Reading time: 5 minutes
3/26/20 Update: The House just passed the CARES Act.
There are multiple tax benefits for businesses and business owners in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) we believe will provide some limited relief from the pandemic that is impacting us all. Although the CARES Act still needs to be approved by the House and signed by the President, we expect this to happen shortly. Please see our separate article on individual tax relief measures by clicking here as well as the Payroll Protection Program, which is a loan on very favorable terms and with portions that may be forgiven.
To help you understand what is contained in the Act, we summarize the important points below:
Payroll Tax Delay
The CARES Act allows employers to delay paying 50% of their 2020 employer-side payroll taxes until December 31, 2021, and then the other 50% until December 31, 2022. In essense, this is a short term, interest-free line of credit for businesses with employees where payment is due at the end of 2021 and 2022.
The more employees a business has, the larger the line of credit. The employer-side payroll taxes would consist of the 6.2% Social Security portion of payroll taxes but would not include the employer Medicare, employee-side of those same taxes or the employees’ income tax withholdings.
Self-Employment Tax Delay
Self-employed individuals generally pay their “payroll taxes” as self-employment taxes either through quarterly tax estimates or payment with their income tax returns. The CARES Act allows for payment of half tax year 2020 self-employment taxes to be paid by the end of 2021 and 2022. This provision does not impact the other half of 2020 self-employment taxes, nor does it allow for a deferral of paying regular income taxes so your 2020 quarterly estimated tax payments may be reduced, but likely will not be eliminated.
Employee Retention Credit
The CARES Act establishes a new Employee Retention Credit (ERC) for businesses that were either forced to shut down or experienced a severe drop in revenue due to COVID19. This credit can offset the employer’s share of Social Security tax.
Qualifying for the ERC sounds complicated, but if you were either required to suspend your operations during a calendar quarter due to government order OR if your business had a 50% drop in revenue as compared to the same quarter in 2019, you might qualify. The credit is designed to lessen the blow of continuing to pay employees while revenue has dropped.
The ERC is equal to 50% of the employer-side of payroll taxes paid on qualified wages and health insurance premiums for each employee for the impacted quarter. The total amount of wages and insurance premiums is limited to $10,000 per employee for the year. You are not able to double-dip on the ERC for amounts you are receiving a credit under the new family medical leave or sick leave.
Payroll Tax Credit Refunds
Although the Families First Coronavirus Response Act previously established credits for employers to fund for paid time off to employees who need to be away from work for COVID-19 related medical needs and to care for children who may be out of school, the CARES Act does provide for the funding mechanism of these payroll tax credits.
Net Operating Losses
For 2018 and forward, Net Operating Losses (NOL) have generally only been allowed to be carried forward. The CARES Act changes that and allows NOLs to be carried back for 2018, 2019, and 2020 and the carryback period is five years. This means that a 2018 NOL can be carried back to the 2013 tax year. If someone has an NOL for a prior year, this will be extremely helpful right now because the carryback can be done currently. For those who have NOLs in 2020 and were previously profitable, this will also be helpful in the future, providing cash flow from carryback claim refunds.
Additionally, for losses incurred after 2017, the NOL had an 80% usage limitation when carried forward. The CARES Act provides 100% usage for losses carried to 2019 and 2020, which may impact filings being worked on today.
Employer Paid Student Loan Payments
The CARES Act allows for an employer to pay up to $5,250 of student loan payments tax free to its employees. This $5,250 limit is combined with the existing tax-free tuition payments allowed so that an employer can pay up to $5,250 of combined student loan and tuition payments on a tax-free basis to an employee.
The CARES Act allows for the delay of required minimum contributions to single-employer retirement plans until 2021.
Corporations generally have had a 10% charitable deduction limitation. Under the CARES Act, this has been increased to allow for charitable contributions subject to a 25% income limitation.
Certain taxpayers have had limitations on the ability to deduct interest expense after our last round of tax changes. The CARES Act relaxes the limitations imposed on these companies by increasing the threshold from 30% to 50% of adjusted taxable income for 2019 and 2020. Additionally, a business can choose to utilize its 2019 income when computing its 2020 interest limitation, which will be helpful since the likelihood of businesses having any taxable income in 2020 has been decreased due to the impact of COVID-19.
Excess Business Loss Limitations
With prior tax law changes, individuals were limited in utilizing net business losses for offsetting other income. The CARES Act temporarily removes this limitation for 2018, 2019, and 2020. This provides a great opportunity for anyone who was previously limited.
Qualified Improvement Property
The CARES Act has provided a technical correction to the depreciable life of qualified improvement property that many CPAs and business owners have been waiting for, allowing the depreciation benefits originally intended for these types of assets.
Several of the above relief measures are timing delays, which helps liquidity today, but businesses need to plan for the repayment of these amounts in the future. Businesses that do not plan for the repayment may just be kicking the can down the road, so please be prepared for the future payback if you are delaying payment of payroll taxes, retirement contributions, self-employment taxes, etc. Additionally, a lot of these delay measures are highly technical, and as such, no action should be taken without discussion with your tax and other advisors.
Based on what we know today, you should consider these six tactics:
There is a ton to digest in the CARES Act, and we will be learning more about it daily. Some of our initial interpretations may even change based on further guidance. However, there are a few things that we should be doing once the CARES Act is signed into law:
- If you are having a cash flow crunch, you may want to consider delaying payment of 2020 payroll (employer-side only) or minimum retirement contributions.
- If you are self-employed and pay quarterly tax estimates, you may want to consider adjusting your 2020 estimates.
- If you experienced a downturn in business and want to continue to pay employees, you will want to explore the employee retention credit.
- If you have an NOL from 2018 or 2019, you should consider carrying that loss back for a refund of prior taxes.
- If you have employees with student loan obligations, you may want to consider restructuring pay or bonuses to provide for some tax-free benefit of their loan payments.
- If you had business loss limitations in 2018, you might want to consider amending tax filings.
We’ll continue to keep you updated. For additional information, call us at 949-860-9892 or click here to contact us.