On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)—a $2 trillion stimulus bill intended to provide financial relief to people and businesses to support the US economy during the COVID-19 pandemic. In addition to the direct financial aid to individuals and forgivable loans for small businesses, there are other tax provisions providing relief to both–some of which beneficially modify the implications of tax laws enacted during the Tax Cuts and Jobs Act (TCJA) of 2017. We take a look at some of the key tax provisions brought on by the CARES act and what they mean for businesses.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
Employers will receive a refundable quarterly payroll tax credit equal to 50% of qualified wages (including costs to provide and maintain group health insurance) paid to an employee. For purposes of the credit, up to $10,000 of qualified wages per employee is taken into account. Excess credits are refundable. Eligible employers include those:
- Whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19
- Who have a 50% decrease in gross receipts for the same calendar quarter in the prior year
Employers claiming a credit due to a significant decline in gross receipts are no longer eligible once gross receipts are 80% of the gross receipts for the same calendar quarter in the prior year. This credit does not apply to governmental employers. This credit applies to wages paid after March 12, 2020, and before January 1, 2021. Wages funded through the Paycheck Protection loan program established under the Act are not eligible for the credit.
Delay of Payment of Employer Payroll Taxes
Employers and self-employed taxpayers can delay payment of the employer portion of Social Security payroll taxes through the end of 2020. 50% of any payroll taxes deferred under this provision must be paid by December 31, 2021, with the remaining 50% paid by December 31, 2022. Deferral of payment is not allowed if an employer has amounts forgiven under the Paycheck Protection loan program.
Due Dates for Contributions to Retirement Plans and Health Savings Accounts
The deadline for making contributions to an IRA, or for an employer to make contributions to its workplace-based retirement plan on account of 2019, is extended to July 15, 2020. In addition, participants may make contributions to an HSA or Archer MSA for 2019 at any time up to July 15, 2020.
Business Losses (NOLs)
TCJA only allowed for carry-forward of net-operating losses for losses created after December 31, 2017. The CARES Act amends provisions of the TCJA to allow for the carryback of losses arising in taxable years ending after December 31, 2017 and before January 1, 2021 to each of the five taxable years preceding the taxable year of such loss. However, real estate investment trusts (REITs) are not permitted such carrybacks. The CARES Act does not alter the indefinite carryforward of NOLs arising in those years. The CARES Act also amends the Code to remove the limitation that NOLs could be used to offset no more than 80% of taxable income (disregarding the NOL deduction itself). The amendment applies to tax years beginning before January 1, 2021 (previously, tax years beginning after December 31, 2017, were subject to the 80% limitation).
The TCJA disallowed the deduction of business losses from a partnership, S corporation, or sole proprietorship in excess of $250,000 for single taxpayers and $500,000 for couples.
Under the CARES Act, the deduction of business losses from a partnership, S corporation, or sole proprietorship are unlimited for 2018 through 2020.
Business Interest Limitations
The TCJA provided new limitations on the deductibility of business interest. Generally, under these rules, the interest expense deduction was limited to business interest income plus 30% of adjusted taxable income.
Under the CARES Act, the limitation is now applied to 50% of adjustable taxable income for taxable years beginning in 2019 or 2020. In addition, the Act provides for an election for taxpayers to use their 2019 adjusted taxable income when calculating their 2020 interest expense limitation, because many businesses will have diminished taxable income in 2020. Taxpayers can also make an irrevocable election to not have the 50% threshold apply to the 2019 or 2020 taxable years.
Government-Provided Relief Funds (Loans and Grants)
For loans provided to businesses under Title I of Division A of the CARES Act (Small Business Administration loans), the Act provides that any forgiveness or cancellation of all or part of such loans will not be treated as income for tax purposes. Assistance received under Title IV of Division A of the CARES Act will be treated as indebtedness for tax purposes, even if the government acquires warrants, stock, or other equity interests in the assisted companies as part of the assistance program. The CARES Act also provides, in Division A, Title I, for grant programs for certain small businesses. The Act does not have any express provision concerning the treatment of such grants for tax purposes. Section 118(b) exempts contributions to a corporation by a government entity from the exclusion for contributions to capital. As a result, absent legislative provision, grants received by a corporate entity may be treated as taxable income.
Technical Correction Related to Qualified Improvement Property (QIP)
The TCJA had a drafting error that placed QIP property as 39-year property which made it ineligible for bonus depreciation, which was increased to 100% in 2018.
Under the CARE Act, qualified improvement property is now treated as 15-year property. In addition, it adjusted the definition of qualified improvement property to mean any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property, if such improvement is placed in service after the date such building was first placed in service. The technical amendments are effective for property placed in service after December 31, 2017.