COVID-19: Aid, Relief and Economic Security Act
As a response to the COVID-19 pandemic, on March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act is a spending tax stimulus package providing various types of economic relief. Demers Beaulne, LLP has reviewed the CARES Act and has highlighted the provisions which we believe will be of particular interest to businesses, employers and individuals.
- Modifications to net operating losses
Carry back net operating losses
The CARES Act reinstates the ability for a corporate taxpayer to carry back net operating losses (“NOL”) arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, as a carry back to each of the previous five taxable years.
This measure can result in a refund of taxes paid in those years rather than having to carry those losses forward to use in future years. These carryback rules can therefore have immediate cash flow benefits to taxable corporations that have recent NOL but paid U.S. federal income taxes in prior years.
80% Limitation – Temporary Repeal
The CARES Act also temporarily liberalizes the treatment of NOL carry forwards. For tax years beginning in 2018, 2019 and 2020, taxpayers can take a NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax years before 2018, and (2) a deduction limited to 80 percent of taxable income for NOLs arising in tax years after 2017. This amendment is welcomed for taxpayers as the Tax Cuts and Jobs Act (passed in 2017) only permitted NOL to be carried forward with no possibility of carrying them backwards.
The temporary repeal of the 80% limit along with the new five-year NOL carryback period can therefore have immediate cash flow benefits to taxable corporations.
- Business Interest deduction limit
Section 163(j) of the Internal Revenue Code (“IRC”) limited the deduction for business interest expense to 30% of the taxpayer’s adjusted taxable income (“ATI”). The CARES Act amends section 163(j) IRC as applied to taxable years beginning in 2019 and 2020.
The CARES Act will permit businesses, unless they elect otherwise, to temporarily increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation.
For partnership, the 30% ATI limit remains in place for 2019 but is increased to 50% for 2020. However, unless a partner elects otherwise, 50% of any business interest allocated to a partner in 2019 is deductible in 2020 and is not subject to the 50% (formerly 30%) ATI limitation. The remaining 50% of excess business interest from 2019 allocated to the partner is subject to the ATI limitations. Partnerships, like other businesses, may elect to use 2019 partnership ATI in calculating their 2020 limitation
The temporary 50% threshold along with the ability to use 2019 ATI for 2020 will permit taxpayers to significantly increase interest deductions for 2019 and 2020. Furthermore, to the extent NOL arise as a result of the increased limitation, such NOL will now be available for carryback and will not be subject to the 80% percent limitations.
- Technical amendments regarding qualified improvement property
The CARES Act makes a technical correction to 2017 Tax Cuts Jobs Act (“TCJA”) to certain qualified improvement property by retroactively treating the following:
- interior portion of a building improvements to non-residential real property (qualified improvement property (“QIP”)) as eligible for bonus depreciation (100% write-off) or for treatment as 15-year MACRS property (rather than 39 years) or
- if treated as Alternative Depreciation System property, eligible for a write-off over 20 years.
The CARES Act restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restore 15 years MACRS write-offs for many leasehold, restaurants and retail improvements. These amendments are retroactive to the effective date of the TCJA, December 22, 2017, and are applicable to property placed in service after December 31, 2017.
These amendments will permit taxpayers to file amended returns for the 2018 and claim 100% bonus depreciation on eligible QIP. Alternatively, taxpayers may consider modifying from a 39 year to a 15-year recovery period. These measures will alleviate cash flow constraints during the COVID-19 pandemic.
- Deferral of Non-Corporate Taxpayer Loss Limits
The CARES Act retroactively turns off the excess active business loss limitation rule enacted under 2017 TCJA by deferring its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). Under this rule, active net business losses in excess of $250,000 ($500,000 for joint filers) were disallowed by the 2017 TCJA and were treated as NOL carry forwards in the following tax year.
- Acceleration of Corporate AMT liability credit
The 2017 TCJA repealed the corporate alternative minimum tax (“AMT”) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully refundable.
The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully refundable and further provides an election to accelerate the refund to 2018.
- Modifications to charitable contributions during 2020
The CARES Act provides an increase in the corporate income tax charitable deduction limitation from 10% to 25% of the corporation’s taxable income for 2020 on “Qualified Contributions” made from January 1, 2020, to December 31, 2020. The increase in the deduction limitation is restricted to 2020 charitable contributions only. Any unused charitable contributions carried forward from prior years will not be subject to this increased limitation.
EMPLOYER FOCUSED PROVISIONS
- Employee retention credit for employers subject to COVID-19 pandemic closure
The CARES Act will provide a credit to Eligible Employers who were required to close its operations due to COVID-19 pandemic and who continue to pay employees salaries during this period.
Eligible Employers can qualify for a refundable credit against the employers 6.2% portion of the Social Security payroll tax in an amount equal to 50% of Eligible Wages paid to employees during the COVID-19 crisis.
The maximum amount of wages eligible to be considered for the credit is $10,000 per employee. If the credit for the quarter exceeds the employer’s overall tax liability, the excess is refunded.
Only wages paid during the period between March 13, 2020, and December 31, 2020, is eligible for the credit.
To be an Eligible Employer under the CARES Act, the following conditions must be met:
- The employer must have been carrying on a trade or business during 2020;
- Ordered by governmental authority to suspend or reduce business operations due to COVID-19; and
- Suffered a significant decline in business during a calendar quarter during 2020. An employer is considered to have a significant decline in business if the employer’s gross receipts are 50% or less than the gross receipts of the comparable calendar quarter in the previous year. Once an employer becomes an Eligible Employer on account of a significant decline in gross receipts, the employer remains an eligible for any succeeding calendar quarter until the employer’s gross receipts during that calendar quarter are 80% or more than the gross receipts in the comparable calendar quarter in the preceding year.
For purpose of the CARES Act, Eligible Wages depend on the size of the employer:
- The employer has 100 or fewer full-time employees, eligible wages include all the wages paid by the employer during the calendar quarter; and
- The employer has more than 100 full-time employees, eligible wages paid by the employer to the employee during the calendar quarter for periods in which the employee is not working, but not to exceed the wages that would have been paid to the employee during the 30-day period prior to when the employee was not working.
Employers who take small business loans provided under the Act are not eligible for this credit.
- Delayed payment of employer payroll taxes
The CARES Act provides a delay for the deposit of payroll taxes.
Taxpayers (including self-employed individuals) will be able to defer paying the portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal instalments: one at the end of 2021 and the other at the end of 2022.
The taxes that will be permitted to be deferred is the 6.2 % employer portion of the Social Security Payroll Tax. The relief is not available if the taxpayer has had debt forgiveness under the Act.
- Employers’ loan programs under the CARES Act
Paycheck Protection Program (“PPP”)
PPP loans are 100% federally guaranteed loans to eligible employers intended to maintain their payroll obligations through June 30, with up to 8 weeks of forgiveness for small businesses, self-employed individuals and non-for-profit organizations.
Under this program, Eligible Employers (generally those with 500 or fewer employees) may qualify for a loan up to $10 million determined by 8 weeks of prior average payroll plus an additional 25% of that amount; loan payments will be deferred for six months; If an employer maintains its workforce, the Small Business Administration (“SBA”) will forgive the portion of the loan proceeds that are used to cover the first 8 weeks of payroll and certain other expenses following loan origination.
Businesses are able to apply for a PPP Loan as of April 3, 2020, whereas independent contractors and sole proprietorships can apply for a PPP loans as of April 10, 2020.
Economic Injury Disaster Loans and Loan Advance (“EIDL”)
In response to the COVID-19, small business owners in all U.S. states, and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of $2 million that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. Funds will be made available within 3 days of a successful application, and this loan advance will not have to be repaid.
SBA Express Bridge Loans
This loan allows small businesses who currently have a business relationship with SBA Express Lender to access up to $25,000 with less paperwork.
- Recovery rebates for individuals
The government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joints returns. An additional $500 additional payment will be sent to taxpayers for each qualifying dependent under 17.
The rebates are not available to non-resident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.
Most individuals won’t have to take any action to receive a rebate. Rebates are payable whether or not tax is owed.
- Waiver of 10% Early Distribution Penalties
The additional 10% tax on early distributions from IRAs and defined contribution plan (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020, by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000.
- Waiver of required distribution rules
Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are delayed one year.