On March 27, 2020, Congress passed and the administration signed the third in a series of major Coronavirus relief bills called the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The purpose of the Bill is to stimulate the American economy during the Coronavirus pandemic. The CARES Act is arguably the largest change to the U.S. tax system in decades outside of the 2017 Tax Cuts and Jobs Act (TCJA) reforms.
A number of provisions in the CARES Act affect businesses and create numerous tax planning opportunities:
Employee Retention Tax Credit
The most well-known employee retention measure in the CARES Act is the Small Business Administration’s Paycheck Protection Program (SBA PPP). However, the Act also provides a tax credit for employers against their employment tax in the amount of 50% of qualified wages up to $100,000 for each employee.
For large employers with more than 100 employees, qualified wages under the retention tax credit are wages paid to employees when they are not working due to Coronavirus related issues. Smaller employers may qualify all employee wages under the credit regardless of whether the business is open or subject to a shut-down.
Credits apply to the first $10,000 of compensation and the credit is available for qualified wages paid between March 13 and December 31, 2020.
Delay of Payroll Tax Payment
Both employers and the self-employed (Schedule C, 1099, etc.) can defer payment on the employer portion of payroll taxes with respect to their employees. The CARES Act defers the employer 6.2% Social Security payment to December 31, 2020. Thereafter, the deferred payments are due half on December 31, 2021 and half on December 31, 2022. Note that this provision does not forgive payroll taxes, but effectively creates a no-interest loan secured by deferral of a portion of payroll taxes.
One caveat to the deferral is for businesses who have received loans under the SBA PPP, the business is not eligible for deferral. It is unknown at this time whether a business that receives a PPP loan, but later repays the loan would be re-eligible for the deferral.
Net Operating Loss (NOL) Limitations
Under the CARES Act, net operating losses (NOLs) from 2018, 2019, and 2020 can be carried back five years, without regard to the taxable income limitation. This is a substantial change to the NOL carryback rules and greatly enhances most companies’ ability to use likely losses in 2020 to offset earlier profitable years.
Limitation on Business Interest Expense
The TCJA limited the deductibility of business interest expense to 30% of taxable income. The rate and calculation is different for pass-through entities. Under the CARES Act, for 2019 and 2020, the deduction limitation is increased to 50%.
Under the TCJA, corporations were limited to a deduction of 10% of taxable income for charitable contributions. This limit is increased to 25% for contributions made during 2020 and provided that the contribution is made to a public charity. One addition is that food inventory up to 25% of taxable income donated to charity during 2020 may also be deducted.
Fixing the TCJA and the PPP
The CARES Act also included a major fix to the TCJA. Companies can now deduct certain costs associated with improving facilities. This deduction is retroactive to the 2017 Act. The fix for the omission in the TCJA has been long sought after by property developers, retailers, and restaurants, who previously faced uncertainty as to the deductabity of facility improvements.
The CARES Act also provides for funding to the SBA for loans to small businesses as part of the Paycheck Protection Program (PPP). The PPP has been mired in controversy and operating issues and is worthy of its own blog post. The intent of the PPP is to encourage employee retention by providing loans to business which, if used mostly for payroll expense, can later b