This article was updated on April 15 to reflect the latest guidance from the Internal Revenue Service.
The Coronavirus Aid, Relief and Economic Security Act (H.R. 748) (the CARES Act or the Act) contains a group of eight provisions that are designed to provide significant tax benefits to businesses. Prompt actions will be needed to take maximal advantage of many of these benefits. Some may be obtained immediately by filing amended returns for prior years, and others may affect employers’ payroll tax deposits and quarterly employment tax returns (the first of which is due next month).
Here is a description of these new tax benefits, including the ones that may require a prompt response by taxpayers. (Please see our overview of the relief package for a look at other provisions in the bill.)
Section 2301 — Employee Retention Credit for Employers Subject to Closure Due to COVID-19
The Act provides a new payroll tax credit equal to 50% of the “qualified wages” paid by an employer to employees with respect to wages paid between March 13 and December 31, 2020. The employee retention credit is available for employers (1) who fully or partially suspend operations due to orders from a government agency due to COVID-19 or (2) who see gross receipts for a given calendar quarter decline by more than 50% compared to the corresponding quarter in the previous year. In the latter case, the employer’s eligibility for the credit will continue until the end of the first quarter thereafter when gross receipts exceed 80% of the gross receipts for the corresponding quarter in the prior year.
For employers with more than 100 employees, “qualified wages” means wages paid to employees who are unable to provide services due to COVID-19 (and the related order from a government agency). For employers with 100 employees or less, “qualified wages” means any wages paid to those employees (regardless of whether or not the employer is open for business or not). The Act treats businesses who are under “common control” or part of an “affiliated service group” as a single employer for purposes of the 100-employee test.
The employee retention credit applies to wages paid and certain qualified health plan expenses incurred by the employer to provide or maintain a group health plan. The credit is capped at $5,000 per employee. The credit will not apply for certain wages already taken into account for purposes of other credits (such as the credits for paid leave time that were included in the prior stimulus package). Also, a business that receives an SBA loan under the new loan program enacted as part of this legislation will not be eligible for the credit.
Any qualified wages paid in excess of the employer’s payroll tax liability is refundable as a credit to the employer. Treasury is also authorized to implement procedures for advance payment of the credits to employers.
The credit acts as an offset against employment taxes otherwise payable by an employer in the quarter (including both FICA and withheld income tax). Any credit amount in excess of that payroll tax liability for the quarter is refundable to the employer. An employer that anticipates such an excess can apply for an advance refund of the amount by filing IRS Form 7200.
A key limitation on the credit, however, is that a business that receives an SBA loan or other benefits under the new program enacted as part of this same legislation will not be eligible for the credit. So employers will need to calculate which benefit will be more valuable to them — the credit or the SBA program.
For many employers, the benefit of this payroll tax credit will begin to be obtained by them as soon as payroll tax deposits would otherwise be due.
Section 2302 — Delay of Payment of Employer Payroll Taxes
The Act also generally allows employers to defer payment of the employer-portion of Social Security taxes (generally 6.2% on employee wages up to $137,700) and allows self-employed individuals a deferral of a corresponding portion of self-employment tax. Such deferred employment taxes are required to be paid in later years, with 50% of such employment taxes due on December 31, 2021, and the remaining 50% due on December 31, 2022. In the case of self-employed individuals, there will also be no estimated taxes due for 2021 or 2022 on account of the deferred amounts.
The deferral will not apply, however, for an employer who receives the benefit of forgiveness of indebtedness under the SBA portions of the Act. Subsequent to the enactment of the Act, the IRS has issued guidance clarifying that an employer who applies for an SBA loan under the Act is allowed to continue to defer payment of the employer portion of Social Security taxes until the date the lender issues a decision to forgive the loan, and that the Social Security taxes that have been deferred up until that point will continue to be deferred until the December 31, 2021 and December 31, 2022 due dates.
Here, again, the deferral of Social Security taxes begins as soon as payroll tax deposits are due.
Section 2303 — Modification of Net Operating Losses
Modifying the change to the net operating loss rules ushered in by the Tax Cuts and Jobs Act, the Act temporarily permits companies to carry back net operating losses incurred in tax years that begin in 2018, 2019 and 2020 back five years. The Act also temporarily does away with the taxable income limitation, allowing a business to fully offset its income with a net operating loss carryback or carryover rather than limiting the possible offset to 80% of taxable income. The modifications are meant to provide liquidity to businesses in the form of tax refunds — although for most taxpayers carryback refunds for losses resulting from the current COVID-19 crisis will not begin to arrive until 2021.
Taxpayers with losses in prior years that can generate carryback refunds will want to file amended returns to obtain those refunds as soon as possible.
Section 2304 — Modification of Limitation on Losses for Taxpayers Other Than Corporations
For taxpayers other than corporations, the Act also modifies the “excess business loss” limitation so that it does not apply to taxable years beginning in 2018, 2019 and 2020. The excess business loss limitation was put into place under the 2017 tax act and applies to pass-through businesses and sole proprietors — generally precluding a taxpayer from using more than $250,000 or, in the case of a joint return, $500,000 in losses from such a business in a particular year to offset other income. The Act’s modification has the effect of deferring the impact of that limitation until 2021. It should not only facilitate taxpayers’ ability to use business losses resulting from the current crisis but should also mean refunds will be available for taxpayers previously affected by the limitation.
Taxpayers who previously have been affected by the limitation on excess business losses will want to file amended returns to obtain tax refunds for those years as soon as possible.
Section 2305 — Modification of Credit for Prior Year Minimum Tax Liability
Under the December 2017 omnibus tax legislation (the 2017 Tax Act), the corporate alternative minimum tax (AMT) was repealed while still allowing taxpayers with corporate AMT credits to receive those credits as refunds over several years. The Act allows corporate taxpayers to accelerate the timeline for receiving the credits to 2020.
Section 2306 — Modification of Limitation on Business Interest
Section 163(j) of the Internal Revenue Code, as amended by the 2017 Tax Act, generally limits a taxpayer’s ability to deduct interest expense each year to an amount equal to 30% of the taxpayer’s earnings before deduction of interest, depreciation and taxes. Under the Act, for tax years beginning in 2019 and 2020 the limitation is increased to 50%. Perhaps more important, the Act also allows a taxpayer to elect to use its 2019 earnings for purposes of computing its 2020 limitation – so taxpayers with 2019 profits and 2020 losses will not be foreclosed from the benefit of interest deductions this year.
Section 2307 — Technical Amendments Regarding Qualified Improvement Property
The Act also retroactively liberalizes the bonus depreciation rules enacted in the 2017 Tax Act so as to allow for bonus depreciation to be claimed on certain costs of improving facilities that would otherwise have to be depreciated over the 39-year period generally applicable to building improvements. The effect is to allow businesses to expense the cost of leasehold improvements and other improvements to real property, which they previously have had to amortize over the 39 years. This fix has been lobbied for by the hospitality industry and other retailers since the enactment of the 2017 Tax Act and should mean that many of these businesses, hard hit by the COVID-19 crisis, may be able to obtain refunds of their 2018 and 2019 taxes as a result of their ability to expense the cost of physical enhancements they made to their premises during those years.
To take advantage of the retroactive feature of this change, businesses will want to file amended returns to obtain tax refunds for prior years as soon as possible.
Section 2308 — Temporary Exception From Excise Tax for Alcohol Used to Produce Hand Sanitizer
The Act also provides that the federal excise tax that normally applies to distilled spirits will not apply to alcohol that is redirected in 2020 for use in the production of hand sanitizer.
As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.