the available tax credits exceed the employer's total Social Security tax obligation, the employer may qualify for a refund in the amount of the excess. Furthermore, the employer's tax credits under the CARES Act may be increased by the employer's qualified health plan expenses allocable to qualified wages paid.
Wages don't include (1) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) wages taken into account for the employer income tax credit for paid family and medical leave or (3) wages in a period in which an employer is allowed for an employee a work opportunity credit. An employer can elect to not have the credit apply on a quarter-by-quarter basis.
Employers eligible for this tax credit include employers who were carrying on a trade or business during the 2020 calendar year, and either (a) whose operations are partially or fully suspended during any applicable quarter due to orders from the appropriate governmental authority limiting commerce, trade, or group meetings due to COVID-19; or (b) beginning January 1, 2020, whose gross receipts for any quarter are less than 50% of gross receipts for the same quarter in the prior year. Credits will continue until gross receipts exceed 80% of the same quarter's gross receipts in the previous year.