The $2 trillion stimulus package known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was signed by President Trump on Friday, March 27, and promises to deliver some help to businesses impacted by COVID-19. Weeks of negotiation led to a unanimous vote in the Senate, which approved the most substantial emergency relief package in U.S. history. Here are a few highlights of the potential impacts of the Act on businesses.
Increased Charitable Contribution Limitations
Under the Coronavirus Aid, Relief, and Economic Security Act, corporate taxpayers have an increased deductible charitable contribution limitation from 10% to 25% of taxable income for 2020.
Tax-Free Employer Payments for Student Loans
Temporary provisions are in place that provide tax-free status to employer-paid student loan repayment assistance programs (LRAPs). This provision is only through the end of 2020. These payments are deductible for the employer and tax-free to the recipient.
Employer Payroll Tax Payment Delay
The CARES Act included the ability for employers of all sizes to defer the payment of the employer’s 6.2% share of Social Security payroll taxes from the date of enactment to December 31, 2020. Payment of these taxes would be due in equal parts on December 31, 2021 and December 31, 2022. This deferment is not allowed for any employers that have had a Paycheck Protection Loan forgiven. The deferment also only occurs if the payroll liability has not been fully credited under the Sick Leave and Family Leave credits discussed here or the Employer Retention Credit discussed below.
Employer Retention Credit
Employers can receive a refundable quarterly payroll tax credit if the employer closed partially or fully due to government mandates or has a significant decrease in gross receipts compared to the same quarter in the prior year. The amount of the credit is limited to 50% of qualifying wages paid to eligible employees. The qualifying wages are capped at $10,000 per employee and as such the credit limited to $5,000 per eligible employee.
- If an employer has more than 100 employees, eligible employees only include employees that did not work during the quarter.
- If an employer has less than 100 employees, all employees are considered eligible.
Employers are also not eligible for this credit if they received a Paycheck Protection Loan (PPL).
For more information on the Employer Retention Credit under the CARES Act, view this FAQ fact sheet from the IRS.
Changes to the Net Operating Loss Rules
Corporate Net Operating Losses can be carried back up to five years for tax years 2018 through 2020. Also, there is a suspension on the 80% limitation to allow taxpayers to fully deduct losses incurred against prior years’ income. As was previously the case, a taxpayer will be permitted to forgo the carryback, and instead carry the loss forward.
Temporary Removal of Section 461(l)
New Section 461(l) provides that the amount of “net business loss” an individual may use in a year to offset other sources of income is capped at $250,000 (if single; $500,000 if married filing jointly). These excess business loss limitations will be suspended through December 31, 2020. This limitation unchanged would limit the noncorporate business to a $500,000 deductible loss in a given year. These losses are also eligible to be carried back as a net operating loss.
AMT Tax Credit
The CARES Act allows for an accelerated usage of previously generated AMT credits for corporate taxpayers to offset tax liability. The Tax Cuts and Jobs Act (TCJA) eliminated the corporate AMT. However, many corporations had AMT credit carryforwards from pre-TCJA years. Rather than spread the realization of this credit over four years from 2018 to 2021, you can accelerate the credit not yet utilized into 2019. Also, corporations could elect to take the entire remaining refundable credit in 2018.
Changes to the Interest Limitation Rules
The business interest limitation is temporarily reduced from 30% to 50% on applicable income. Given that some businesses will not have taxable income in 2020, the company can elect to use its 2019 adjusted taxable income in computing its 2020 limitation. This change is valid for the 2019 and 2020 tax years. Taxpayers have the option to elect out of the rule changes. The interest limitation rules include special provisions for entities taxed as partnerships.
Technical Corrections to Qualified Improvement Property (QIP)
Qualified Improvement Property (QIP) has had a technical correction to update the depreciable life to 15 years as initially intended in the TCJA. QIP is an improvement to an interior portion of a building which is nonresidential real property. This correction makes QIP eligible for 100% bonus depreciation, allowing for a complete write-off of these costs in the year of acquisition. Otherwise, a taxpayer would be required to depreciate these costs over 39 years. In addition, this rule change is retroactive to the original passage of the TCJA, thus making QIP placed in service in 2018 and 2019 eligible for this tax treatment.
Aldrich is Here to Support You
As always, your Aldrich Advisor is here to provide support for you during these rapidly changing times. We understand these changes are complex and are here to help you understand the potential impacts on you and your business. For further information, please contact your advisor. We are monitoring the effects of COVID-19 closely and will continue to provide updates. For more resources, please visit our COVID-19 Resource Center.