The Coronavirus Aid, Relief, and Economic Security (CARES) Act (HR 748) was signed into law by President Trump on Friday, March 27, 2020. The act includes both tax and nontax measures.
An overview of the act’s key tax provisions for businesses follows.
Net Operating Loss Carrybacks Permitted for Losses Generated in 2018, 2019, and 2020
The act restores the five-year net operating loss (NOL) carryback for losses arising in any taxable year beginning after 2017, but before 2021. A taxpayer may elect to forgo the carryback.
Special rules are provided for taxpayers that had a transition tax obligation under Section 965 in one of the carryback years.
Since the enactment of the tax reform law in 2017, commonly referred to as the Tax Cuts and Job Act (TCJA), NOLs carried forward are limited to 80% of taxable income for the tax year. The CARES Act suspends this rule until the taxpayer’s first taxable year beginning after 2020 and clarifies that the 80% limitation applies to taxable income computed without regard to deductions for Sections 199A and 250 after taking into account pre-2018 NOL carryovers.
It also makes a TCJA-technical correction that had negatively impacted fiscal taxpayers with NOLs generated in a tax year beginning in 2017 and ending in 2018.
Finally, special rules are provided for real estate investment trusts (REITs) and life insurance companies.
Payment of Employer Payroll Taxes Deferred
Employers can defer payment for the employer portion of payroll taxes incurred between the date the CARES Act is enacted through December 31, 2020.
If deferred, the employer would instead pay 50% of this amount by December 31, 2021, and the remaining 50% by December 31, 2022. The eligible payroll taxes are the employer’s portion of Social Security taxes—6.2% of an employee’s wages.
Self-employed taxpayers can also defer the employer’s portion of Social Security taxes in the self-employment tax.
Employee Retention Credit for Employers
Eligible employers may claim a credit against Social Security taxes for each qualifying calendar quarter, equal to 50% of qualified wages, and up to $10,000 for all quarters per employee. The maximum credit may be worth up to $5,000 per eligible employee.
Eligible employers operating a business during 2020 must have experienced either:
- A partial or full suspension of the operation of their trade or business during the calendar quarter due to governmental orders that limited commerce, travel, or group meetings due to COVID-19
- A significant decline in gross receipts from 2019
A significant decline begins with the quarter in which the gross receipts for the quarter were less than 50% of those in the same quarter in the prior calendar year. The decline ends with the quarter in which gross receipts are greater than 80% of the gross receipts for the same quarter in the prior calendar year.
Qualified wages for employers with 100 or fewer employees qualify for the entire credit. For employers with more than 100 employees, the wages eligible for the credit are the wages paid to employees who aren’t providing services due to circumstances described above.
Employers who take advantage of the payroll protection loan—Section 1102 of the act—aren’t eligible. Also, qualified wages don’t include amounts paid for the sick leave credit or The Family and Medical Leave Act (FMLA) credit enacted by HR 6201.
Section 163(j) Limit Increased for 2019 and 2020
The act increases the Section 163(j) interest deduction limitation from 30% to 50% of adjusted taxable income (ATI) for tax years beginning in 2019 or 2020. Partnerships, however, remain subject to the 30% limitation for tax years beginning in 2019.
Taxpayers eligible for the 50% limitation may elect to instead use the 30% limitation. In addition, all taxpayers, including partnerships, may elect to use their ATI for a tax year beginning in 2019 to compute their Section 163(j) interest deduction limitation for their tax year beginning in 2020. This favorable election should be beneficial for many businesses hit hard by the COVID-19 pandemic.
Partners that are allocated excess business interest expense (EBIE) for tax years beginning in 2019 are able to deduct 50% of that EBIE in tax years beginning in 2020 and the remaining 50% of the 2019 EBIE is subject to the normal Section 163(j) rules. This means it’s carried forward to tax years for which the partner is allocated sufficient excess taxable income (ETI) from the partnership.
Qualified Improvement Property
The long-awaited technical correction to qualified improvement property (QIP) is here.
QIP is any improvement made by the taxpayer to the interior portion of nonresidential real property after the building was first placed in service, excluding improvements to enlarge the building, any elevator or escalator, or the internal structural framework of the building.
The fix is retroactive so taxpayers that placed QIP in service in 2018 are able to treat such property as 15-year property eligible for bonus deprecation.
For alternative depreciative system (ADS) purposes, QIP is recovered over 20 years.
Accelerated Recovery of Alternative Minimum Tax Credits for Corporations
Since the repeal of corporate alternative minimum tax (AMT) by the TCJA, corporations with carryover AMT credits have been able to recover the credits over a four-year period. Under the CARES Act, a taxpayer may claim a refund for any remaining AMT credit carryover in their first tax year beginning during 2019 under new Section 53(e).
An election is available to take the entire credit amount in 2018 under Section 53(e)(5). Under this election, the taxpayer would need to apply for a tentative refund before December 31, 2020.
Increased Limitation on Charitable Contributions for 2020
The limitation on a corporation’s deduction of charitable contributions is increased from 10% of taxable income to 25% for 2020.
The excess is carried over for five years. Eligible charitable contributions must be made in cash during 2020 and must not be to a Section 509(a)(3) charitable organization or donor-advised fund.
In addition, the limitation on donated food inventory during 2020 has increased from 15% of taxable income to 25%.
Excess Business Loss Rule Suspended Through 2020
The act modifies excess business loss (EBL) rules (EBLs) for noncorporate taxpayers under Section 461(l) to postpone the effective date of the provision to tax years beginning after 2020.
Those taxpayers that filed 2018 tax returns reflecting a EBL would presumably be eligible to file an amended tax return to remove any imposed EBL limitation and receive a refund.
The Section 461(l) modifications also included several much needed technical amendments to the statute that include:
- Clarifying that any EBL is treated as a NOL for subsequent tax years, eligible for carryforward or carryback, if applicable
- Stating that the EBL is computed without including a NOL or a Section 199A deduction
- That W-2 wages aren’t included in the EBL computation
- Providing that capital gains are included in the computation of EBL only to the lesser of gains and losses attributable to a trade or business or net capital gain income of the taxpayer
- Net capital losses aren’t included in the computation of EBL
Other Notable Business Provisions
Other noteworthy provisions of the act include:
- Any hand sanitizer produced between December 31, 2019, and January 1, 2021, by distillers related to COVID-19 is exempt from excise tax
- Exemption from treating as cancellation of indebtedness (COD) income forgiveness from certain qualifying loans made and guaranteed under the Small Business Act (SBA)
- Advance credits for paid sick leave, a modification to HR 6201
In addition, there are numerous industry-specific provisions impacting the health care, financial, and airline industries.
We’re Here to Help
There are numerous provisions in the CARES Act that could be beneficial to your business, including several retroactive provisions that may help you access an influx of cash. To learn more, contact your Moss Adams professional.