The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, provides direct economic and substantive assistance to taxpayer affected by the COVID-19 pandemic. CARES Act provides various provisions to improve business cash flow by deferring payroll tax liabilities, etc. However, business taxpayers needs to consider the CARES Act provisions carefully before applying and may consult with professionals to determine the best program to apply. Here we discuss key provisions provided by CARES Act.

1.         Income Tax Return and Payment Date Extension

The Treasury Department and Internal Revenue Service (IRS) announced that the federal income tax filing and payment due date is extended from April 15, 2020, to July 15, 2020 in response to COVID-19 pandemic. Many states including New York State and California State also extended the state tax filing and payment due date to July 15, 2020.

2.         Employee Retention Credit

Employee Retention Credit is designed to encourage Eligible Employers to keep employees on their payroll despite experiencing an economic hardship related to COVID-19. Eligible Employers are those businesses, including tax-exempt organizations, with operations that have been fully or partially suspended due to governmental orders due to COVID-19 or that Gross receipts declined by more than 50% when compared to the same quarter in the prior year.

The Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages that Eligible Employers pay their employees. The definition of qualified wages depends, in part, on the average number of full-time employees employed by the Eligible Employer during 2019. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.

The Employee Retention Credit provides an Eligible Employer with a tax credit that is allowed against certain employment taxes. The credit is refundable, which means that Eligible Employers may receive payment of the portion of the credit that exceeds certain employment taxes that are due. In anticipation of receiving the Employee Retention Credit, Eligible Employers can reduce their federal employment tax deposits.

An Eligible Employer may not receive the Employee Retention Credit if the Eligible Employer receives a PPP loan that is authorized under the CARES Act.  An Eligible Employer that receives a PPP loan should not claim Employee Retention Credits.

3.         Employer Payroll Tax Deferral

CARES Act allows employers and self-employed individuals defer the following payroll taxes:

(1)     The employer’s share of Social Security taxes (the 6.2% employer portion up to the wage base amount of $137,700 for 2020).

(2)    The equivalent amount of self-employment tax for individuals with self-employment income (50% of the 12.4% self-employment tax which equals the 6.2% Social Security rate).

Taxes that were due to be submitted during the period beginning on March 27, 2020, and ending December 31, 2020 are eligible for deferral. There is no maximum amount of qualifying payroll taxes that can be deferred. The deferred deposits of the employer’s share of Social Security tax must be deposited by the following dates to be treated as timely (and avoid a failure to deposit penalty):

(1)     On December 31, 2021, 50 percent of the deferred amount; and

(2)     On December 31, 2022, the remaining amount.

This benefit is not available if any debt is forgiven under the Paycheck Protection Program.

4.        Excess Business Loss Limitation (EBL)

TCJA limits the ability of non-corporate taxpayers (pass-through businesses and sole proprietors) to use business losses to offset their non-business income for tax years beginning after December 31, 2017.  Specifically, business losses that exceed business income can only be used to offset $250,000 of non-business income.  Any losses in excess of the amount allowed are carried forward to subsequent years as a net operating loss.

CARES Act delays the effective date of the business loss limitation rules to tax years beginning after December 31, 2020.  As a result, for tax years beginning in 2018 through 2020, business losses are fully deductible against business and non-business income.  Taxpayers whose losses were limited on their 2018 or 2019 tax returns by this provision may have an opportunity to amend these returns to modify the treatment of those losses.

5.         Net Operating Losses (NOLs)

The Tax Cuts and Jobs Act (TCJA) amended net operating losses (NOLs) by placing several limitations on the use of NOLs for the tax years from 2018 forward. TCJA eliminated the ability to carry back NOLs, and NOLs could be used to offset no more than 80 percent of a taxpayer’s taxable income, with any remainder carried forward for use in a subsequent year.   

However, CARES Act provide for a carryback of any net operating loss (NOL) arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, to each of the five taxable years preceding the taxable year in which the loss arises (carryback period), without subject to any taxable income limitations. 

Any taxpayers filed 2018 or 2019 tax returns reporting NOLs subject to the TCJA rules may consider submitting amended tax return to claim additional losses and possibly carry back any unused NOLs. 

6.        Acceleration the Refund of Corporate Alternative Minimum Tax (AMT)

The TCJA eliminated the corporate AMT, but allowed corporations to fully offset regular tax liability with AMT credits. Any remaining AMT credits amount became refundable incrementally from tax years beginning in 2018 through 2021.

For tax years beginning in 2018, 2019 or 2020, corporations could receive a refundable credit equal to 50% of the excess of the MTC for the tax year over the amount of the credit allowable for the year against regular tax liability, any remaining will be refunded in tax year 2021.

The CARES Act accelerates the refund schedule, permitting corporate taxpayers to claim 50% of the refund for 2018 and a 100% for 2019. Alternatively, a taxpayer may elect to claim the entire refundable credit amount for 2018.

7.        Modification to Limitations on Interest Expense

Generally, taxpayers can deduct interest expense paid or accrued in the taxable year. The TCJA limited the amount of deductible business interest expense in a taxable year cannot exceed the sum of:

(1)     the taxpayer’s business interest income for the year;

(2)     30% of the taxpayer’s adjusted taxable income (ATI) for the year; and

(3)     the taxpayer’s floor plan financing interest expense for the year.

The CARES Act increases the 30% threshold up to 50% of adjusted taxable income for 2019 and 2020. Given that a possible economic downtown in 2020, the taxpayer may have a greater ATI in 2019 than 2020. In this scenario, the taxpayer may elect to use 2019 ATI to substitute the 2020 AIT, allowing more deductible interest expense in 2020.

8.        Qualified Improvement Property

Qualified Improvement Property is interior additions to a building after the building has been put into service. For example, leasehold improvements.

According to CARES Act, Qualified Improvement Property will be classified as 15-year property that is depreciable under MACRS and may use the 100% Bonus Depreciation provisions. These technical amendments are retroactive and applicable to property placed in service after December 31, 2017. For taxpayers electing not to claim 100 percent bonus depreciation, QIP is depreciated over 15 years rather than 39 years.

9.        Other Business Tax Relief and Incentives

There are more provisions updated in CARES Act to support business affected by the COVID-19 pandemic. For example, the CARES Act amends the limitation of charitable contributions from 10% of the entity’s income to 25% for 2020.
Kaizen U.S. office is a professional CPA firm, offers complete compliance services and business support, such as bookkeeping, financial statement audit, filing tax return, making payroll, etc. Please consult with Kaizen consultants for more details.