Key tax relief measures designed to provide critical cash flow for businesses.
On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief, Economic and Security (CARES) Act.
This 880-page legislation provides emergency assistance and health care response for individuals, families, and businesses affected by the COVID-19 pandemic. While the CARES Act provides many potential sources of relief for businesses, including Small Business Administration (SBA) loans, this article focuses on the key business tax relief measures in the Act designed to provide critical cash flow for businesses to help maintain operations and continue payroll for employees. Businesses may benefit from these measures to relieve pressure now and, where appropriate, by amending prior tax returns and claiming refunds.
Employee retention credit
Qualifying employers are eligible for a refundable payroll tax credit against applicable employment taxes for an amount equal to 50% of qualified wages. Applicable employment taxes are the Old-Age, Survivors, and Disability Insurance amounts often referred to as Social Security Tax. If businesses are receiving any other tax credits with regard to these employment taxes, the legislation limits or denies any double tax benefit. The credit is provided for the first $10,000 of compensation, including health benefits, paid (or incurred by) the employer to an eligible employee from March 13, 2020 through December 31, 2020.
The credit is available to qualifying employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year.
For employers with 100 or less 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 more than 100 full-time employees, “qualified wages” are wages paid to employees when they are not providing services due to COVID-19-related circumstances.
Deferral of payment for employer payroll taxes
Generally, employers are responsible for paying a 6.2% Social Security Tax with respect to their employees. Self-employed individuals pay both shares—the employer’s 6.2% and the employee’s 6.2%. For wages earned through the end of 2020, the CARES Act permits employers and self-employed individuals to delay remittance of payment to the federal government of the employer’s share of the Social Security Tax over a two-year period. One-half is due December 31, 2021, and the balance is due December 31, 2022.
Business operating losses
Under current tax law, Net Operating Losses (NOLs) for Subchapter C corporations are subject to limitations based on a percentage of taxable income, and those losses cannot be carried back to reduce income in a prior tax year. The Act relaxes these limitations. Now, any Net Operating Loss arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. Also, the losses are not restricted to a percentage of taxable income. As such, losses may be fully used to offset taxable income.
Additionally, loss limitations previously applied to pass-through businesses and sole proprietors as well. The tax rules computed an “excess business loss.” In essence, a business tax loss may have been limited not to exceed $250,000 when business expenses exceeded business income. The Act removes this limitation for such business losses occurring in 2018, 2019, and 2020.
Business interest expense
Generally, businesses are limited in deducting business interest expense to no more than 30% of adjusted taxable income. For 2019 and 2020, business interest expenses will be deductible up to 50% of adjusted taxable income.
Correction of previous tax law—Qualified Improvement Property
The CARES Act provides a technical correction to the Tax Cuts and Jobs Act of 2017 with respect to Qualified Improvement Property. As a result, Qualified Improvement Property now has a depreciation recovery period of 15 years and is eligible for the 100% bonus depreciation. This amendment is retroactively effective December 31, 2017 and applies to property placed in service after that date.
Please be sure to consult with your tax advisor about how these and other potentially beneficial provisions of the CARES Act may affect tax planning for your business.
To learn about recent legislation regarding personal tax relief, please read Relief for Taxpayers Affected by Ongoing COVID-19 Pandemic and CARES Act Brings More Taxpayer Relief from COVID-19 Pandemic.
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The information in this article has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, while this article is not intended to provide tax advice, in the event that any information contained in this article is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein. Note that a few states, including Delaware, have special trust advantages that may not be available under the laws of your state of residence, including asset protection trusts and directed trusts.