The passage of the much-anticipated CARES Act brings welcome changes to several tax provisions for businesses and adds two new payroll tax benefits. However, some of the credits may not be used if a business is taking advantage of other existing credits or other provisions of the CARES Act, so businesses should carefully weigh the options to determine the greatest benefit.
Employee Retention Credit
What is it and who qualifies?
- A credit against the employer’s 6.2% share of Social Security payroll taxes for 50% of qualified wages paid by a business whose operations were fully or partially suspended due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19.
- The credit is also available to employers who have experienced a greater than 50% reduction in quarterly gross receipts, measured on a year-over-year basis.
- The credit will continue through the end of the quarter in which the business’s receipts exceed 80% of what they were for the same quarter in 2019.
- Gross receipts are determined using the method used for federal income tax purposes.
- The credit is refundable. Refunds can be claimed using the new IRS form 7200.
- Tax-exempt organizations are eligible for the credit.
What are “qualified wages”?
- For employers with greater than 100 employees, qualified wages are wages paid to an employee who is not providing services.
- For employers with not greater than 100 employees, qualified wages are wages paid to any employee.
- Note that if there is more than one business with common control, you may be required to consider those businesses as a single employer when determining if a business is a small business for purposes of the employee retention credit.
- This credit applies to wages paid after March 12, 2020 and before January 1, 2021.
- Qualified wages include the pro rata share of the cost of the employer’s health plan expenses attributable to the employees for which you’re claiming an employee retention credit.
- Only the first $10,000 of wages paid to any employee are eligible for the employee retention credit. The $10,000 wage limit is in effect even if your business is fully or partially closed for more than one quarter.
IRS is granted authority to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit.
Other limitations and rules:
- The credit is reduced by certain other credits, including the credits for Emergency Paid Sick Leave or Emergency Family and Medical Leave Expansion under the Families First Coronavirus Response Act.
- The credit is not allowed to be claimed on wages for which you’re also claiming Work Opportunity Tax Credits or the credit for Employer Paid Family and Medical Leave.
- The credit is not allowed for certain related individuals.
- You must reduce your payroll tax deduction (on your income tax return) by the amount of the Employee Retention Credit claimed.
- This credit is unavailable to those businesses who have received an SBA Section 7(a) loan (a Paycheck Protection Program Loan).
Delay of Payment of Employer Payroll Taxes
How it works:
- Employers may delay paying their 6.2% share of Social Security payroll taxes imposed between March 27, 2020 and December 31, 2020. Half of those deferred payroll taxes must be paid by December 31, 2021. The other half is due by December 31, 2022.
- Self-employed individuals may delay paying half of their 12.4% old-age, survivors, and disability insurance self-employment taxes incurred between March 27, 2020 and December 31, 2020 by way of reduced estimated tax payments. Half of those deferred self-employment taxes must be paid by December 31, 2021, and the other half is due by December 31, 2022.
Other limitations and rules:
- If an employer chooses to defer payroll taxes under this provision, the employer becomes solely liable for the payment of the applicable employment taxes by December 31, 2021 and December 31, 2022. Therefore, an agent, fiduciary, or other person who has control of wages or pays the wages is not subject to potential penalties if the deferred payroll taxes are not paid in a timely manner.
- Any business that benefited from the loan forgiveness provisions of the SBA Section 7(a) loan program (the Paycheck Protection Program Loan) does not qualify for this benefit.
- Any business that had a loan forgiven under Section 1109 of the CARES Act does not qualify to delay payment of employer payroll taxes.
The following provisions revise sections of the Tax Cuts and Jobs Act, which was effective January 1, 2018
Changes to Net Operating Loss Rules
Prior to the passage of the CARES Act, a net operating loss (NOL) could only offset 80% of taxable income in a succeeding year. It was carried forward indefinitely until fully utilized. The CARES Act modifies the NOL rules as follows:
- NOLs incurred in 2018, 2019, or 2020 may be carried back 5 years.
- NOLs carried to the 2019 and 2020 tax returns may offset 100% of taxable income.
Changes to Excess Business Loss Limitations
The Tax Cuts and Jobs Act limited the amount of business losses an individual taxpayer could claim in a year to $250,000 per year, as adjusted for inflation (or $500,000 for individuals who filed a joint return). This applied to business losses reported in years 2018 through 2025. The CARES Act removes the excess business loss limitations for 2018, 2019, and 2020. If you had excess business loss limitations on your 2018 or 2019 tax returns, you may amend to claim the full loss as a result of these changes.
Business Interest Expense Limitations
The Tax Cuts and Jobs Act allowed a business interest expense deduction only to the extent it was less than 30% of “adjusted taxable income.” The disallowed business interest expense was carried forward to future years and treated as business interest in the subsequent year (again, subject to the limitation in that carryforward year).
The CARES Act amends these provisions to allow a business interest expense deduction to the extent the interest is less than 50% of adjusted taxable income in tax years beginning in 2019 or 2020 (rather than 30%). For tax years beginning in 2020, taxpayers may elect to compute their business interest expense limitation using 2019 adjusted taxable income.
The new 50% limitation does not apply to partnerships. However, if excess business interest was allocated to a partner in a tax year beginning in 2019, the partner may utilize 50% of the excess business interest in the next tax year (not subject to the business interest expense limitations). The remaining 50% is subject to the business interest expense limitations.
Qualified Improvement Property Technical Amendment
Qualified improvement property is any improvement made by the taxpayer to the interior portion of a nonresidential building any time after the building was placed in service. Under the Tax Cuts and Jobs Act, Congress intended for it to have a 15-year life and be eligible for 100% bonus depreciation. Because of a drafting error in the Act, it was given a 39-year life (which made it ineligible for 100% bonus depreciation). The CARES Act corrects this error, giving qualified improvement property a 15-year life, which makes it eligible for accelerated bonus depreciation.
This correction is effective as of January 1, 2018. If your business placed qualified improvement property in service and depreciated it over 39 years, you may amend to claim the more favorable 15-year life.
Credit for Prior Year Minimum Tax of Corporations
The CARES Act speeds up the refundable prior year minimum tax credit by allowing the entire refundable credit in 2018. Taxpayers may file an application for a tentative refund prior to December 31, 2020, and the IRS is required refund the money or apply the overpayment within 90 days of the filing date.
Temporary Exemption from Excise Tax for Alcohol Used to Produce Hand Sanitizer
Distilled spirits used to produce hand sanitizer between December 31, 2019 and January 1, 2021 are not subject to the excise tax for alcohol.
There have been continuous changes with regards to relief available for those impacted by the Coronavirus Pandemic. We are monitoring all current events and are here to help you navigate your options in this uncertain time. If you have any questions, please reach out to your MarksNelson advisor for assistance.