As a result of the COVID-19 pandemic, President Trump signed two pieces of legislation into law: the Families First Coronavirus Response Act (FFCRA) on March 18, and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27. These were enacted to provide relief to individuals and businesses during the crisis, and have tax implications for banks.
Tax Credits to Recover Costs of Providing COVID-19 Leave
The Families First Coronavirus Response Act provides two paid leaves that employers with less than 500 employees must provide: Emergency Paid Sick Leave and Emergency Family and Medical Leave. These provisions take effect within 15 days of the signing of the Act and expire on December 31, 2020.
As part of the legislation, employers are allowed two new refundable payroll tax credits, designed to reimburse them for the cost of providing COVID-19 leave to their employees.
Employee Retention Credit For Employers Subject To Closure Due To COVID-19
Eligible employers can qualify for 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:
- Employers 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
- Employers 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 gross receipts for the same calendar quarter in the prior year.
For employers with less than 100 employees, the credit is based on wages paid to all employees, even if employees have not been prevented from providing services. For employers with more than 100 employees, the credit is allowed only for wages of employees who are not providing services because of the business suspension or reduction in gross receipts described above.
The credit applies to wages paid after March 12, 2020, and before January 1, 2021. Wages funded through the paid leaves in the Families First Coronavirus Response Act are not eligible for the credit.
Increased Charitable Contribution Limitation for 2020
Usually, a corporation’s charitable contribution deduction cannot exceed 10% of its taxable income (with certain modifications). Any nondeductible contribution can be carried over for five years. The CARES Act increases the limitation for certain cash contributions made during calendar year 2020 to 25% of taxable income (with modifications) over the amount of other charitable contributions. Nondeductible contributions are carried over pursuant to the same rules as other contributions.
Delay of Payment of Employer Payroll Taxes
Employers 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 Program (PPP).
Modifications for Net Operating Losses (NOLS)
The Tax Cuts and Jobs Act (TCJA) eliminated the two-year carryback of net operating losses, and allowed for an indefinite carryforward (increased from 20 years). It also provided a limitation that NOLs would only be able to offset 80% of taxable income. These rules were for NOLs generated in taxable years ending after December 31, 2017.
The CARES Act amends provisions of TCJA to allow for the carryback of losses arising in taxable years beginning 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.
The CARES Act also fixes a technical error in the TCJA that prevented NOLs arising in a tax year beginning in 2017 and ending in 2018 from being carried back two years.
Modification of Credit for Prior Year Minimum Tax Liability
The TCJA repealed the Alternative Minimum Tax for corporations for years beginning after December 31, 2017. Any unused minimum tax credit could be used, subject to limitations, for tax years before 2021, when any remaining credit would be fully refundable.
The CARES Act allows corporations to claim any remaining credit in tax years beginning in 2019, with an election to amend the return for the tax year beginning in 2018 to claim the remaining credit in that year.
Modifications of Limitation of Business Interest
The TCJA imposed limitations on the deductibility of business interest, if interest expense exceeds interest income. The CARES Act reduces the amount of the limitation for taxable years beginning in 2019 and 2020.
This provision most likely will not have a direct impact on financial institutions, but may have an indirect impact through partnership interests and to the banks customers.
Technical Amendments Regarding Qualified Improvement Property (QIP)
TCJA added QIP, a new category of assets. However, a drafting error placed QIP in the 39-year category, and therefore was not eligible for bonus depreciation, which increased to 100% in 2018.
QIP means “any improvement made by the taxpayer to an interior portion of a nonresidential building if the improvement is placed in service after the date the building was first placed in service, but qualified improvement property does not include any improvement for which the expense is attributable to the enlargement of the building, to any elevator or escalator, or to the internal structural framework of the building.”
Under the CARES Act, QIP is now treated as 15-year property, eligible for bonus depreciation. The amendments are effective for property placed in service after December 31, 2017.
Federal Tax Filing and Payment Deadline Deferral
In response to the COVID-19 pandemic, the IRS announced in Notice 2020-18 that it is extending the April 15 tax filing deadline for both income tax filings and payments to July 15, 2020 to provide relief for taxpayers.
There is no limitation on the amount of payment that may be postponed. This postponement applies to individuals, trusts, estates, partnerships, associations, companies, and corporations (collectively, “Affected Taxpayers”), and no extension forms (e.g., Forms 4868 or 7004) are required to be filed. Please note, the state taxing authorities are responding and enacting their own version of deferrals and may differ from the Federal deferral rules noted above.
Please visit our COVID-19 Resource Center for more details on these issues, as well as the acts’ impacts on businesses and individuals.
This article is based on the tax laws as currently written is intended for informational purposes only. If you have any questions, we encourage you to reach out to your Wolf & Company tax team.
