CARES Act – Business Relief
Posted April 2020
On March 27th , the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law to provide relief for businesses, employers, and individuals affected by the COVID-19 pandemic and economic downturn. This article will cover a list of topics about the tax-related provisions of the CARES Act for businesses.
- Employee retention credit
- Payroll and self-employment tax payment delay
- Pension funding delay
- Temporary repeal of taxable income limit for NOLs
- Acceleration of corporate AMT liability credit
- Interest expense deduction temporarily increased
- Modification of limitation on losses for non-corporate taxpayers
- Bonus depreciation for qualified improvement property
- Charitable deduction liberalizations
Employee Retention Credit
The new law provides a refundable payroll tax credit on 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to employers with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. The credit is available to businesses and non-profits but not government entities. The credit also is not available to employers receiving Small Business Interruption Loans.
For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether an employee is furloughed. For employers with more than 100 full-time employees last year, only the wages of furloughed employees or those with reduced hours as a result of closure or reduced gross receipts are eligible for the credit. Eligible wages include health benefits and is capped at the first $10,000 paid by an employer to an eligible employee. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
Payroll and Self-Employment Tax Payment Delay
Employers must withhold Social Security taxes at a rate of 6.2% from wages paid to employees. Self-employed individuals are subject to self-employment tax (SE tax). The CARES Act allows many employers to defer paying the employer portion of Social Security taxes and eligible self-employed individuals to defer 50% of the SE tax based on 12.4% of self-employment income through December 31, 2020. Instead, employers and self-employed can pay 50% of the amounts due by December 31, 2021 and the remaining 50% by December 31, 2022.
UPDATE: With passing of the PPP Flexibility Act, this delay is available regardless of receiving PPP funds.
This relief is not available if the taxpayer has debt forgiveness under the CARES Act for certain loans under the Small Business Act. Applicable employment taxes eligible for deferral do not include the 1.45% employer portion of Medicare taxes.
If an employer is part of a PEO or CPEO and directs that company to defer payment of any applicable employment taxes during the payroll tax deferral period, the employer will become solely liable for the payment of the applicable employment taxes before the applicable due dates.
Pension Funding Delay
The CARES Act gives single employer pension plan companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest.
Temporary Repeal of Taxable Income Limit for NOLs
The CARES Act temporarily removes the 80% taxable income limit and allows a net operating loss (NOL) to fully offset income. The new law also modifies the rules to allow NOL carryback to the prior five tax years.
Acceleration of Corporate AMT Liability Credit
The 2017 tax law repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully-refundable. The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and further provides an election to accelerate the refund to 2018.
Interest Expense Deduction Temporarily Increased
The Tax Cuts and Jobs Act (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income. The CARES Act temporarily and retroactively increases the limit on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. There are special rules for partnerships.
Modification of Limitation on Losses for Non-Corporate Taxpayers
The CARES Act temporarily modifies the loss limitation for non-corporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020. Previously, TCJA disallowed the deduction of excess business losses by non-corporate taxpayers for these tax years. An excess business loss is the excess of the 1) taxpayer’s aggregate trade or business deductions for the tax year over 2) the sum of the taxpayer’s aggregate trade or business gross income or gain plus $250,000 (as adjusted for inflation).
Bonus Depreciation for Qualified Improvement Property
The TCJA amended the tax code to allow 100% additional first-year bonus depreciation deductions for certain qualified property. The CARES Act provides a technical correction to TCJA and specifically designates qualified improvement property (QIP) as 15-year property for depreciation purposes, making QIP eligible for 100% bonus depreciation. QIP includes 1) qualified leasehold improvement property, 2) qualified restaurant property, and 3) qualified retail improvement property. The provision is effective for property placed in service after December 31, 2017.
Charitable Deduction Liberalizations
The limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income does not 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.