A significant portion of the changes made in the CARES Act pertain to changes that will benefit all businesses.
Employee Retention Credit
To encourage companies to keep employees on the payroll, the Act includes a provision for a refundable payroll tax credit. Here is how it works:
- Applies to wages paid after March 12, 2020 and before January 1, 2021
- The payroll tax credit is 50% of wages paid by eligible employers for wages paid to certain employees.
- Eligible employers are:
- Employers including non-profits, and
- Whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.
- The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
- The credit is not available to employers receiving Small Business Interruption Loans.
- Eligible employees include:
- For employers that had 100 or fewer full-time employees in 2019 all employee wages are eligible, regardless of furloughs.
- For employers who had more than 100 full-time employees in 2019, only the wages of employees who were furloughed or face reduced hours as a result of their employer’s closure or reduced gross receipts are eligible for the credit.
- Wages include health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee.
- To the extent that the credit exceeds the payroll taxes due for the quarter the excess can be refunded
- IRS is granted authority to advance payments to eligible employers and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipating of receiving the credit.
We will need some additional guidance as to the definition of what “partially suspended” means. From our perspective all companies have been impacted to some degree. If a business is considered “essential” and continues to operate, does that exclude them even though they have been impacted by the COVID-19 crisis? However, if you meet the 50% quarterly receipt reduction this question is not applicable.
It does not appear to be any exclusion for wages paid to the owner of the business unless the definitions are linked to a different bill.
The potential credit is significant, and we will provide further guidance as we receive it to provide more clarity.
Delay of Employer Payroll Taxes
The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. The following are some of the provisions and limitations:
- This would be the employer portion of the social security taxes and not including Medicare taxes
- The deferral period starts on March 27th and goes through December 31, 2020
- The re-payment must be made as follows:
- 50% by December 31, 2021
- 50% by December 31, 2022
The deferral is an interest free loan, but it does have to be paid back. The larger your payroll the greater the benefit.
Treatment of Net Operating Losses (NOL’s)
The 2017 tax legislation significantly changed the ability of businesses to carry losses back. In addition, the amount of the net operating losses that can be used was limited to 80% of taxable income. The 2017 changes also put into place on the ability to deduct “excess business losses” on individual returns.
The CARES Act temporarily changes the rules to provide relief to corporations that pay tax and individuals who had (or will have) business net operating losses from flow-through entities, a Schedule C or Schedule E activities. The changes include:
- The taxable income limitation is removed and NOL’s can be used 100% against taxable income
- The rules limiting loss carrybacks for corporate
taxpayers have changed.
- NOL’s arising in a tax year beginning after December 31, 2018 and before January 1, 2021 can be carried back five tax years preceding the tax year of the loss.
- For individuals the changes include:
- Now can deduct “excess business losses” arising in 2018, 2019 and 2020.
- Based on my reading of the provision, individuals would also be able to carry losses back five years.
We will be reviewing our client files to determine how many clients had net operating losses in 2018 who may benefit this change. Any qualifying net operating loss can now be carried back five years. For example, an NOL on an individual return incurred in 2018 can now be carried back to 2013.
Deductibility of Interest Expense
The 2017 tax law changes limited the amount of business interest deduction to 30% of adjusted taxable income. There were numerous exceptions to this rule and in most cases our clients were excluded based on a $25,000,000 gross receipts test.
The CARES Act temporarily and retroactively increases the limitation of the deductibility of interest expense raising the percentage from 30% to 50% for tax years beginning in 2019 and 2020.
Qualified Improvement Property
This is an item that has been discussed since the passage of the tax bill in 2017. We had several classifications that were all redefined and are now called “qualified improvement property”. The types of property classifications included:
- Qualified leasehold improvement property
- Qualified restaurant property
- Qualified retail improvement property
Unfortunately, during the writing of the 2017 bill the “qualified improvement property “was given a 39-year recovery period thus, making it ineligible for bonus depreciation.
The CARES act provides a technical correction to the 2017 legislation and specifically designates “qualified improvement property” to a 15-year recovery period for depreciation purposes. Accordingly, it is now eligible for bonus depreciation. This is retroactive to any property placed in service after December 31, 2017.