April 1, 2020
Tax Implications of the CARES Act
Published on April 1, 2020
On March 27, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act. The product of a swift bipartisan effort, the CARES Act is designed to provide economic relief for businesses and individuals impacted by the ongoing COVID-19 crisis. The CARES Act comes as a follow up to the Families First Coronavirus Response Act and provides benefits targeted at employers affected by COVID-19. The CARES Act brings a variety of changes to the economic landscape as well as several tax implications to be aware of.
- A refundable payroll tax credit is available for employers (including nonprofits) that retain employees where gross receipts declined by more than 50 percent due to the current crisis, or who had their operations fully or partially shut down by a government order. The credit is 50% of the wages paid by the employer, up to $10,000 per employee per quarter (i.e. $5,000).
- There is also a provision that extends the due date of employer paid Social Security taxes from the date of the legislation through the end of 2020. Half of the tax is due by December 31st, 2021, and the other half is due by December 31st, 2022.
- Certain small businesses, including nonprofits organized under section 501(c)(3), and veteran’s organizations organized under section 501(c)(19) are now eligible for Small Business Administration (SBA) loans if they employ 500 or fewer individuals. These loans are designed to help employers meet their payroll obligations, pay interest (but not principal) on prior loans, and to cover rent and utilities. These loans will be available through banks and credit unions. Some of these loans may be eligible for forgiveness. Additionally, certain Economic Injury and Disaster Loans (EIDL) requirements have been waived for small businesses and nonprofits. Advances of up to $10,000 are available in certain cases. The advance is not required to be repaid, even if the loan is denied.
- Single employer defined benefit pension plans can delay contributions otherwise due during 2020 until January 1st, 2021.
- The provision with possibly the greatest impact is the modification of Net Operating Loss (NOL) rules. NOLs arising in tax years 2018 through 2020 are now able to be carried back up to five years. The 80% of taxable income limitation is also removed and NOLs are allowed to offset 100% of future income, whereas previously under the Tax Cuts and Jobs Act (TCJA), these NOLs were limited to 80%, and could only be carried forward. Related to NOLs, for non-corporate taxpayers, certain excess business losses that were previously carried forward as NOLs will now be eligible for use in the year incurred. Taxpayers should consider the benefits of the extended carrybacks in order to generate immediate cash flow.
- Corporations are now able to accelerate their alternative minimum tax (AMT) credits. AMT was repealed by the TCJA, and the resulting AMT tax credits were to be refunded in tax years 2018 through 2021. Corporations may now recover their full credits in tax years 2018 and 2019, hastening their tax savings.
- The tax treatment of Qualified Improvement Property (QIP) has been changed from the unintended treatment under the TCJA. TCJA categorized QIP as depreciable over 39 years. Under the CARES Act, QIP is now depreciable over 15 years, and is eligible for bonus depreciation. This change is retroactive so taxpayers impacted should consider amending.
- The deduction for business interest expense has been increased. Under the TCJA, the amount of the business interest expense deduction was limited to 30% of adjusted taxable income (ATI). The CARES Act has increased the deductible portion to 50% of ATI for tax years 2019 and 2020. Partners are only able to take advantage of this provision in tax year 2020. For tax year 2020, the 2019 ATI amount may be used to calculate the business interest limitation. This allows the taxpayer to utilize whichever year provides a more advantageous deduction. It is important to note that utilizing the 50% threshold is not mandatory.
- Corporations can now deduct charitable contributions with an increased limitation of 25% of taxable income (prior was 10%).
- Employers may also contribute up to $5,250 towards student loans prior to January 1st, 2021 without the employee including the payment in their taxable income.
The new law contains many other provisions designed to stimulate the economy and limit the impact of COVID-19. We have focused only on the issues that are most impactful to our clients in this article. Because of the wide-reaching impacts, including those that can influence current period income tax provisions, it is important to keep abreast of the developments in the tax arena.
We know these are challenging times and the information is moving fast. We are here to help. If you have any questions about the CARES Act or how it may affect your business, please reach out to the Johnson Lambert Team.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.