Title II of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides a number of tax relief provisions for businesses. The provisions are aimed at increasing liquidity and reducing costs of capital, so that businesses can continue operating and keep employees on payroll. The provisions include:
Payroll Tax Credit for Retaining Employees
The CARES Act provides an employee retention credit to eligible employers against the employer’s payroll tax liability.
How much credit can a business get?
The amount of the credit is equal to 50% of the first $10,000 in wages per employee (including the value of benefits from a qualified health plan). The credit cannot exceed the employer’s applicable payroll tax liability for that calendar quarter. The credit is effective for wages paid after March 12, 2020, and before January 1, 2021. For example, if a business has one employee making $10,000, the employer would ordinarily be required to pay $620 (6.2%) in payroll taxes. With the new credit, the employer would only be obligated to pay $310, assuming the conditions are met.
Is my business eligible?
To be eligible for the credit, the employer must have carried on a trade or business during 2020. In addition, the business must meet one of two criteria:
Businesses relying on this second criteria should examine their gross receipts for the calendar quarter and compare them to the gross receipts from that calendar quarter in the prior year. A business is considered to have a significant decline in gross receipts if there was a reduction in gross receipts of at least 50% year-over-year. The ability to take the credit ends once the gross receipts are in excess of 80% year-over-year.
There is also one limitation for businesses that employed more than 100 full-time employees. For such businesses, the credit is only available for employees retained but not currently working due to the crisis.
Deferral of Employer Payroll Taxes
The CARES Act will allow for employers to defer paying their 6.2% share of 2020 payroll taxes from March 27, 2020, through December 31, 2020. The deferred amounts are payable over the next two years – with half due December 31, 2021, and half due December 31, 2022.
Expanded Ability to Use Net Operating Loss Carryovers
The CARES Act suspends some key provisions in the Tax Cuts and Jobs Act (“TCJA”) for net operating loss carryovers. Under current law, net operating losses are subject to limitations based on taxable income and cannot be carried back to prior tax years. Under the CARES Act, a net operating loss of a corporate taxpayer arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, can be carried back five years preceding the taxable year of such loss. In addition, the TCJA’s “80% of taxable income” limitation on net operating losses will not apply to the 2018, 2019, and 2020 tax years. Thus, 100% of net operating losses are generally available for offset in 2018, 2019 and 2020. The CARES Act also modifies the excess business loss limitation applicable to pass-through businesses and sole proprietors, so they can benefit from the carryback rules.
Acceleration of Corporate AMT Credits
Corporate alternative minimum tax (“AMT”) was repealed in the TCJA, but corporate AMT credits were made available as refundable credits over several years until 2021. The CARES Act accelerates the credits, and companies may claim AMT credits immediately to obtain additional cash flow during this crisis.
Limitation on Business Interest Expenses Modified
The net interest deduction limitation, which under the TCJA currently limits businesses’ ability to deduct interest paid on their tax returns to 30% of earnings before interest, tax, depreciation, and amortization, has been expanded to 50% for the 2019 and 2020 tax years.
Costs for Qualified Improvement Property
The CARES Act adopts a few TCJA technical corrections. Businesses may immediately write off costs associated with improving facilities, instead depreciating those improvements over the 39-year life of the building. Companies may thus obtain additional cash flow during this crisis by amending a prior year return.
Temporary Exception from Excise Tax for Alcohol
The excise tax applied on alcohol used to produce hand sanitizer is temporarily suspended for the 2020 tax year. The sanitizer must be produced and distributed in a manner consistent with any guidance issued by the FDA related to COVID-19.