The Coronavirus Aid, Relief and Economic Security (CARES) Act has been approved by both houses of Congress and is expected to be signed into law this afternoon. The CARES Act includes several different tax incentives intended to help workers, families and businesses absorb some of the financial impact of the coronavirus. Some of the key tax incentives include the following:
Modifications of Limitation on Utilization of Net Operating Losses. The 2017 Tax Cuts and Jobs Act (“TCJA”) narrowed a taxpayer’s ability to utilize net operating losses by (a) eliminating the carryback of such NOLs to reduce taxable income in prior tax years and (b) permitting carryforwards of NOLs generated in tax years beginning after December 31, 2017 to offset only up to 80% of the taxpayer’s taxable income. The CARES Act relaxes these limitations by providing that an NOL of a taxpayer (other than a REIT) arising in a tax year beginning in 2018, 2019 or 2020 can be carried back five years. Since carrybacks are made to the earliest of the tax years first, this potentially allows a taxpayer to “recoup” taxes paid at a 35% federal income tax rate during 2015-2017, notwithstanding the fact that the current corporate rate is only 21%. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income for taxable years beginning before January 1, 2021. The CARES Act also extends for 120 days after enactment the ability of a taxpayer to apply for a so-called “quickie” refund, or make or revoke an election not to carryback NOLs.
Modification of Corporate AMT Credit. The corporate alternative minimum tax (AMT) was repealed as part of the TCJA, and any unused corporate AMT credits were made available as refundable credits over a period of several years, ending in 2021. The CARES Act accelerates the ability of corporations to recover those AMT credits, allowing half of the credit in the tax year beginning in 2018 and the remainder in the tax year beginning in 2019. Alternatively, a corporation may elect to claim the entire credit in its tax year beginning in 2018. A corporation that makes this election may apply before December 31, 2020 for a so-called “quickie” refund. In such a case, the IRS is required, within 90 days after the claim is filed, to review the claim, determine the amount of overpayment, and credit or refund the overpayment to the corporation.
Modification of Limitation on Deductibility of Business Interest. The TCJA generally limited the deductibility of business interest expense to 30% of the taxpayer’s adjusted taxable income for the taxable year. The CARES Act increases the amount of business interest expense which taxpayers are allowed to deduct on their tax returns, by increasing the 30% limitation to 50% of adjusted taxable income for any tax years beginning in 2019 (for taxpayers other than partnerships) or 2020 (for all taxpayers, including partnerships). Taxpayers may, if desired, elect not to have this increased limitation apply. The CARES Act also provides that, in determining the interest deductibility limitation for tax years beginning in 2020, a taxpayer may elect to utilize the amount of the taxpayer’s adjusted taxable income generated in the taxpayer’s tax year beginning in 2019.
In the case of business interest incurred by a partnership, the TCJA’s interest deductibility limitation rules generally apply at the partnership level, interest whose deductibility is limited at the partnership level (“excess business interest”) is passed through to the partners of the partnership, and such interest may not be deducted by any such partner unless and until the partnership has excess business income allocable to such partner in subsequent tax years. The CARES Act specifies that, in the case of a partnership for its tax year beginning in 2019, (a) the 30% (rather than 50%) limitation applies to the partnership, but (b) the partner is permitted to treat 50% of the excess business interest allocated to such partner by the partnership for 2019 as business interest which is actually paid by such partner during its first tax year beginning in 2020 and is not subject to either the 30% or 50% limitation.
Employee Retention Credit For Employers Subject To Closure or Significant Decline in Revenue Due To COVID-19. The CARES Act provides a refundable payroll tax credit for 50% of “qualified wages” paid by any “eligible” employer to employees during the COVID-19 crisis. The credit may be claimed against the employer’s share of all Social Security taxes owed by the employer (as reduced by credits against such taxes for qualified sick leave and family leave claimed under applicable provisions of the Family First Coronavirus Relief Act (“FFCRA”)). The employer may obtain a refund to the extent the credits exceed the employer’s social security tax obligations.
An employer generally is treated as an “eligible employer” (i) during any calendar quarter for which the employer’s operations were fully or partially suspended due to orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19 or (ii) beginning with the first calendar quarter after December 31, 2019 for which the employer’s gross receipts are less than 50 percent of the employer’s gross receipts for the same calendar quarter in the prior year and ending with the calendar quarter following the first calendar quarter for which the employer’s gross receipts are greater than 80 percent of the employer’s gross receipts for the same quarter in the prior year. For eligible employers with greater than 100 full-time employees during 2019, “qualified wages” generally include wages paid to employees during period in which they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees during 2019, all employee wages generally qualify for the credit, regardless of whether the wages are paid to an employee who is providing services during the period of the COVID-19 related circumstances described above. There are several limitations, however.
- The credit is limited to the first $10,000 of compensation, including health benefits, paid to any eligible employee for all quarters.
- For employers with 100 or fewer employees, no credit is allowed for wages taken into account under the family leave and sick leave provisions of the FFCRA.
- For employers with more than 100 employees, the maximum amount of wages taken into account with respect to an employee during a period in which the employee is not providing services due to the COVID-19-related circumstances described above may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.
- No credit is allowed to employer’s who receive small business interruption loans under Section 7(a)(36) of the Small Business Act.
- The credit is not allowed for wages paid to any employee for whom the employer is claiming the work opportunity credit.
For purposes of applying the foregoing rules, all persons treated as a single employer under IRC Sections 52(a), 52(b), 414(m) or 414(o) are treated as a single employer. The credit is available for wages paid or incurred from March 13, 2020 through December 31, 2020.
Deferral of Payment of Employer Payroll Taxes. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages, up to a specified wage cap ($137,700 of wages for 2020). Self-employed persons are subject to a corresponding Social Security component of self-employment tax. The CARES Act generally allows employers to defer payment of the employer’s share of Social Security tax which the employer otherwise is required to pay after March 27, 2020 and before January 1, 2021 and, instead, pay such deferred social security tax (without interest or penalty) over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. A similar deferral applies to 50% of the social security portion of the self-employment tax otherwise required to be paid by self-employed individuals after March 27, 2020 and before January 1, 2021. The foregoing deferrals do not apply, however, to taxpayers who have indebtedness forgiven under certain other provisions of the CARES Act.
Modification of limitation on losses for taxpayers other than corporations. The TCJA added limitations on the ability of a taxpayer other than a corporation to utilize net losses from trades or businesses to offset other taxable income and gains of the taxpayer. In particular, such provision prevents taxpayers other than corporations from deducting “excess business losses” in taxable years beginning after December 31, 2017 and before January 1, 2026. The CARES Act relaxes this limitation so that it does not apply to tax years beginning before January 1, 2021. Losses allowed for tax years beginning in 2018, 2019 or 2020 as a result of this change are added to the taxpayer’s NOLs which can then be carried back under the changes made to the NOL rules by the CARES Act (described above).
Modification of limitations on charitable contributions during 2020. Deductions for charitable contributions of cash by (a) corporations generally are limited to 10% of the corporation’s taxable income before taking into account the charitable contribution deduction and (b) individuals generally are limited to 50% (60% for taxable years beginning after 2017 and before 2026) of the individual’s adjusted gross income. The CARES Act increases the limitations on deductions for “qualified” charitable contributions by individuals who itemize their deductions, as well as corporations. For individuals, the 50% or 60% of adjusted gross income limitation is increased to 100% for “qualified” charitable contributions made in 2020. For corporations, the 10% limitation is increased to 25% of taxable income for “qualified” charitable contributions made in 2020. “Qualified” charitable contributions include contributions of cash during 2020 to public charities and private operating foundations described in IRC Section 170(b)(1)(A) other than contributions to supporting organizations or donor advised funds. The CARES Act also increases the limitation on deductions for contributions of food inventory from a trade or business during 2020 from 15% to 25% of the net income from the trade or business.
Bonus Depreciation Eligibility for Qualified Improvement Property. The CARES Act contains a technical correction to the TCJA by classifying “qualified improvements” made to the interior of a building by a taxpayer (e.g., tenant improvements made by a landlord) as 15-year MACRS property, rather than 39-year property. This, in turn, allows such property to qualify for bonus depreciation (which, among other things, requires that the property have a class life of 20 years or less) and, thus, the cost of same can be written off immediately. The amendment is effective as if included in the TCJA and, thus, taxpayers can, if desired, file amended returns to claim this benefit for 2018 or 2019.
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