CARES Act Extends Tax Relief to Businesses Hit Hard by COVID-19

Categories : Coronavirus

Types : Alerts

In addition to providing stimulus checks to most American taxpayers and funding loans to small- to mid-size businesses hit hard by the novel coronavirus (“COVID-19”) pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law March 27, 2020 by President Donald Trump, contains several changes to the federal tax code that will allow businesses to significantly lower, or eliminate, their tax liability for the 2020 tax year. The new law also provides for deferral of employer-funded payroll taxes for 2020 for up to two years.

Removing Limitations on Losses

In recognition of the precarious financial environment produced by the COVID-19 pandemic, the CARES Act amends Section 172(b) of the Internal Revenue Code (the “IRC”) to allow businesses to carryback operating losses generated between January 1, 2018 and December 31, 2020 to each of the five preceding taxable years (real estate investment trusts, otherwise known as REITs, are not permitted to carryback these losses). The CARES Act also amends Section 172(a) of the IRC to allow net operating losses (“NOLs”) of a business to offset up to 100% of taxable income in any taxable year ending before January 1, 2021. Previously, in a change to the statute occasioned by the 2017 Tax Cuts and Jobs Act (the “TCJA”), businesses could only offset up to 80% of taxable income through the application of NOLs.

For taxpayers other than corporations, the CARES Act removes the limitation on excess business losses in tax years beginning in 2018, 2019, and 2020 by amending Section 461(l) of the IRC. Whereas the TCJA limited these taxpayers to no more than $500,000 (in the case of married taxpayers filing jointly) of offsets, now such taxpayers may use losses to offset the entirety of capital gain and other income.

Tax Credit and Payroll Tax Deferral

The CARES Act also extends a potentially valuable tax credit to businesses and allows for the deferral of 2020 payroll taxes for up to two years.

The Employee Retention Tax Credit (“ERTC”) allows eligible employers to receive a refundable quarterly payroll tax credit equal to 50% of qualified wages paid to employees. Up to $10,000 of qualified wages per employee may be applied in calculating the credit. Eligible employers are those whose trade or business is fully or partially suspended during the quarter due to government orders limiting business activity because of COVID-19 or those who experience a 50% decrease in gross receipts when compared to the same quarter in the previous year. For employers with less than 100 full-time employees, qualified wages are all wages paid during the period in which the employer is an eligible employer. For employers with more than 100 full-time employees, qualified wages are wages paid to employees not providing services because of a government order limiting business activity because of COVID-19.

The ERTC applies to wages paid between March 12, 2020 and December 31, 2020. Businesses taking advantage of the Payroll Protection Program, forgivable loans backed by the Small Business Administration to cover payroll and other expenses arising because of the pandemic, may not benefit from the ERTC.

Additionally, the CARES Act allows all employers and self-employed taxpayers to delay payment of the employer portion of payroll taxes through the end of 2020. Half of the deferred payroll taxes must be paid by December 31, 2021 and the remaining half is due by December 31, 2022.

Interest Expense Deduction Increased

The CARES Act also amends Section 163(j) of the IRC by increasing the business interest expense deduction to the sum of (i) business interest income, (ii) 50% of adjusted taxable income, and (iii) floorplan financing interest expense. The TCJA had previously limited the adjusted taxable income component of the sum to 30% of adjusted taxable income. Additionally, taxpayers must elect to substitute 2019 adjusted taxable income for 2020 adjusted taxable income in calculating the deduction.

Montgomery McCracken attorneys are available to assist with applications and have been assisting clients with numerous issues related to COVID-19. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation.