Business Tax Provisions in the CARES Act
On March 27, The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed and signed into law to provide economic relief to businesses and individuals impacted by COVID-19. It includes several significant changes to tax law, below is a summary of key provisions that impact businesses.
1. Modifications for Net Operating Losses
A net operating loss (NOL) occurs when a company’s tax deductions exceed its taxable income for a given tax period. Before 2018 the NOLs could be carried back 2 years and carried forward 20 years. After the Tax Reform, Tax Cuts & Jobs Act (TCJA) of 2017, NOLs could only be carried forward indefinitely and the NOL deduction was limited to only 80 percent of taxpayer’s taxable income. The Act temporarily repeals the prohibition on the carryback of NOL by permitting the carryback of NOLs after Dec. 31, 2017, and before January 1, 2021. NOLs incurred in 2018, 2019, or 2020 can carryback to each of the 5 tax years preceding the tax year loss. The Act also temporarily removes the 80% taxable income limitation and allows for taxpayers to fully offset their taxable income for tax years beginning before January 1, 2021.
Individual taxpayers may claim an NOL carryback by either filing an amended tax return for the carryback year or by filing an application for a tentative refund. However, the deadline for filing a Form 1045 is normally only 12 months from the end of the year in which the loss was generated. The Treasury Department and the IRS have granted a six-month extension There is now a six-month extension to file Form 1045, Application for Tentative Refund, and corporations to file Form 1139, Corporation Application for Tentative Refund, with regard to the carryback of a net operating loss that arose in any taxable year that began during the calendar year 2018 and that ended on or before June 30, 2019. Eligible partnerships are now allowed to file amended partnership returns using Form 1065, U.S. Return of Partnership Income. The option to file amended returns only applies to partnerships that filed Forms 1065 and furnished Schedules K-1 for the partnership taxable years beginning in 2018 or 2019.
2. Temporary Repeal of Excess Business Loss Limitations
The TCJA temporarily limited the ability of non-corporate taxpayers to deduct business losses in excess of their business income against non-business income. The tax reform limited the allowable losses that could be deducted for non-corporate taxpayers to $250,000 for individuals and $500,000 for married filing joint taxpayers, in taxable years beginning after December 31, 2017, and ending before January 1, 2026. Any business loss beyond the limits laid out above was carried over as an NOL. The CARES Act lifts this limitation for tax years beginning in 2018, 2019, and 2020, permitting the deduction of business losses in excess of the above threshold. This excess business loss limitation for pass-through business owners does not apply until January 1, 2021. If you had a business loss that was limited in 2018 or 2019 under the excess business loss rules, then you may be able to obtain a refund by filing an amended tax return.
3. Modification of Limitation on Business Interest
In 2017 the tax reform created a limitation on the deductibility of net business interest expense that exceeds 30% of a taxpayer’s “adjusted taxable income.” The CARES Act temporarily modifies the limitation and increases the limit to 50% of adjusted taxable income for 2019 and 2020, potentially increasing interest expense deductions and reducing taxable income. You have the opportunity to amend your return if you already filed your 2019 tax returns and your deduction for business interest was limited.
4. Employee Retention Credit
This provision would provide a refundable payroll tax credit for 50 percent of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in wages and compensation paid by the employer. Wages paid through December 31, 2020, are eligible for the credit. While many tax credits are available when filing a tax return, the employee retention credit works differently in that employers can be reimbursed immediately by reducing their required payroll tax deposits. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS.
5. Delay of Payment of Employer Payroll Taxes
Businesses and self-employed individuals can delay their payroll tax payments. These payments can instead be deferred and paid over the next two years. This applies to wages paid from March 27, 2020, to December 31st, 2020. The payment of the tax is deferred, with 50 percent of the tax payable on December 31, 2021, and the remaining 50 percent of the tax payable on December 31, 2022. This deferral is unavailable to employers who receive a small business paycheck protection loan.
6. Corporate Minimum Tax Credit Accelerated
The corporate alternative minimum tax (AMT) was repealed as part of the 2017 tax reform act. AMT credits from prior tax years could be carried forward as refundable credits over several tax years through 2021. The CARES Act accelerates corporate AMT credits by making any unused credits fully refundable in 2019. Additionally, the CARES Act provides an election to obtain the entire refundable credit amount in 2018.
7. Improvement to the Provision of Qualified Improvement Property
The Act makes technical amendments to make qualified improvement property (QIP) eligible for bonus depreciation. A QIP is any improvement to an interior portion of a building that is a nonresidential real property if the improvement is placed in service after the date the building was first placed in service. Businesses can immediately deduct 100% of the cost of improving facilities, rather than having to depreciate improvements over 39 years. This provision is effective for property placed in service after December 31, 2017. Since the change to qualified improvement property is retroactive to January 1, 2018, taxpayers may have an opportunity to amend their 2018 and 2019 returns to claim bonus depreciation.
8. Charitable Contributions Limits Increased
Businesses are given additional tax incentives to contribute to charities. For corporations, 10 percent of taxable income limitation is increased to 25 percent of taxable income for 2020. This provision also increases the percentage limitation on deductions for contributions of food inventory from 15 percent to 25 percent.
9. Tax Break for Employer-Paid Student Loan Contributions
The Cares Act temporarily expands the qualified educational assistance plans. The Act exempts certain student loan repayments made to or for employees from federal income tax under an employer’s Educational Assistance Program. Employers may contribute up to $5,250 annually toward the payment of an employee’s qualified student loans, and such payment is excluded from the employee’s income. This exclusion applies to student loan payments made by an employer on behalf of an employee between March 27, 2020, and January 1, 2021. Traditionally, these payments are treated as wages, but until December 31, 2020, these payments are excluded from income and payroll taxes. Tax-free treatment of employer contributions toward employee student loan debt is intended to dramatically reduce the nation’s student debt.
