The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on Friday, March 27, making it the largest emergency stimulus package in the history of the United States.
The CARES Act comes in response to the coronavirus outbreak as it takes hold around the globe. Its mammoth $2 trillion economic stimulus brings a swell of relief with spending and tax cuts, loans, and lighter guidelines for businesses as they navigate the impacts of COVID-19.
Many of the new provisions offer immediate assistance in providing liquidity for small businesses to keep their doors open and employees on payroll. Other provisions suspended or amended provisions of the Tax Cuts and Jobs Act (TCJA), some resulting in opportunities for taxpayers to amend their returns and receive tax current refunds.
Here’s how the CARES Act provides support for businesses and employees.
For qualifying businesses, employers may be eligible for a refundable payroll tax credit for 50 percent of the wages paid to employees, for up to $10,000 per employee. If your business experienced a decrease of 50 percent or more in gross receipts compared to last year’s quarter or was required to shut down due to the coronavirus, you could be eligible for this credit. This credit is not available if a company qualifies for loan forgiveness in the Paycheck Protection Loan discussed below.
Payroll Tax Delay
Businesses may elect to defer the employer portion of the Social Security tax, from the enactment date of the Act through December 31, 2020, and then pay half of the amount owed by December 21, 2021 and the other half by December 31, 2022. Again, this can’t be used in conjuncture with forgiveness of the Paycheck Protection Loan.
Net Operating Losses
For business taxpayers, the CARES Act reestablishes the five-year net operating loss (NOL) carryback provision for losses occurring in taxable years after 2017 and before 2021. This means that taxpayers can opt to take NOLs incurred in 2018, 2019, or 2020 and carry back those losses five years to offset taxable income. The CARES Act also suspends current law and lifts the NOL limit of 80 percent of taxable income through 2021. Additional losses can be carried forward.
This provision of the CARES Act will provide much-needed cash flow and liquidity for companies to utilize their losses and amend previous years’ returns.
Alternative Minimum Tax Credit
Under current law, the TCJA eliminated the corporate alternative minimum tax (AMT) starting in 2018 which allowed companies to claim a refundable portion of unused credits over a four-year period between 2018 and 2021. However, in an effort to increase cash flow for businesses disrupted by COVID-19, the CARES Act accelerates the availability of these credits, and either allows a company to claim the remaining of its credits in 2019 or elect to use all the credits in 2018.
Excess Business Loss Rule Suspended
Suspending a TCJA change, the CARES Act modifies the excess business loss rules (EBLs) for pass-through entities and sole proprietors by removing the limitation on the deductions of business losses for taxable years beginning before December 31, 2020. These limitation amounts were set at $250,000 for a single filer and $500,000 for joint returns.
A noncorporate business that filed 2018 returns reflecting an EBL is able to file an amended return to reverse any EBL limitations and claim a refund. Some losses and wages are not included in the EBL calculations.
Business Interest Deductions
The TCJA modified Section 163(j) of the Internal Revenue Code to state that the amount of deductible business interest expense in a taxable year cannot exceed the sum of: the taxpayer’s business interest income for the year; 30 percent of the taxpayer’s adjusted taxable income (ATI) for the year; and the taxpayer’s floor plan financing interest expense for the year.
For many taxpayers, the CARES Act increases the limitation from 30 percent to 50 percent for taxable years 2019 and 2020. Although, a partnership must still apply the 30 percent limitation with some modifications.
Qualified Improvement Property
The CARES Act has corrected the long-awaited drafting error involving the expensing of qualified improvement property noted in the TCJA. The error inadvertently removed the alternative 15-year recovery period, which would have allowed 100 percent bonus depreciation for certain interior improvements for non-residential buildings, including qualified leasehold improvements, retail improvements, and restaurant property. Instead, the way the law was written left these improvements ineligible for the bonus depreciation provision and required them to be written off over a recovery period as long as 39 years.
Moving forward, the correction now allows taxpayers that placed qualified improvement property in service in 2018 to retroactively apply bonus depreciation and a 15-year recovery period on the qualified property.
Increased Charitable Contributions
In an effort to incentivize corporations to heighten their charitable contributions during this time of need, the CARES Act temporarily increases the deduction limitation for charitable contributions from 10% to 25% of taxable income for 2020. Similarly, the limitation on donated food inventory is also increased from 15% to 25% of taxable income.
These changes only relate to cash donations and will not be eligible for stocks, real estate, or other non-cash donations. The increase only applies to public charities and will not pertain to certain private foundations or donor-advised funds.
Small Business Administration Paycheck Protection Program
Embedded in the CARES Act is a hearty $349 billion lending program that aims to expand the access and availability of loans to small businesses that are experiencing financial hardship due to the pandemic. Known as the Paycheck Protection Program, the loan is structured to help small businesses stay up and running and keep their workers employed. Loans are 100 percent guaranteed by the SBA and are generally available to businesses with fewer than 500 employees for up to 2.5 times the business’s average monthly payroll over the prior 12 months. The PPP loans can be used for the following expenses:
- Payroll costs (up to $100,000 per employee),
- Group health coverage,
- Business occupancy costs (mortgage interest, rent, and utilities), and
- Interest on other loan obligations.
Businesses may have the loans forgiven for amounts used for these expenses for up to eight weeks from the date of the loan. Loan forgiveness will be limited to no more than 25% of non-payroll costs and will be reduced by reductions in employee compensation or layoffs of employees during the period of February 15, 2020 through June 30, 2020.
There are other SBA loans available to meet working capital needs and normal operating expenses under the Economic Injury Disaster Loan program available directly through the SBA. These loans are capped at $2M with low interest rates and extended repayment terms. Part of this program includes up to a $10,000 emergency grant to pay sick leave, maintain payroll, meet increased costs of materials, make rent or mortgage payments, or repay obligations.
For those industries hardest hit by the coronavirus, $500 billion in emergency lending will go to businesses, states and cities. The airline industry, air cargo firms, and national security firms will receive billions in funds for economic stabilization. Terms of the loan include at least 90 percent of employee retention as of March 24, 2020, limiting employee compensation and severance pay, and the inability to engage in stock buybacks for the life of the loan plus one year.
As we continue to face this unparalleled time, there are resources to help get through it and strategies to plan for the future. Contact me at firstname.lastname@example.org or (805) 963-7811 with any questions or to get started on a tax and financial strategy for your business.