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FEDERAL TAXATION
Washington CARES
Tax relief provided for businesses impacted by coronavirus pandemic
Congress and the administration have been busy this year providing economic assistance to businesses, individuals and others impacted by the ongoing coronavirus pandemic. The largest legislation (to date) was the Coronavirus Aid, Relief,
By Jim and Economic Security (CARES)
Brandenburg, CPA, MST Act, signed into law on March 27. This historic legislation provided over $2 trillion in relief: the largest rescue package in U.S. history. In most tax legislation, there are some changes that provide savings for taxpayers but other provisions that cause higher taxes for certain businesses and individuals. In the CARES Act, things were different, as the tax provisions in the bill were designed to provide liquidity and savings to businesses impacted by the pandemic. There were also several significant loan provisions in the CARES Act, most notably the Paycheck Protection Program (PPP). This article focuses on the tax measures, not the loan provisions. Here are several selected business tax incentives in the CARES Act:
Employee retention credit
The CARES Act offers a refundable payroll tax credit of 50% of wages paid to employees during the coronavirus crisis. This tax credit is available to employers that (1) had their operations partially or fully suspended by the COVID-19 shutdown order or (2) experienced a drop of 50% or more in gross receipts compared with the prior year. The credit is based on wages paid to an organization’s employees and covers the first $10,000 of compensation, including health benefits, paid to an eligible employee. There are separate rules based on the size of the employer: • For employers with more than 100 full-time employees, qualified wages are wages paid to employees when the employer is impacted as described above by the coronavirus pandemic.
• For eligible employers with fewer than 100 full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order. Tax-exempt organizations may also qualify for this employee retention credit. The credit is provided for wages paid or incurred from March 13, 2020, through Dec. 31, 2020. This credit presents opportunities for employers to recover part of their payroll costs if they meet the retention rules. The IRS provided detailed FAQ guidance of nearly 100 questions covering many aspects of this new credit on its website at this link: https:// www.irs.gov/newsroom/faqs-employee-retention-credit-underthe-cares-act.
Deferred payroll taxes
The CARES Act also permits employers and self-employed individuals to defer payment of the employer’s share of the FICA tax of their employees (employers are responsible for paying a 6.2% FICA tax on employee wages). This deferral applies for the period March 27, 2020, through Dec. 31, 2020. The provision allows the deferred payroll tax in this period to be paid over the following two years. One half of the deferred tax would be paid by Dec. 31, 2021, and the other half by Dec. 31, 2022. Further, companies with a PPP loan that is forgiven are also able to use this payroll tax deferral provision. Here is the link to the IRS website for its FAQ on this payroll tax deferral: https://www.irs.gov/newsroom/deferral-of-employment-taxdeposits-and-payments-through-december-31-2020.
You may recall that the Tax Cuts and Jobs Act (TCJA) of 2017 ushered in a new limitation on deducting losses for passthrough businesses and sole proprietors. This new provision started in 2018 and specified that taxpayers were limited to an overall $500,000 loss deduction per year. Any loss above this amount was carried over. CARES removes this new loss limitation, and thus the $500,000 cap does not apply for tax years 2018 through 2020. Several other modifications were made
to this loss limitation beginning in 2021. This tax relief for 2018–2020 allows impacted individuals to use these business losses and should generate cash flow by deducting them. Some taxpayers might be able to amend their 2018 and/or 2019 tax returns to obtain this deduction.
Another TCJA change limited the deductibility of interest expense. This was a complicated provision with many limitations and exceptions, which started in 2018. Generally, the TCJA change limited the interest expense deduction for a business to 30% of its adjusted taxable income (ATI). CARES, however, increased the 30% threshold to 50% of ATI but only for 2019 and 2020. Additional provisions were added for partnerships. This higher deduction level could help businesses deduct more of their interest expense in these challenging times. The IRS offered guidance on the CARES Act changes with interest expense in Rev Proc 2020-22 (https://www.irs. gov/pub/irs-drop/rp-20-22.pdf ).
Changes with net operating losses
The TCJA made several significant changes to the deduction for net operating losses (NOLs). First, the TCJA removed the ability of carrying back NOLs to recover prior years’ tax paid. Next, TCJA limited the amount of income that could be offset by NOLs. The CARES Act softens the new TCJA limitations by first removing the taxable income limitation for NOLs. Next, under CARES any NOLs incurred in 2018, 2019 or 2020 can be carried back five years to obtain a refund of a taxpayer’s prior years’ tax liabilities. This could be a boost to a business struggling this year. This is a complicated measure, so the IRS has offered the following guidance to assist taxpayers incurring NOLs: • Rev Proc 2020-24 (https://www.irs.gov/pub/irs-drop/rp20-24.pdf ) • Notice 2020-26 (https://www.irs.gov/pub/irsdrop/n-20-26.pdf ) • FAQ on NOLs and AMT (https://www.irs.gov/newsroom/ questions-and-answers-about-nol-carrybacks-of-ccorporations-to-taxable-years-in-which-the-alternativeminimum-tax-applies)
Fix for TCJA glitch with qualified improvement property
The TCJA established 100% bonus depreciation for many fixed asset additions. This provides a significant incentive for businesses. Congress, however, made a drafting error in the legislation with “qualified improvement property” (QIP) costs related to improving facilities. The QIP was supposed to be treated as 15-year property and thus entitled to the 100% bonus depreciation. This TCJA glitch, however, relegated the QIP to 39-year straight-line depreciation with no bonus depreciation. Congress had been unable to remedy the QIP glitch over the past several years. A special CARES provision fixes the glitch and thus now allows businesses to use 100% bonus depreciation for QIP. This CARES change could provide a large tax savings for any recent QIP items. Thus, QIP costs can now be written off in one year rather than over a 39-year depreciable life. This change is retroactive for QIP items in 2018 and 2019. The IRS issued Rev Proc 2020-25 to assist taxpayers in adopting this QIP change (https://www.irs.gov/pub/irs-drop/rp-20-25.pdf ).
Businesses are confronted with change on a regular basis. Usually, this entails dealing with customers, vendors, workforce and staffing issues, competition in their industry, technology advances, government regulations and more. This year, however, businesses have been pushed to their limits through the many challenges unleashed by the COVID-19 pandemic. Congress continues to do what it can by offering relief to businesses via several tax incentives designed to keep organizations afloat and their staffs employed during these difficult times.
James D. Brandenburg, CPA, MST, is a tax partner with Sikich LLP, Brookfield. Contact him at 262-754-9400 or jim.brandenburg@sikich.com.
