On March 27, 2020, President Trump signed into law, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). A summary of key business tax provisions follows.
Employee Retention Credit
The CARES Act provides businesses with a refundable tax credit against the employer’s 6.2% share of Social Security taxes (the “Employee Retention Tax Credit”). The Employee Retention Credit is a refundable tax credit equal to 50% of eligible wages paid to employees for wage payments made between March 13, 2020 and December 31, 2020.
The Employee Retention Tax Credit is only available to employers whose:
- Operations were fully or partially suspended due to a COVID-19 related “shut-down order,” or
- Gross receipts declined by more than 50% when compared to the same quarter in the prior year.
For businesses with greater than 100 full-time employees, eligible wages are limited to wages that are paid to employees who are furloughed and not providing services to their employer due to COVID-19. For businesses with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. Under all circumstances, eligible wages are limited to $10,000 per employee.
It is important to note that businesses that receive a Paycheck Protection Loan program, discussed HERE, will not be able to benefit from the Employee Retention Credit.
Qualification for the Employee Retention Credit should be considered with the payroll tax credit provided under the Families First Coronavirus Response Act (FFCRA).
Payroll Tax Deferral
The CARES Act allows businesses to defer making deposits of the employer’s 6.2% share of Social Security taxes that would have otherwise been due from March 27, 2020 through December 31, 2020. 50% of the taxes deferred for this period will be due December 31, 2021 and the remaining 50% will be due December 31, 2022.
It is important to note that businesses that receive a Paycheck Protection Loan, discussed HERE, are not eligible for payroll tax deferral under the CARES Act.
Modification of Excess Business Losses for Pass Through Entities
Under previous law enacted under the Tax Cuts and Jobs Act, owners of pass through entities and sole proprietorships incurring business losses were limited to deducting up to $250,000 of excess business losses ($500,000 for married taxpayers filing jointly). The CARES Act allows excess business losses to be deductible without such limitations for tax years 2018 through 2020. Taxpayers that were previously subject to excess business loss limitation in 2018 should consider whether they would benefit by filing an amended return.
Modification to Net Operating Loss Rules
Under previous law enacted under the Tax Cuts and Jobs Act, net operating losses (“NOLs”) for tax years beginning in 2018 and later may not be carried back but instead may be carried forward indefinitely and used to offset 80% of taxable income. The CARES Act has loosened the NOL provisions by allowing taxpayers to carryback NOLs 5 years (without being subject to taxable income limitations) for NOLs generated in calendar years 2018, 2019, and 2020. This change will allow Taxpayers to recover income taxes paid in prior years and may result in significant refunds.
Modification of Business Interest Expense Rules
Under previous law enacted under the Tax Cuts and Jobs Act, the deductibility of a Taxpayers business interest expense was limited to 30% of adjusted taxable income. For 2019 and 2020, the CARES Act increased the interest expense limitation to 50% of the Taxpayer’s adjusted taxable income. Further, Taxpayers may elect to use their 2019 adjusted taxable income to determine their limitation for tax year 2020.
Corporation Charitable Contributions
For corporations, the CARES Act has temporarily increased the limitation on the deductibility of cash charitable contributions from 10% of taxable income to 25% of taxable income for tax year 2020.
Please contact Kerr Russell attorneys today for a detailed analysis of how your business may benefit from the various tax relief provisions enacted by the CARES Act.
John D. Gatti is a Certified Public Accountant as well as an attorney. He concentrates his practice in the areas of taxation, mergers and acquisitions, business law, real estate law, and estate planning. John also serves as the firm’s administrative partner and chairs the firm’s Taxation Practice Group. He has considerable experience representing professional services firms. These include accounting, engineering, and architectural firms, as well as insurance agencies, in purchase and sale transactions.
Liam K. Healy has a broad range of experience in business law and business tax matters. His practice in this area includes plan design strategies to achieve the maximum allowable contributions for the business owner clients. He also prepares determination letter applications and represents clients in IRS and Department of Labor audits. Liam also practices in the areas of employee benefits and ERISA. He regularly writes and speaks on the practice of tax and employee benefits law.
Cody Attisha focuses on taxation law, corporate law, mergers and acquisitions, finance, and estate and trust planning. He also helps clients with entity formation, including evaluating, choosing, and implementing the right partnership, corporate, or non-profit structure.
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