CARES Act Business Tax Provisions Explained

March 30, 2020Alerts

The Coronavirus Aid, Relief and Economic Security Act or CARES Act, passed on March 27, 2020, offers fiscal and economic stimulus to individuals and businesses impacted by the COVID-19 pandemic. This alert addresses certain of the more salient business provisions of the Act.

Employee Retention Credits
In general, the Act provides that certain employers are eligible for a refundable credit against employment taxes for each calendar quarter equal to 50 percent of wages paid after March 12, 2020 and before January 1, 2021 to employees during a calendar quarter.

Eligible employers are those employers carrying on business during 2020 the business of which was: (i) fully or partially suspended during a calendar quarter due to orders from a governmental authority limiting commerce, travel or group meetings, or (ii) whose gross receipts for any calendar quarter beginning after December 31, 2019 are less than 50 percent of the gross receipts for the same calendar quarter in the prior year (and ending in the first calendar quarter for which the gross receipts are greater than 80 percent of the gross receipts for the same calendar quarter in the prior year).

For employers with more than 100 full-time employees, wages are defined as wages paid to employees who are unable to provide services due to COVID-19 circumstances in (i) or (ii) above. For employers with not more than 100 full-time employees, all wages paid to an employee qualify.

The maximum wages, including health plan expenses, that may be taken into account for all calendar quarters is up to $10,000 for each employee. Further, the allowable credit is reduced for credits under the Families First Coronavirus Response Act. Employers receiving small business interruption loans under the Small Business Act are not eligible for the credit.

Delay of Payment of Employer Payroll Taxes
In general, employers and self-employed individuals may delay the payment of the employer portion of social security taxes and self-employment taxes, respectively, for the period beginning on March 27, 2020 through 2020, by paying 50 percent of such taxes on December 31, 2021 and the remaining 50 percent on December 31, 2022.

Net Operating Losses
The Act temporary repeals the prohibition on the carryback of net operating losses (NOL) by permitting the carryback of NOLs arising in a taxable year after December 31, 2017 and before January 1, 2021 (i.e., 2018, 2019 and 2020) to each of the five taxable years preceding the taxable year of the NOL.

The Act also temporarily suspends the 80 percent taxable income limitation on the use of an NOL. Accordingly, NOL’s can generally be used to fully offset taxable income with respect to any taxable year beginning before January 1, 2021.

Special rules apply for NOL carrybacks that are carried to years in which the taxpayer included income from its foreign subsidiaries under IRS Code Section 965.

Modification of Limitation on Losses for Other Than Corporate Taxpayers
In general, the Act repeals the excess loss limitation under IRS Code Section 461 for tax years beginning after January 1, 2017 and before January 1, 2021 (i.e., 2018, 2019 and 2020).

Modification of Limitation on Business Interest
The Act temporarily and retroactively increased the limitation on the deductibility of interest expense under IRS Code Section 163(j) from 30 percent to 50 percent for taxable years beginning in 2019 and 2020. Special rules apply to partnerships.

Technical Amendments Regarding Qualified Improvement Property
The Act makes technical amendments to qualified improvement property (QIP) (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). Specifically, due to an oversight in The Tax Cut and Jobs Act of 2017, QIP was classified as 39-year recovery property which was ineligible for 100 percent bonus depreciation. The Act specifically designates QIP as 15-year depreciable property eligible for 100 percent bonus depreciation. The correction is retroactive for property placed in service after December 31, 2017. Accordingly, taxpayers may want to consider filing amended tax returns.

If you have questions regarding this alert or would like to discuss any matter addressed herein or in the Act, please contact a member of the Fox Rothschild Taxation & Wealth Planning Department.