On March 27, 2020, the President signed The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The lengthy legislation contains a host of measures as part of a $2 trillion aid package designed to help the suffering economy, businesses, and individuals.

This summary focuses on the business tax relief provisions in Subtitle C of the CARES Act.

Employer Payroll Tax Credit Refunds Based on Paid Leave for Employees under the FFCRA

The bill provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Response Act (FFCRA). The FFCRA requires covered employers to provide Paid Sick Leave and to provide Expanded Family Medical Leave for covered COVID-19 related events. Employers paying these required leave amounts will be reimbursed through tax credits. The CARES Act clarifies that the credits for required Paid Sick Leave and the credits for Expanded FML can be refunded in advance using forms and instructions the IRS will provide sometime soon. Under the CARES act, the IRS is instructed to waive any penalties for failure to deposit payroll taxes if the failure was due to an anticipated payroll tax credit.

Business Tax Provisions of the CARES Act

NOTE: The provisions summarized below relate to wages that are not related to the Paid Leave discussed above. These tax provisions are a separate employer incentive to retain employees during the COVID-19 emergency.

§2301 – Employee Retention Credit:

Who: Employers that close due to the coronavirus pandemic whose:

• Operations were fully or partially suspended, due to a COVID-19-related shut-down order, or
• Gross receipts declined by more than 50% when compared to the same quarter in the prior year, until the gross receipts exceed 80% of the gross receipts for the same calendar quarter in the prior year.
  
  Not available to:
• Employers receiving Small Business Interruption Loans.
• Employers who get a Work Opportunity Credit for the specific employee.

What: Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (limited to $10,000 in wages including health benefits) for each employee. The credit is further limited by the number of employees;

• For employers with 100 or fewer employees, all wages paid qualify for the credit.
• For employers with more than 100 employees, credit eligible wages are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts.

When: The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

How: Taken on annual income tax return forms 941, 940, and a new refund form is TBA.

§2302 – Delayed Payment of Employer Payroll Taxes

Who: Employers and Self-Employed Individuals.

What: CARES Act allows employers and self-employed individuals to defer payment of the employer’s share of the Social Security and Railroad Retirement taxes of 6.2% of wages to the feds.

When: The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision meaning there will be no penalties assessed to the company or the “responsible party” under the onerous trust fund recovery penalty (TRFP).

Exclusions: Penalty waivers for delayed payment will not apply to employers who have their debt forgiven under the SBA Act provisions for COVID-19 relief.

§2303 and §2304 Revised Rules for Net Operating Losses (NOL’s)

Who: All Businesses (corporate and noncorporate taxpayers).

What: Prior to the CARES Act, a NOL was limited by the business’ taxable income. Now an NOL is temporarily unlimited and may fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.

When: The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years of the year preceding the loss.

How: Taken on annual income tax return forms 1120, 1120S, 1065, and 1040 (Schedule C).

§2305 Revised Corporate Alternative Minimum Tax (AMT) Credits

Who: All corporations

What: The CARES Act provision accelerates the ability of companies to recover refundable AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency. The Tax Cuts and Jobs Act repealed the corporate alternative minimum tax and any related outstanding minimum tax credits were to be refunded at a rate of 50% of the credit until 2021. The CARES act revises the refundability of the AMT credit at a rate of 100% beginning in 2019.

When: Begins with 2019 corporate income tax returns.

How: Amend 2019 1120 previously filed or take the credit when the 1120 Corporate return is due.

§2306 Business Interest

Who: All Businesses, with special limitations for partnerships.

What: The CARES Act increased the business expense deduction limitation for interest from 30% of taxable income to 50%. Partnership’s excess interest expense deduction limitations over 50% in 2020 will remain the same.

When: For tax years 2019 and 2020. Partnerships must wait until 2020.

How: Annual income tax return. 1120, 1120S or 1065.

§2307 Bonus Depreciation for Improvements

Who: All businesses.

What: This section will allow businesses to immediately write off expenses related to improving property instead of depreciating it over 39 years. Qualified improvement property (“QI Property”) is (1) qualified leasehold improvement property, (2) qualified restaurant property, and (3) qualified retail improvement property. The CARES Act makes QI Property eligible for 100% bonus depreciation.

When: For property placed in service after 12/31/2017.

§2307 Alcohol Excise Tax Exemption.

Who: Alcohol manufacturers.

What: This section of the CARES Act waives the federal excise tax on distilled spirits used to produce hand sanitizer in compliance with FDA guidance.

When: Effective for 2020.

The CARES Act specifically addresses several other industries. There will likely be more guidance coming out in the coming weeks from the IRS with regard to procedural details. Please consult a qualified tax professional for guidance on your specific facts and circumstances.

By Jeffery D. Trevillion Jr., JTrevillion@dsda.com