On Friday, March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides updates to the Families First Coronavirus Response Act (signed into law on March 18, 2020) and also provides a number of temporary and permanent changes to the Internal Revenue Code (“IRC”). The analysis below summarizes the relevant tax provisions of the CARES Act.
Employer Tax Credit
The CARES Act would add an employment tax credit for each calendar quarter equal to fifty percent (50%) of qualified wages paid to each eligible employee for that calendar quarter, up to ten thousand dollars ($10,000) per employee for all calendar quarters. An employer is eligible for this credit if the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders of a governmental authority as a result of COVID-19. Employers are also eligible for this credit if in the first calendar quarter in which the employer has a reduction of gross receipts of more than fifty percent (50%) in a calendar quarter as compared to the same calendar quarter in the prior year, and eligibility for the credit continues in each calendar quarter as long as the employer has a reduction of gross receipts of more than eighty percent (80%) reduction of gross receipts from the calendar quarter in the prior year.
For employers with more than one hundred (100) full-time employees, qualified wages are only those wages paid to employees during the period that the employees are not providing services due to COVID-19. For employers with one hundred (100) or fewer full-time employees, all employee wages paid during the applicable period qualify for the credit, whether or not the employee is providing services to the employer. The amount of the credit is reduced by any credits allowed under Sections 7001 or 7003 of the Families First Coronavirus Relief Act. Lastly, employers are not eligible for this credit if the employer receives any small business interruption loans pursuant to section 1102 of the CARES Act.
Extension Payment of Employer Payroll Taxes
Employer payroll taxes for the period beginning on the date the CARES Act is enacted until the end of the year are deferred. Fifty percent (50%) of those taxes are deferred until December 31, 2021, and the remaining fifty percent (50%) are deferred until December 31, 2022—similar provisions apply to self-employed individuals, however, fifty percent (50%) of the self-employment tax still needs to be remitted on the existing deadlines.
Modification of Net Operating Losses
The Tax Cuts and Jobs Act (the “TCJA”), which was enacted in 2017, eliminated net operating loss carrybacks for certain years. Under the TCJA, Net Operating Losses (“NOLs”) arising after 2017 could be carried forward indefinitely, but were limited to eighty percent (80%) of taxable income in the relevant period. These rules were changed by the CARES Act to allow NOLs arising in tax years 2018, 2019 and 2020 to be carried back five (5) years. In addition, the eighty percent (80%) limitation created by the TCJA has been eliminated for tax years beginning before January 1, 2021, temporarily allowing NOLs to offset up to one hundred percent (100%) of a taxpayer’s current taxable income. Taxpayers cannot carryback back NOLs to offset foreign subsidiary earnings deemed repatriated under IRC section 965; however, taxpayers can elect to exclude any tax years in which the foreign earnings were included in gross income from the calculation of the five (5) year carryback period. Lastly, Real Estate Investment Trusts (“REITs”) will not be able to carry back losses, and losses may not be carried back to any REIT year.
Temporary Modification of Limitation on Losses for Taxpayers Other Than Corporations
As a result of the TCJA, a non-corporate taxpayer’s ability to deduct excess business losses was limited during tax years beginning after December 31, 2017 and before January 1, 2026. Excess business losses are the amount by which the total deductions attributable to all of a taxpayer’s trades or businesses exceed such taxpayer’s total gross income and gains attributable to those trades or businesses plus two hundred fifty thousand dollars ($250,000) ($500,000 in the case of a joint return). The CARES Act amends this limitation so that it applies only to taxable years beginning after December 31, 2020; therefore, excess business losses that would otherwise be disallowed for taxable years 2018 through 2020 will be permitted.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations
The corporate alternative minimum tax (“AMT”) was repealed by the TCJA; however, corporate alternative minimum credits were made available as refundable credits over several years, ending in 2021. The CARES Act accelerates the ability of companies to recover those refundable AMT credits by amending IRC Section 53 to accelerate the corporation’s ability to recover one hundred percent (100%) AMT credits beginning in 2019.
Temporary Modifications of Business Interest Expense
The amount of a taxpayer’s business interest expense allowable as a deduction is limited under IRC section 163(j) to thirty percent (30%) of the taxpayer’s adjusted taxable income; however, the CARES Act temporarily increases the amount of interest expense businesses are allowed to deduct to fifty percent (50%) for 2019 and 2020. Additionally, taxpayers may elect to use their 2019 adjusted taxable income in place of their 2020 adjusted taxable income for purposes of applying the interest expense limitation.
Qualified Improvement Property Fixes
The CARES Act makes technical corrections to IRC Section 168(k) to treat qualified improvement property as fifteen (15) year property for depreciation purposes and makes said properties eligible for bonus depreciation. These corrections are retroactive to the effective date of the TCJA (January 1, 2018).
Refundable Tax Credit for Individuals
The CARES Act provides up to a twelve hundred dollar ($1,200) refundable tax credit for individual filers ($2,400 for joint filers), with additional amounts of five hundred dollars ($500) per child in certain cases. The bill requires the Internal Revenue Service to refund or credit these amounts as quickly as possible, but in no event will any such refund or credit be allowed after December 31, 2020. These amounts are reduced for taxpayers with seventy-five thousand dollars ($75,000) or more in adjusted gross income for individual filers ($150,000 or more for joint filers), and completely phased out above ninety-nine thousand dollars ($99,000) for individual filers ($198,000 for joint filers).
With the sudden changes to several aspects of the law there is added confusion regarding what programs/relief are available; however, ShuffieldLowman’s Corporate and Tax team is here to help clients navigate these changes and to answer questions to assist clients in making those important business decisions.