Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the "Act") on March 27, 2020. The $2.2 trillion price tag for tax relief and incentives for individuals and businesses makes it the most expensive piece of legislation ever passed.
Employee Retention Credit
The CARES Act grants eligible employers a credit against employment taxes equal to 50% of qualified wages paid to employees who are not working due to the employer's full or partial cessation of business or a significant decline in gross receipts. The credit can be claimed on a quarterly basis, but the amount of wages (including health benefits) for which the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
An eligible employer is defined as an employer whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease (COVID-19); or an employer that experiences a 50% decline in gross receipts for the calendar quarter compared to the same quarter in the prior year.
If the employer has more than 100 full-time employees, qualified wages are wages paid to employees who cannot work during the COVID-19-related circumstances described above. If the employer has 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order.
Payroll Tax Deferral
To help employers free up cash flow and retain employees, the Act allows employers to elect to defer the payment of certain payroll taxes. Employers can elect deferral of payroll taxes incurred between March 27, 2020 and December 31, 2020. Payroll taxes qualifying for deferral include the employer's share of Social Security (FICA) taxes (6.2% of wages up to the wage base, which is $137,700 in 2020), and 50% of the equivalent payroll taxes incurred by self-employed persons. The payroll tax deferral does not apply to federal income tax withholding, Medicare tax, or the employee's portion of Social Security tax. Half of the deferred taxes are due by December 31, 2021, and the remaining half are due by December 31, 2022.
Net Operating Losses
The Act allows for a 5-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business. Businesses will be able to amend tax returns for tax years dating back to 2013 in order to take advantage of the carryback. Additionally, the Act allows for NOLs arising before January 1, 2021 to fully offset income (rather than the current law limiting NOLs to 80% of taxable income).
Business Interest Expense Limitations
The Act temporarily increases the amount of interest expense businesses can deduct, by increasing the 30% limitation (as imposed under the Tax Cuts & Jobs Act) to 50% of the taxpayer's adjusted taxable income for 2019 and 2020. In calculating the limitation for 2020, taxpayers may elect to use adjusted taxable income for 2019.
Qualified Improvement Property
The Tax Cuts & Jobs Act included a drafting error that required qualified improvement property to be depreciated over the same 39 years as the building itself, and making it ineligible for bonus depreciation. The CARES Act eliminates this drafting error. Taxpayers are now allowed to claim bonus depreciation for costs associated with improving facilities, rather than having to depreciate those improvements over 39 years. This change is made as if included in the TCJA, and therefore it is effective for property acquired and placed in service after September 27, 2017. Accordingly, taxpayers should determine whether they should file amended returns to claim additional deductions for improvements made to their facilities in 2018 and 2019.
We are here to assist you during these difficult economic times. Please contact us if you have any questions related to any provisions of the CARES Act or any other matter.
The Marston Group, PLC