CARES Act: Tax Considerations for Businesses

This First Alert expands upon and explains in more detail the items mentioned in yesterday’s First Alert on tax provisions in the Senate version of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), H.R. 748. The legislation passed by the Senate has been passed (unchanged) by the House of Representatives and was just signed into law by the President.

As mentioned yesterday, the business tax provisions in the CARES Act are intended primarily to get cash in the hands of businesses now, or in the very near term, to address liquidity issues caused by the coronavirus pandemic. Some of the benefits are permanent and some are temporary (i.e., more in the form of an interest-free loan from the government). Most are generally applicable and do not require the taxpayer to be directly impacted by the crisis.

Included here is a general summary of the material tax provisions included in the final version of the CARES Act. As with any tax law, however, these are subject to various qualifications, exceptions, and, in some cases, elections, and so the particular application of each of these to any situation would have to be analyzed closely on a case-by-case basis.

Deferral of Employer OASDI Tax

The CARES Act provides for a temporary deferral of the employer portion of the Old-Age, Survivors, and Disability Insurance tax, commonly known as the Social Security portion of the FICA tax (the other portion of the FICA tax being the Medicare tax). The OASDI tax is 12.4% with the employer and employee splitting the tax. The CARES Act allows employers to defer payment of their 6.2% share that would otherwise be paid for the period beginning on the date the CARES Act is enacted and ending on December 31, 2020. One-half of the deferred taxes are due December 31, 2021, and the other half are due December 31, 2022. The benefit does not apply to an employer that has had certain indebtedness forgiven under the CARES Act. There is a similar deferral for one-half of the OASDI portion of the self-employment tax that self-employed individuals generally pay through their individual Forms 1040 each year.

Employment Tax Credit for Businesses Directly Affected by the Pandemic

The CARES Act provides a refundable credit against the 6.2% employer share of the OASDI tax in the amount of 50% of wages (including amounts paid for health benefits) paid by “eligible employers” to certain employees. The refundable concept means that if the amount of the credit is greater than the amount of the tax, the government will pay over the difference.

To be an “eligible employer,” the employer must be operating a trade or business in calendar year 2020 and either (i) the operation of the trade or business is “fully or partially suspended 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 2019 (COVID-19)” or (ii) the trade or business experiences an at least 50% reduction in gross receipts as compared to the same quarter for the previous calendar year. For those employers qualifying under part (ii) of the test, the credit is lost if the employer returns to 80% or more of gross receipts compared to the same period in the prior year.

The employee wages taken into account for purposes of calculating the credit depend primarily on the size of the employer. For small businesses (those with an average of 100 or fewer full-time employees in 2019), wages paid to each employee are taken into account (up to a maximum of $10,000 per employee). For larger businesses (those with an average of more than 100 full-time employees in 2019), only wages paid to those employees who are not providing services due to the pandemic are eligible (up to the same $10,000 cap). Other limitations on the amount included in “wages” apply as well.

The credit is not available to employers that receive Small Business Interruption Loans under Section 1102 of the CARES Act. The credit only applies for the period from March 13, 2020 through December 31, 2020.

Net Operating Losses

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) made significant changes to the net operating loss rules of Section 172, such as the prohibition of net operating loss carrybacks. The CARES Act, however, provides that net operating losses created in tax years beginning in 2018, 2019, and 2020 can be carried back five years. The TCJA also imposed a general cap on net operating losses that can be utilized in a given tax year. The cap is 80% of taxable income. The CARES Act removes the cap for tax years beginning before 2021.

Corporate AMT Credits

The TCJA repealed the alternative minimum tax for corporations beginning in 2018. That legislation allowed the use of remaining minimum tax credits until 2021, when they became fully refundable. The CARES Act would accelerate the use of remaining minimum tax credits by making them fully refundable in 2019 (if not fully utilized earlier).

Section 163(j) Interest Limitation

Another redo of the TCJA relates to the Section 163(j) business interest deduction limitation. The TCJA imposed a new limit on the deductibility of business interest to an amount equal to 30% of “adjusted taxable income.” The CARES Act raises the cap to 50% of adjusted taxable income for years 2019 and 2020. Also, taxpayers can elect to apply their 2019 adjusted taxable income amount to year 2020. Special rules apply to taxpayers that are partnerships.

Qualified Improvement Property Glitch Fixed

A major benefit for taxpayers from the TCJA were the bonus depreciation deductions under Section 168. These changes allowed taxpayers to immediately deduct the entire cost of certain large projects in a single year. In what can only be considered a drafting error, “qualified improvement property” was misclassified as 39-year property instead of 15-year property, meaning the costs of such property were not eligible for the generous bonus depreciation provisions. The CARES Act fixes this error, and the correction is retroactive to the effective date of the TCJA.

Summary

Taxpayers should immediately assess the benefit of the OASDI tax deferral and eligibility for the OASDI tax credit. For the other items described in this First Alert, taxpayers do not need to wait until they are filing their 2020 tax returns to take advantage of these benefits. Rather, taxpayers should immediately assess whether unfiled 2019 tax returns need a second look and also whether amended tax returns for 2019 or earlier years are appropriate. Because of the nature of these changes, we do not anticipate much in terms of guidance in the form of Treasury Regulations and the like. Thus, taxpayers should consider moving right away on amended tax returns and other avenues to utilize these changes and get badly needed cash in their businesses.

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