Tax Planning in the Wake of COVID-19: Business Tax Breaks in CARES Act
Significant Changes to Payroll Taxes, Calculating NOLs, and more
Today, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, H.R. 748, a $2 trillion dollar stimulus package aimed at stabilizing and catalyzing the US economy, which has been reeling in the wake of the COVID-19 pandemic.
After over a week of heated negotiations, the bill was first passed in the Senate with a unanimous 96-0, then passed in the House of Representatives after a number of lawmakers rushed back to the Capitol to record their vote. The bill then landed on the President’s desk, who wasted no time in approving it.
In broad strokes, the CARES Act (“the Act”) includes the following:
- $454 billion in emergency lending to businesses, states, and cities through the U.S. Treasury’s Exchange Stabilization Fund, including:
- $25 billion in lending for airlines
- $4 billion in lending for air cargo firms
- $17 billion in lending for firms “critical” to US national security
- $349 billion to the Small Business Administration (SBA) for a “paycheck protection program”
- $153.5 billion in emergency funding for healthcare providers
- $150 billion for a Coronavirus Relief Fund for state and city government expenditures
While the loan and stimulus components are earning the headlines, there are also important tax provisions that will have a major impact on businesses during, and long after, the COVID-19 pandemic.
Key Tax Provisions for Businesses
Employee Retention Credit
- The Act provides for a refundable payroll tax credit of up to 50% of qualified wages (up to $10,000 per employee). Qualified wages includes employer-provided coverage under a group health plan that has been excluded from the employee’s income.
- Applies to calendar quarters starting after 12/31/19 where the qualifying employer’s business (1) has been fully or partially suspended (due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings) or (2) has less than 50% of the gross receipts that it had reported in the same quarter in the prior year. For businesses that qualify for the second condition, the credit can be claimed until the business has a quarter where it has greater than 80% of the gross receipts that it had reported in the same quarter in the prior year.
- For employers with greater than 100 employees – applies to wages for employees not providing services due to the conditions described above. Wages may not exceed the amount such employees would have been paid for working an equivalent duration during the 30 days immediately preceding that period.
- For employers with 100 or less employees – applies to all employees.
- Credit applies to the FICA employer portion (i.e., 6.2% tax) and not the Medicare portion. Any excess is refunded.
- Credit can start in first calendar quarter after 12/31/19 and is calculated on a continual quarterly basis.
- All employees of all corporations that are members of the same controlled group of corporations are treated as employed by a single employer. Also, all employees of trades or businesses (whether or not incorporated) that are under common control are treated as employed by a single employer.
Employer Payroll Tax Deferral
- The Act allows for the deferral of payment of 50% of 2020 employer payroll taxes (attributable to FICA) until 12/31/21. The other 50% is deferred until 12/31/22.
- Also applies to 50% of self-employment taxes (attributable to FICA), which may be significant to individuals.
- Estimated tax payments do not need to include this portion.
- Credit applies to FICA employer portion (or the equivalent for self-employment tax) and not the Medicare portion.
- For the self-employment tax calculation for individual returns, this will require splitting out the Medicare portion on Schedule SE.
Net Operating Loss (NOL) Modification
- The Act grants a five-year carryback period for NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 (i.e., 2018, 2019, and 2020). An election can be made to relinquish the entire five-year carryback with respect to a particular year’s NOL, with the election being irrevocable.
- The Act repeals the new 80% limitation on net operating losses (i.e., 100% net operating losses are allowed to be used) for that three year period.
- For taxpayers with an IRC Section 965 inclusion amount in a prior year that has NOLs that are carried back to such year, the taxpayer is treated as having made the election under IRC Section 965(n) to not apply NOLs to offset the 965 amount.
- Alternatively, a taxpayer can elect to exclude years where there is a 965 inclusion amount from the carryback period. The election must be made by the due date (including extensions) for filing the taxpayer’s return for the first taxable year ending after the date that the bill is passed.
MGO Insights: As part of the 2019 and 2020 tax preparation process, taxpayers should plan to review their accounting methods to determine if any changes would accelerate deductions or defer revenue and ultimately increase NOLs. The IRS is expected to issue guidance shortly on the procedural aspects of the NOL carryback (e.g., whether a Form 1139 (Corporation Application for Tentative Refund) will be allowed given the circumstances to avoid having to amend returns). Further, state conformity should be considered.
Excess Business Loss Limitation
- The Act repeals the excess business loss limitation under IRS Section 461(l) for the 2018, 2019, and 2020 tax years.
- The Act also repeals the $250k ($500k if married filing jointly) cap on losses for unincorporated businesses for that 3 year period (The excess was previously converted to net operating losses) and contains several technical corrections.
MGO Insights: Taxpayers should review the several technical corrections to IRC Section 463(l) to determine if 2018 and 2019 (if filed) tax returns should be amended to claim previously disallowed losses for those years. In addition, state conformity should be considered.
Modifications of Limitation on Business Interest (IRC 163(j))
- For taxable years beginning in 2019 and 2020, the interest limitation on adjusted taxable income (ATI) is increased from 30% to 50%.
- For partnerships, the above rule does not apply – 50% of 2019 excess business interest allocated to a partner is treated as business interest accrued by the partner in 2020 and not subject to the ATI limit. The other 50% is treated the same as any other excess business interest.
- The taxpayer can elect out of either of these provisions.
- A taxpayer can elect to use the ATI for the tax year beginning in 2019 for the tax year beginning in 2020 for purposes of the adjusted taxable income limitation. A short tax year would be prorated for purposes of this election.
MGO Insights: As part of the 2019 tax preparation process, taxpayers should be careful as to positions taken or elections made that may impact the overall ATI calculation. Certain planning can be implemented to increase the overall amount of deductible interest expense.
Technical Amendments Regarding Qualified Improvement Property
- The Act corrects a prior drafting error so Qualified Improvement Property (QIP) can be depreciated over 15 years instead of 39 years.
- QIP is any improvement made by the taxpayer to the interior of a non-residential building that is placed in service after the building’s initial placed in service date other than improvements attributable to elevators, escalators, building enlargements or the building’s internal structural framework.
- This allows a taxpayer to take bonus depreciation on such property.
How the CARES Tax Provisions Will Affect Businesses
The CARES Act represents ‘phase three’ of federal COVID-19 economic stimulus, with further packages in negotiation and likely to be finalized in the coming weeks. Tax provisions from the CARES Act are positioned to have a significant impact on businesses currently struggling due to the COVID-19 pandemic. Business leaders should carefully review all provisions to understand the available opportunities to gain tax relief and increase cash flow during this crisis.
For analysis on how the CARES Act will impact your business, or to schedule a consultation, contact us as soon as you can.