As part of the Federal economic response to the COVID-19 crisis, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provides relief for individuals, businesses, not-for-profits, among others. Below we dive into the most important provisions for businesses and how they will benefit and impact your business.
Employee Retention Credit for Employers (Payroll Tax Credit)
This provision provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.
Eligible employers operating a business during 2020 must have experienced either:
- A partial or full suspension of the operation of their trade or business during the calendar quarter due to governmental orders that limited commerce, travel, or group meetings due to COVID-19
- A significant decline in gross receipts from 2019
A significant decline begins with the quarter in which the gross receipts for the quarter were less than 50% of those in the same quarter in the prior calendar year. The decline ends with the quarter in which gross receipts are greater than 80% of the gross receipts for the same quarter in the prior calendar year.
Qualified wages for employers with 100 or fewer employees qualify for the entire credit. For employers with more than 100 employees, the wages eligible for the credit are the wages paid to employees who aren’t providing services due to circumstances described above.
The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act.
Loan Programs Available Through the SBA and Participating Lenders
The CARES Act includes a Paycheck Protection Program (PPP) which authorizes up to $349 billion of federally guaranteed loans to qualifying small businesses. This new loan program is based on the architecture of the SBA’s existing 7(a) loan program and will make forgivable loans of up to $10 million available to qualifying small businesses. It’s important to note that businesses that qualify and accept the Economic Injury Disaster Loan (EIDL) through the SBA would not be able to receive the PPP loan for the same purpose. Consult with your banker to confirm there are no duplication of uses that may affect your forgiveness.
Forgiveness for Certain SBA-guaranteed Loans
Under the CARES Act, an eligible recipient can request forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period: (1) payroll costs; (2) any interest payments on any covered mortgage obligation; (3) any payment for any covered rent obligation; (4) covered utility payments. Recipients cannot ask for forgiveness exceeding the loan amount.
Under the CARES Act:
- An eligible recipient is the recipient of a covered loan (borrower)
- A covered loan is a loan guaranteed under Sec. 7(a)(36) of the Small Business Act
- The covered period is the 8-week period beginning on the origination date of a covered loan
- A covered rent obligation is rent paid under a lease agreement in force before Feb. 15, 2020
- A covered mortgage obligation is any indebtedness or debt instrument incurred in the ordinary course of business that (A) is the liability of the borrower; (B) is a mortgage on real or personal property; and (C) was incurred before Feb. 15, 2020
- Covered utility payments are payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before Feb. 15, 2020
Net Operating Loss Carrybacks for Losses Generated in 2018, 2019, and 2020
The Act restores the five-year net operating loss (NOL) carryback for losses arising in any taxable year beginning after 2017, but before 2021. A taxpayer may elect to forgo the carryback. Special rules are provided for taxpayers that had a transition tax obligation under Section 965 in one of the carryback years.
Since the enactment of tax reform in 2017, NOLs carried forward are limited to 80% of taxable income for the tax year. The CARES Act suspends this rule until the taxpayer’s first taxable year beginning after 2020 and clarifies that the 80% limitation applies to taxable income computed without regard to deductions for Sections 199A and 250 after taking into account pre-2018 NOL carryovers. It also makes a TCJA-technical correction that had negatively impacted fiscal taxpayers with NOLs generated in a tax year beginning in 2017 and ending in 2018.
Special rules are provided for real estate investment trusts (REITs) and life insurance companies.
Limitation on Losses for Noncorporate Taxpayers
The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020.
Acceleration of Corporate Minimum Tax Credit (MTC)
Since the TCJA’s repeal of corporate alternative minimum tax (AMT), corporations with carryover AMT credits have been able to recover the credits over a four-year period. Under the CARES Act, a taxpayer may claim a refund for any remaining AMT credit carryover in their first tax year beginning during 2019.
An election is available to take the entire credit amount in 2018, but the taxpayer would need to apply for a tentative refund by December 31, 2020.
Deductibility of Interest Expense Increased for 2019 and 2020
The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. Partnerships still remain subject to the 30% limitation for tax years beginning in 2019.
Taxpayers eligible for the 50% limitation may elect to instead use the 30% limitation. All taxpayers, including partnerships, may elect to use their ATI for a tax year beginning in 2019 to compute their Section 163(j) interest deduction limitation for their tax year beginning in 2020. This election will be very beneficial for many businesses.
Partners that are allocated excess business interest expense (EBIE) for tax years beginning in 2019 are able to deduct 50% of that EBIE in tax years beginning in 2020 and the remaining 50% of the 2019 EBIE is subject to the normal Section 163(j) rules.
Technical Correction for Qualified Improvement Property (QIP)
The TCJA eliminated pre-existing definitions for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property and replaced those definitions with one category called qualified improvement property (“QI Property”). Under the TCJA, QI Property falls into the 39-year recovery period for nonresidential rental property, making the QI Property category ineligible for 100% Bonus Depreciation.
The CARES Act provides a technical correction to the TCJA, designating QIP as 15-year property and eligible for 100% Bonus Depreciation. For alternative depreciative system (ADS) purposes, QIP is recovered over 20 years.
Increased Limits on Charitable Contributions for 2020
The limit on a corporation’s deduction of charitable contributions is increased from 10% of taxable income to 25% for 2020. The excess is carried over for five years. Eligible charitable contributions must be made in cash during 2020 and must not be to a Section 509(a)(3) charitable organization or donor-advised fund. The limitation on donated food inventory during 2020 has increased from 15% of taxable income to 25%.
Excess Business Loss Rule Postponed
The Act modifies excess business loss (EBL) rules (EBLs) for noncorporate taxpayers to postpone the effective date of the provision to tax years beginning after 2020.
Taxpayers that filed 2018 tax returns reflecting a EBL would be eligible to file an amended tax return to remove any imposed EBL limitation and receive a refund.
The modifications also included several much-needed technical amendments:
- Clarifying that any EBL is treated as a NOL for subsequent tax years, eligible for carryforward or carryback, if applicable
- W-2 wages aren’t included in the EBL computation
- Stating that the EBL is computed without including a NOL or a Section 199A deduction
- Providing that capital gains are included in the computation of EBL only to the lesser of gains and losses attributable to a trade or business or net capital gain income of the taxpayer
- Net capital losses aren’t included in the computation of EBL
Advanced Credit Refunds for Paid Sick Leave and Paid Family Leave
The CARES Act offers advanced refunding of credits for paid sick leave and paid family that were established under the Families First Coronavirus Response Act (FFRCA)
In anticipation of the credits, including the refundable portion, the credit may be advanced, according to forms and instructions provided by the IRS. The IRS will waive any penalty for any failure to make a deposit of the tax imposed if the IRS determines that the failure was due to the anticipation of the credit allowed.
Telehealth Safe Harbor for High Deductible Health Plans
Eligible individuals who have high deductible health plans can take a deduction for contributions made to health savings accounts. Under the CARES Act, for plan years beginning on or before December 31, 2021, a health plan will not fail to be treated as a high deductible health plan by reason of failing to have a deductible for telehealth and other remote care services. Visit the CMS website for more information on Telehealth services and eligibility for billing these services.
Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed about potential business implications. Visit our COVID-19 Resource Center for more news, tools and insights you need to know in these uncertain times. Please keep in mind that due to the quickly-changing nature of the COVID-19 pandemic, you should always discuss changes with your Anders advisor, banker or legal counsel.