CARES Act Wolters Kluwer
BUSINESS TAX RELIEF FOR COVID-19 Affected Businesses
EMPLOYEE RETENTION CREDIT
The CARES Act grants eligible employers a credit against employment taxes equal to 50 percent of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business or a significant decline in gross receipts. The credit is available to be claimed on a quarterly basis, but the amount of wages, including health benefits, for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters. The provision contains several requirements defining qualified wages, qualified employees, and qualified employers. The credit applies to wages paid after March 12, 2020, and before January 1, 2021.
PAYROLL TAX DEFERRAL
In order to free up employers’ cash flow and retain employees during times of quarantine or shutdown, the CARES Act defers the payment of payroll taxes. Payroll taxes due from the period beginning on the date the CARES Act is signed into law and ending on December 31, 2020, are deferred. The 6.2 percent OASID portion of payroll taxes incurred by employers, and 50 percent of the equivalent payroll taxes incurred by self-employed persons qualify for the deferral. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.
NET OPERATING LOSSES
The Act allows for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business. Businesses will be able to amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carryback. Under current law, only farming NOLs are allowed to be carried back, and the carryback is limited to two years.
The Act also eliminates loss limitation rules applicable to sole proprietors and passthrough entities to allow them to take advantage of the NOL carryback. Additionally, the Act allows for NOLs arising before January 1, 2021, to fully offset income. Under current law, NOLs are limited to 80 percent of taxable income.
MINIMUM TAX CREDITS
The TCJA eliminated the alternative minimum tax for corporations for tax years after 2017, but allowed corporations to claim a refundable portion of any unused minimum tax credits through 2021. The amount of the refundable credit is limited to 50 percent of any excess minimum tax in 2018 through 2020, before being fully refundable in 2021. The Act accelerates the year for which a fully refundable credit can be claimed to 2019, and allows corporations to elect to claim the fully refundable minimum tax credits in 2018.
BUSINESS INTEREST EXPENSE LIMITATION
The TCJA limited the amount of allowable deductions for business interest (regardless of the type of entity) for tax years beginning after 2017. The limitation is generally the amount of business interest income for the year plus 30 percent of the taxpayer’s adjusted taxable income for the year. The limitation does not apply to taxpayers with average annual gross receipts for the prior three years below an inflation-adjusted amount. For 2020, this amount is $26 million or less.
The Act increases the limitation amount to 50 percent of the taxpayer’s adjusted taxable income for 2019 and 2020 (with a special allocation election required for partnerships for 2019). In calculating the limitation for 2020, the taxpayer may elect to use adjusted taxable income for 2019.
QUALIFIED IMPROVEMENT PROPERTY
When Congress drafted the TCJA, it allowed for 100-percent bonus depreciation rules to apply to all MACRS property with a recovery period of 20 years or less. Before TCJA, qualified improvement property was depreciated as 39-year residential real property, unless it separately qualified as 15-year qualified leasehold improvement property, 15-year retail improvement property, or 15-year restaurant property. Congress eliminated the three separate categories of 15-year improvement properties with the intention of making all qualified improvement property 15-year property. However, it failed to do so, and as a result, qualified improvement property is depreciated as 39-year property and not qualified for bonus depreciation.
The CARES Act corrects this Congressional oversight by defining qualified improvement property as 15-year property, thus allowing 100 percent of improvements to be deducted in the year incurred. The change is made as if included in the TCJA and, thus, is effective for property acquired and placed in service after September 27, 2017.
The closures and quarantines related to the Coronavirus/COVID-19 pandemic have been especially hard on small businesses, which includes restaurants and local retail stores. This technical correction allows any expenses incurred by owners to make improvements to the physical premises related to these businesses to be accelerated into the 2017 or 2018 tax year on an amended return or the 2019 tax year on a return due July 15, 2020.
(information was derived from Wolters Kluwer Tax Briefing Summary dated March 27, 2020)