New and Modified Tax Programs Under CARES Act
April 2, 2020
By: Naomi Smith, K. Dwayne Vande Krol
The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”), signed by President Trump on March 27, 2020 includes several tax provisions intended to provide financial relief and immediate liquidity to business during the economic crisis caused by the COVID-19 pandemic. This package of tax provisions includes a new tax credit, delay of payroll taxes, temporary exception for excise taxes, and relief from certain aspect of the Tax Cuts and Jobs Act of 2017.
Employee Retention Tax Credit
The Employee Retention Tax Credit, summarized below, is based upon qualifying wages an employer may pay during the applicable period. An employer’s eligibility for this credit is not affected by whether the employer is entitled to tax credits for payment of required paid sick leave under the Emergency Paid Sick Leave Act or paid family leave under the Emergency Family and Medical Leave Expansion Act as authorized by the Families First Coronavirus Response Act (“FFCRA”). However, the amount of qualified wages for which an eligible employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA. For more information regarding the tax credits for required paid leave under the FFCRA, the IRS recently published FAQs to assist taxpayers.
Employers receiving loans under the Paycheck Protection Program are not eligible to claim Employee Retention Credits.
An “eligible employer” will be allowed a refundable credit against the employer portion of employment tax (social security and railroad retirement) for each calendar quarter an amount equal to 50% of the “qualified wages” paid after March 12, 2020, through and including December 31, 2020, with respect to each employee. The amount of qualifying wages with respect to each employee which may be taken into account for this credit is limited to $10,000 in the aggregate, resulting in a maximum credit of $5,000 per employee.
Additional details regarding eligibility for this credit, calculation of qualified wages, and limitations are summarized below. Additionally, the IRS recently published IR-2020-62 and FAQs pertaining to the Employee Retention Credit.
Eligible employers are determined on a quarterly basis as follows:
- Any employer carrying on a trade or business during 2020 with respect to any calendar quarter for which:
- the trade or business is fully or partially suspended during the calendar quarter due to orders from a governmental authority limiting commerce, travel, or group meetings due to COIVD-19; OR
- such calendar quarter is within the following period: beginning the first calendar quarter in which the employer’s gross receipts are less than 50% of gross receipts for the same calendar quarter the prior year and ending with the calendar quarter for which gross receipts are greater than 80% of the gross receipts for the same calendar quarter in the prior year.
- A tax-exempt organization described in Code section 501(c) and exempt from tax under Code section 501(a) is an eligible employer if it operated during 2020 and its operations were fully or partially suspended during the calendar quarter due to orders from a governmental authority limiting commerce, travel, or group meetings due to COIVD-19.
- Governmental employers (Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing) are not eligible employers.
- Self-employed individuals are not eligible for this credit for their self-employment services or earnings.
The following guidelines apply to calculating the amount of qualifying wages with respect to each employee which may be taken into account for this credit.
- For employers with 100 or more full-time employees during 2019, qualified wages include only wages paid to employees who are retained but not providing services, not to exceed the amount an employee would have been paid for working an equivalent duration during the 30 days immediately prior to the period for which the employee is not providing services.
- For employers with 100 or fewer full-time employees during 2019, qualified wages includes all wages paid to employees.
- Qualified wages also include the eligible employer’s “qualified health plan expenses” (the amounts paid or incurred by the employer to provide and maintain a group health plan, but only to the extent that such amounts are excluded from the gross income of employees (which generally includes all employer-provided coverage under a group health plan)) as are properly allocable to such wages.
- Qualified wages do not include any wages taken into account for Emergency Paid Sick Leave or Extended Family and Medical Emergency Leave under the Families First Coronavirus Response Act.
- Various aggregation rules apply in determining whether there is a single employee to determine whether employers are over the 100-employee threshold. Further, special rules apply to exclude the wages of related parties.
The credits will be offset against the employer’s portion of social security tax owed, and any excess will be treated as a refundable overpayment. As stated in the IRS FAQs, consistent with its treatment as an overpayment, any excess credit will be applied to offset any remaining tax liability on the employment tax return and the amount of any remaining excess will be reflected as an overpayment on the return. Also, like other overpayments of federal taxes, the overpayment will be subject to offset under Section 6402(a) of the Internal Revenue Code.
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes withheld for employees’ wages. If the anticipated credit exceeds the deposits for that quarter, employers may file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance refund for the amount of the credit in excess of federal employment tax deposits. The IRS provided helpful example:
An Eligible Employer paid $20,000 in qualified wages, and is therefore entitled to a credit of $10,000, and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, on wage payments made during the same calendar quarter. The Eligible Employer has no paid sick or family leave credits under the FFCRA. The Eligible Employer can keep the entire $8,000 of taxes that the Eligible Employer was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on the Form 941. The Eligible Employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.
Eligible Employers will report their total qualified wages and the related credits and will account for any reduction in deposits for each calendar quarter on their federal employment tax returns, usually Form 941, Employer's Quarterly Federal Tax Return.
Note that other rules apply to prevent an employer from “double dipping” with other credits taken by the employer.
Delayed Payment of Payroll Taxes
Employers and self-employed individuals may delay payment of the employer portion of social security tax and corresponding portion of self-employment tax, as applicable, that would otherwise be due for the period beginning on the date of enactment of the CARES Act (March 27, 2020) and ending on December 31, 2020. 50% of the amount of delayed taxes is due on or before December 31, 2021, and the remaining amount of delayed taxes is due on or before December 31, 2022. Taxpayers who received Paycheck Protection Program loans under the Small Business Act and had such loans forgiven may not delay payment of taxes under this section of the CARES Act.
Temporary Exception from Excise Tax
The CARES Act eliminates excise tax on distilled spirits removed after December 31, 2019 and before January 1, 2021, used in or contained in hand sanitizer produced and distributed in a manner consistent with any guidance issued by the FDA related to the outbreak of COVID-19.
Modifications of Business Tax Provisions
The CARES Act contains a number of substantial technical changes to the calculation of losses, limitations on business interests, minimum tax liability for corporate taxation, and changes to the qualified improvement property. A number of these changes may provide needed cash flow and liquidity to businesses through the filing of an amended return for a previous tax year. Below is a high-level summary of these changes.
Net Operating Losses
The CARES Act provides that net operating losses (“NOL”) incurred in 2018, 2019, and 2020 may be carried back to offset taxable income earned during the five-year period prior to the year in which the NOL was incurred. The CARES Act also temporarily removes the taxable income limitation, therefore allowing taxpayers utilize NOLs to offset 100 percent of taxable income in tax years 2018, 2019, and 2020.
Pass-Thru Business Losses
The loss limitation for individuals applicable to pass-thru businesses and sole proprietors has been eliminated retroactively for taxable years prior to 2021. This provision of the CARES Act also turns off active farming loss rules for tax years beginning after December 31, 2017 and before December 31, 2020.
Alternative Minimum Tax
This provision of the CARES Act allows corporations to claim 100% of alternative minimum tax credits in 2019 as fully-refundable and provides an election to accelerate claims to 2018, with eligibility for accelerated refunds.
Modification on Limitation of Business Interest
The CARES Act temporarily and retroactively increased the limitation on net business interest deductions from 30% to 50% of adjusted taxable income for 2019 and 2020. Taxpayers may elect to substitute adjusted taxable income for 2019 for purposes of apply the deduction limitation in 2020.
Special rules for tax partnerships:
- The increased limit from 30% to 50% applies for tax years beginning in 2020 (but not 2019).
- For excess business interest in tax years beginning in 2019, partners can elect to have 50% of that excess business interest treated as business interest paid in 2020 that is not subject to the business interest deduction limitation, and the remaining 50% of that excess business interest subject to the 30% business interest expense limitation can be carried forward.
- Tax partnerships may elect to use their adjusted taxable income from their 2019 tax year for their business interest deductions in their 2020 tax year. This election may be made by the partnership.
Qualified Improvement Property
The CARES Act corrects a drafting error in the Tax Cuts and Jobs Act of 2017 by assigning qualified improvement property a 15-year depreciable life, thereby allowing it to be characterized as “qualified property” eligible for 100% bonus depreciation. Taxpayers may treat the change in law as if it was always in the law. This means that taxpayers may retroactively claim 100% bonus depreciation on qualified improvement property placed in service in 2018 and 2019. Accordingly, taxpayers may want to consider filing amended tax returns.
Modifications of Limitations on Charitable Contributions During 2020
Section 2205 of the CARES Act (Modification of Limitations on Charitable Contributions During 2020) temporarily modifies charitable contribution limitations for individuals, corporations, and food inventory contributions. For corporations, the CARES Act modifies the limitation from 10% to 25% of taxable income. Similar to individuals, if a corporation’s contributions exceed the 25% limitation, the excess contributions may be carried over for the next five tax years, subject to certain limitations. The CARES Act modifies the limitation for food inventory contributions under Section 170(e)(3)(C) from 15% to 25% for both C corporations and non-C corporations.
Additional CARES Act Coverage
- CONGRESS INCREASES APPROPRIATIONS TO CARES ACT PROGRAMS
- CARES ACT ESTABLISHES PAYCHECK PROTECTION PROGRAM
- HOW TO APPLY FOR A PAYCHECK PROTECTION PROGRAM LOAN
- 7 FAQS ON UPDATED GUIDANCE TO PAYCHECK PROTECTION PROGRAM
- PPP LOAN FORGIVENESS: AN OVERVIEW
- BEST PRACTICES TO MAXIMIZE PAYCHECK PROTECTION PROGRAM LOAN FORGIVENESS
- FED LAUNCHES MAIN STREET LENDING PROGRAMS FOR SMALL AND MID-SIZED BUSINESSES
- EXPANSION OF OTHER LOANS PROGRAMS
- CARES ACT: EMPLOYEE BENEFIT PROVISIONS
- WHAT CARES ACT MEANS FOR HIGHER EDUCATION INSTITUTIONS
- CARES ACT PROVIDER RELIEF FUND
- ADDITIONAL DISTRIBUTION FROM CARES ACT PROVIDER RELIEF FUND
- CARES ACT: MORE THAN STIMULUS MONEY
- CARES ACT PROVIDES INCREASED OPPORTUNITIES FOR INDIVIDUALS TO DEDUCT CHARITABLE CONTRIBUTIONS
- MEDICARE ACCELERATED AND ADVANCE PAYMENT PROGRAM
- FEDERAL RELIEF FOR HEALTHCARE PROVIDERS