On March 27th, Congress passed the CARES Act (Coronavirus Aid, Relief, and Economic Stimulus Act) as a form of financial relief for businesses and individuals during the COVID-19 pandemic. Embedded in the act are the Payroll Protection Program (PPP), Small Business Administration (SBA) debt relief and express loans, and provisions for individuals, to name a few. Most conversations about the act end at the loan provisions and unemployment benefits, however, the CARES Act also includes a range of tax benefits for businesses and individuals. Understanding how these provisions impact your business can be challenging. Here is a brief overview of the tax provisions specific to businesses that may impact you.
Refundable Payroll Tax Credit
This provision allows businesses to claim a credit against payroll taxes for wages paid to employees in 2020. This credit is intended for businesses forced to shut down or suspend operations due to the COVID-19 outbreak or businesses whose gross receipts declined by more than 50 percent compared with the same quarter in 2019. The refundable credit is equal to 50 percent of the first $10,000 of qualified wages paid to an employee during the year.
Delay of Employer Payroll Taxes
Allows businesses impacted by COVID-19 to defer qualified payroll taxes that would normally be due in 2020, including an employer’s share of the Social Security tax component. The business may pay 50% of the required amount by December 31, 2021 and the remaining percentage by December 31, 2022.
The refundable payroll tax credit and the employer payroll payment deferral are not available to employers who have taken the PPP loan or other CARES ACT loan. However, if you were unable to access those loans, you should take advantage of the payroll tax benefits provided under CARES.
Modifications for Net Operating Losses
This modification allows taxpayers to carry net operating losses occurring in 2018, 2019, or 2020 back up to five years, and losses from these years may be carried forward. This allows a net operating loss to offset taxable income for the applicable years.
Non-Corporation Taxpayers Excess Business Losses
The provision modifies a rule from the Tax Cuts and Jobs Act (TCJA) that had limited the ability of non-corporation taxpayers to claim excess business losses through 2026. The modification eliminates these limits for 2020. The TCJA rules still apply to tax years 2021-2026.
Modification of Credits for Corporate Prior Year Minimum Tax Liability
The TCJA eliminated the corporate minimum tax but allows unused credits to offset taxes or be refunded through 2021. The CARES Act allows all credits to be taken or refunded in 2018 and 2019.
Modification of Limitation on Business Interest Expense
The TCJA limited the deduction for annual net business interest expenses to 30% of adjusted taxable income (ATI). The CARES Act increases this limit to 50% of ATI for the 2019 and 2020 tax years.
Technical Correction to Qualified Improvement Property Deduction
The CARES Act resolves an issue in qualified improvement property (QIP) many consider to be long overdue. Under the TCJA, QIP placed in service after 2015 should qualify for a 15-year depreciation recovery period, making this type of property eligible for bonus depreciation, however, the language of this law did not include the tax break.
The CARES Act extends the bonus depreciation to QIP. This tax break is retroactive to September 2017, allowing businesses to file and amend their 2018 return.
While formerly limited to 10%, under CARES, corporations may take a charitable deduction of up to 25% of their taxable income. This modification was put in place to encourage corporate gift-giving during these challenging times.
Most media coverage of the CARES Act focuses only on the PPP or EIDL loans. While the SBA loans provided a much-needed band-aid to our economy during the economic shutdown, there is far more to the CARES Act than just those programs. In addition to business tax law changes, there are several adjustments to individual tax and retirement planning. Consider subscribing to our content as I plan to address the individual provisions in a separate article.