CARES Act: Business Tax Provisions

By April 10, 2020 May 19th, 2020 CARES Act
CARES Act: Business Tax Provisions

On March 27, 2020 Congress officially passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. With a $2.2. trillion stimulus deal, the CARES Act marks the largest economic relief package in the history of the United States.

With such a relief package of that size, there is quite a bit to unpack. While the Act provides funding for hospitals, medicines, vaccines and provisions for medical equipment to fight the COVID-19 virus, the bill also contains tax and related relief for businesses and individuals.

While we previously covered the key takeaways of the CARES Act here and looked at the measures for individuals here, now we will explore the major business tax components of the bill.

What are some of the key business provisions of the CARES Act?

1. Small business loans

One of the biggest takeaways of the bill is the $350 billion fund allocated for the Paycheck Protection Program (PPP). The program aims to make small business interruption loans available to companies and certain nonprofit organizations with 500 or fewer employees.

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To qualify, the company or organization must fall under the parameters of “small business” determined by the Small Business Act, during the period between February 15, 2020 and June 30, 2020.

  • The maximum loan amount is the lesser of $10 million or an amount determined using a formula that incorporates the applicant’s payroll, mortgage, other debt and rent payments.
  • Taxpayers may use the loan proceeds for interest on debt obligations incurred before March 1, 2020; payroll support; employee salaries; mortgage payments; rent; and/or utilities.
  • Recipients of PPP loans cannot receive a SBA Economic Injury Disaster Loan (EIDL) for the same purpose.
  • Sole-proprietors are eligible for the loans.
  • Unrelated EIDL loans may be refinanced with this PPP loan.
  • If the loan is not forgiven, there is a maximum term of 10 years and interest cannot exceed 4%.
  • Deferral on repayment of no less than six months and no more than one year.
  • Recipients may receive EIDL (as of January 31, 2020 and beyond) and PPP loans as long as the EIDL loan is not used for payroll and other PPP purposes.
  • No prepayment penalty exists.
  • Certain expenditures can qualify for loan forgiveness.
    • Loans may be forgiven if a firm uses the loan for certain payroll, mortgage interest, rent and utility costs paid within eight weeks of the loan’s origination date.
    • The debt forgiveness is not subject to federal taxation. However, state taxation of such debt forgiveness is far from certain at this time.

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2. Net operating losses

The Tax Cuts and Jobs Act (TCJA) of 2017 limited the amount of taxable income a net operating loss (NOL) could offset to 80%. The CARES Act restores NOL usage to pre-TCJA levels, meaning NOLs can offset 100% of taxable income for 2018, 2019 and 2020 returns. The 80% limit would apply to taxable years beginning after December 31, 2020.

The TCJA also eliminated a taxpayer’s ability to carry back NOLs. The CARES Act allows NOLs from 2018 to 2020 to be carried back five years. Taxpayers with losses in those years should review prior years to determine whether to carry back their NOLs to get tax refunds.

This could result in permanent cash savings if the NOLs are carried back to pre-TCJA years with a higher corporate tax rate (up to 35% tax rate). Keep in mind that the alternative minimum tax (AMT) NOL rules may still be in effect depending on the carryback year. Consequently, you may not be able to offset 100% of prior-year income for AMT purposes.

There are also special rules for real estate investment trusts (REITs), life insurance companies and those taxpayers with Section 965 income inclusion amounts (U.S. shareholders paying a repatriation tax on untaxed foreign earnings).

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3. Excess business loss limitations

Section 461(l), created by the TCJA, limits excess business losses of noncorporate taxpayers. Individuals with business losses from partnerships, S corporations or sole proprietorships can only offset nonbusiness income with a portion of the loss plus a threshold amount of $255,000 for single filers in 2019 ($510,000 for joint filers).

This provision was originally effective for taxable years beginning after December 31, 2017 and before January 1, 2026. The Act delays the effective date until 2021. This could possibly result in amended returns if you have a section 461(l) limitation in prior years.

Once Section 461(l) becomes effective in 2021, wages will no longer be considered business income for the purpose of this limitation. While more taxpayers will likely be subject to this limitation in the future, it will not impact their ability to obtain a refund if subject to this limitation in the past.

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4. Business interest expense limitation

Per Section 163(j), the TCJA limits the interest expense deduction to 30% of a taxpayer’s adjusted taxable income (ATI). The CARES Act increases the ATI limit to 50% for the 2019 and 2020 tax years. In addition, taxpayers can elect to use 2019 ATI for the calculation for their taxable year beginning in 2020.

However, special rules apply to partnerships. The change to 50% does not apply to 2019, thereby deferring any potential benefits from the 50% threshold to 2020. However there are changes to rules at the partner level that allow for additional deductions in 2020. This may result in a somewhat similar outcome as corporate entities.

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5. Qualified improvement property

In a much longed-for technical correction to the TCJA, the CARES Act fixes the so-called “retail glitch” as it relates to qualified improvement property (QIP). As a result of the change, QIP now has a 15-year recovery rate and is eligible for bonus depreciation. Also, QIP now has a 20-year recovery period for purposes of the Alternative Depreciation System (ADS).

This change is retroactive to 2018. Taxpayers that placed QIP in service in 2018 may be able to file an accounting method change (Form 3115) to “catch up” the bonus depreciation on their 2019 return. Taxpayers may also be able to amend their 2018 return to claim bonus (under the “one-year depreciable property” rule). Certain partnerships are restricted from amending returns under the centralized partnership audit regime (CPAR) rules.

The QIP change does not help real property trade or businesses that previously elected out of Section 163(j). Taxpayers that made the irrevocable real property trade or business election to opt out of the business interest expense limitation must depreciate nonresidential real property, residential real property and QIP under the alternative depreciation system (ADS).

ADS property is not eligible for bonus depreciation. Unless Congress changes this rule to provide retroactive relief, electing real property trades or businesses cannot take bonus on QIP. Congress may address this issue in the next round of coronavirus legislation.

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6. Payroll tax deferral

The CARES Act allows employers and self-employed individuals to defer payment of the employer share of the FICA 6.2% payroll tax liability. This deferral applies to wages incurred after the date of enactment through December 31, 2020.

Half of deferred payroll tax liability would be due by December 31, 2021, with the remaining 50% due by December 31, 2022. These late payments are not subject to underpayment penalties.

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7. Employee retention credit

The CARES Act provides a quarterly credit against employer payroll taxes available to employers that experienced a full or partial suspension in their operations, or a 50% decline in gross receipts compared to the same quarter the year before, due to COVID-19. The amount of the credit equals 50% of qualified wages paid or incurred from March 13, 2020 through December 31, 2020, not to exceed $10,000 per quarter.

For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19 related circumstances described above.

The credit is refundable to the extent that it exceeds the employer portion of Social Security taxes reduced by the paid sick leave and paid extended FMLA established by the Families First Coronavirus Response Act.

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8. Amendments to payroll tax credits

The CARES Act amends the Families First Coronavirus Response Act (FFCRA) to make the payroll tax credits refundable for both the emergency sick leave pay and emergency Family and Medical Leave Act (FMLA) pay. Additionally, the Act provides for advances on the credits.

The CARES Act also amends the FFCRA to provide that an eligible employee, solely for purposes of emergency FMLA pay, includes the employees who are rehired by the employer, if such employee had (1) been laid off on March 1 or a later date, and (2) worked for the employer for at least 30 days of the last 60 days prior to being laid off.

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9. Refundable tax credits

Taxpayers with AMT credits will be able to claim a refund for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the TCJA. Also, the 100% MTC refund is available starting in 2018, so taxpayers may either claim the refund on a 2018 tentative claim for refund (“quickie refund”) by December 31, 2020 or request the refund on their 2019 tax return.

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10. Corporate charitable contributions

For 2020, the CARES Act expanded the threshold for corporations making charitable contributions from 10% to 25% of taxable income. Also, the deductible threshold for contributions of food to charitable organizations that use it for the ill or needy also increased to 25% for 2020 donations.

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11. Coronavirus Economic Stabilization Act

In addition to the small business loan program described above, there is a separate $500 billion fund established under the Coronavirus Economic Stabilization Act (CESA) where the Treasury has the authority to make COVID-19 loans, loan guarantees and other investments in support of eligible businesses.

Loan recipients under this program are subject to both employee and executive compensation and stock buyback restrictions, plus they must maintain a specified level of employment for a certain period.

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How can Squar Milner help?

The CARES Act is packed full of tax and business measures that warrant consideration for your business. If you have questions or are looking for someone to strategize with, our Squar Milner tax team is here for you.

Please do not hesitate to reach out to talk through the business provisions laid out in the new legislation.

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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

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