The following is a summary of certain key tax provisions relevant to businesses outlined in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”– H.R. 748). The CARES Act provides financial support to businesses and individuals in the wake of the COVID-19 pandemic.
REFUNDABLE TAX CREDIT FOR QUALIFIED SICK LEAVE WAGES & QUALIFIED FAMILY LEAVE WAGES
The CARES Act provides for advanced refunding of the credits provided for in the Families First Coronavirus Response Act (“FFCRA”).
The FFCRA allows a credit for each calendar quarter against an employer’s share of the Old-Age, Survivors, and Disability Insurance (“OASDI”) tax imposed by Section 3111(a) of the Internal Revenue Code of 1986 (“IRC”) on wages paid to its employees, in each case in an amount equal to 100 percent of the “qualified sick leave wages” and “qualified family leave wages” paid by an employer with respect to such calendar quarter.
“Qualified sick leave wages” include wages and compensation paid by an employer to satisfy the requirements of the Emergency Paid Sick Leave Act, subject to the following limitations:
- The credit is limited to $511 per day per individual for persons taking paid leave to care for themselves and $200 per day per individual for persons taking paid leave to care for others.
- The aggregate number of days that may be taken into account in calculating the credit for qualified sick leave wages paid to a single individual is limited to ten (10).
“Qualified family leave wages” include wages and compensation paid by an employer to satisfy the requirements of the Emergency Family and Medical Leave Expansion Act, subject to the following limitations:
- $200 per day per individual; and
- $10,000 total per individual.
The CARES Act amends the FFCRA as follows:
- Allows for advancing of the refundable portion of the tax credit for required paid sick leave and required paid family leave (subject to the original limitations set forth under Sections 7001 and 7003 of the FFCRA);
- Indicates the Secretary of Treasury (“Secretary”) will provide forms and instructions on how to receive an advance of this tax credit; and
- The Secretary will also waive any penalties associated with a failure to make deposits of payroll taxes in anticipation of these credits being available.
EMPLOYEE RETENTION CREDIT
The Employee Retention Credit (“ERC”) is a refundable credit applied to an eligible employer’s share of OASDI or Tier 1Tax, as the case may be, equal to 50% of the qualified wages paid to each employee of such eligible employer on a quarterly basis. The credit is refundable to the extent not used to offset OASDI or Tier 1 Tax for a given quarter.
An employer carrying on a trade or business in 2020 are “eligible employers” for a calendar quarter to the extent such employer:
- had operations fully or partially suspended during any calendar quarter of 2020 due to orders from an appropriate government authority limiting commerce, travel, or group meetings (for commercial, social, religious or other purposes) due to COVID-19; or
- had gross receipts for any quarter in 2020 that were less than 50% of what they were for the same quarter in 2019. The credit will remain available to an employer from such quarter until the employer has a quarter where gross receipts exceed 80% of what they were for the same quarter in the prior year.
Any employer that receives a Small Business Interruption Loan under the Paycheck Protection Program established by the CARES Act will be ineligible for the ERC.
For employers that had on average more than 100 full-time employees in 2019, qualified wages include only those wages paid to employees who are not providing services due to circumstances described in 1 or 2 above. Qualified wages may not exceed the amount an employee would have been paid for working an equivalent duration during the 30 days immediately prior to the relevant period.
For employers that had on average 100 or fewer full-time employees in 2019, qualified wages include all wages paid to employees during a period described in 1 or 2 above, regardless of whether such employees are providing services.
If an employer is allowed a Work Opportunity Credit under Section 51 of the IRC with respect to an employee for a period, the employer may not claim the ERC with respect to such employee for the same period.
Qualified wages are limited to a maximum of $10,000 per employee and do not include wages taken into account in calculating the credit for paid sick leave wages or paid family leave wages under Sections 7001 and 7003 of the FFCRA described above or wages taken into account for purposes of the credit for paid family and medical leave under Section 45S of the IRC.
Tax-exempt organizations described in Section 501(c) of the IRC may claim the ERC.
PAYROLL TAX DELAY
Employers may defer payment of their share (6.2%) of OASDI on wages paid to employees for the period commencing March 27, 2020, and ending on December 31, 2020, until December 31, 2021, on which date 50% of deferred taxes are due, and December 31, 2022, on which date all remaining deferred taxes shall be due. Deposits of such taxes may also be deferred in the same manner.
An employer will not qualify for any payroll tax deferral relief under this provision if it receives any debt forgiveness pursuant to the Paycheck Protection Program.
Self-employed individuals may defer 50% of the OASDI portion of Self-Employment Contributions Act tax (“SECA”) on self-employment income earned for the period beginning March 27, 2020, and ending December 31, 2020, with one-half of the deferred taxes to be due on December 31, 2021 and the balance due on December 31, 2022. Estimated tax payments made in 2020 may be reduced to reflect the deferred taxes without penalty.
INCREASED NET OPERATING LOSS CARRYBACKS & UTILIZATION
Corporate net operating losses (“NOLs”) occurring in taxable years beginning after December 31, 2017, and before January 1, 2021 may be carried back five years. For taxable years beginning before January 1, 2021, deductions of NOLs are not subject to the 80% of taxable income limitation of IRC Section 172(a) such that NOLs may offset 100% of taxable income.
Certain limitations on carrying back farming losses and NOLs incurred by insurance companies under Section 172 of the IRC have also been suspended for such years. Special rules apply to real estate investment trusts (REITs), life insurance companies, and corporations with deferred foreign income.
The CARES Act also suspends the limitation on excess business losses of non-corporate taxpayers under IRC Section 461(l) retroactively to January 1, 2018 so that excess net business losses converted to net operating losses are now subject to the favorable net operating loss changes.
BONUS DEPRECIATION ALLOWED FOR QUALIFIED IMPROVEMENT PROPERTY
The CARES Act reclassifies qualified improvement property as 15-year property, which makes it eligible for 100% bonus depreciation. The Act also makes this reclassification retroactive to all property that was placed in service after December 31, 2017, which would allow any 2018 or 2019 returns to be amended to reflect 100% bonus depreciation.
MODIFICATION OF PRIOR YEAR MINIMUM TAX CREDIT
The CARES Act modifies the credit under Section 53(e) of the IRC for a corporate taxpayer’s prior year minimum tax liability to make any unused portion of the credit for taxable years commencing in 2018 and 2019 50% refundable in 2018 and 100% refundable in 2019. A taxpayer may, however, elect to take the entire refundable minimum tax credit in 2018.
Taxpayers may file an application for a tentative refund for any portion of the credit due by reason of an election to take the entire refundable minimum tax credit in 2018.
ADJUSTED LIMIT ON BUSINESS INTEREST DEDUCTION
For taxable years beginning in 2019 and 2020, the business interest expense deduction under Section 163(j) of the IRC is increased to equal the sum of a taxpayer’s business interest income, 50% (rather than 30% as was the case prior to the CARES Act) of adjusted taxable income, and floor plan financing interest. For taxable years commencing in 2020, taxpayers may elect to use adjusted taxable income from the last taxable year beginning in 2019 for purposes of calculating the limitation.
The increased limit does not apply to taxable years of partnerships beginning in 2019. If a partner is allocated excess business interest by a partnership for 2019, then, unless the partner elects out of the application of this rule, 50% of such excess business interest will be treated as paid or accrued in 2020 and will not be subject to the business interest deduction limitation described in the preceding paragraph, and the balance will be deemed paid or accrued in succeeding years and subject to the deduction limitations (as they were in effect prior to modification by the CARES Act) under Section 163(j)(4)(B) of the IRC.
INCREASED CHARITABLE DEDUCTIONS AND ADJUSTED LIMIT ON DONATIONS OF FOOD INVENTORY
C corporations may elect to treat cash charitable contributions made in 2020 as “qualified contributions” and deduct the same up to an amount equal to the excess of 25% of the taxpayer’s taxable income over all other charitable contributions made during the year, with the excess added to excess charitable contributions with respect to which no such election has been made and carried over to future years. Contributions to supporting organizations or for the establishment of new or maintenance of existing donor-advised funds cannot be treated as “qualified contributions”. For partnerships and S corporations, the election is made at the partner or shareholder level.
In addition, the annual limitation on deductions for charitable contributions of food inventory under Section 170(e)(3)(C) of the IRC is increased for 2020 to 25% of taxable income for C corporations and 25% of aggregate net income for trades or businesses from which the contributions are made for all other taxpayers.
 The credit is also available to offset the Tier 1 tax imposed on employers subject to the Railroad Retirement Tax Act under 3221(a) of the IRC.
This alert does not purport to be a substitute for advice of counsel on specific matters.
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