COVID-19 Resources

Crucial Business Provisions of the Coronavirus Aid, Relief and Economic Security Act (CARES Act)

Written by T. Van Trefethen, CPA on March 27, 2020

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On March 27, 2020, the president signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law.  A large portion of the $2 trillion stimulus package focuses on businesses, many of which have been required to close due to shelter-in-place orders.

The CARES Act provides support to businesses in a variety of ways.

  • $350 billion appropriated to the SBA loan program to encourage employers to retain their employees
  • Employee retention payroll tax credit for 50% of wages paid during the crisis
  • Delay in employer-side Social Security payroll tax until 2021 and 2022
  • Provide taxpayers with the ability to carryback 2018, 2019 or 2020 net operating losses, which would generate refunds
  • Removes the limitation on losses for pass-through businesses
  • Acceleration of tax credit for prior year alternative minimum tax (AMT) paid by corporations
  • Interest expense limitation changed to allow companies to deduct more interest paid
  • Correction of prior law to allow immediate write-offs of qualified improvement property

SBA 7(a) Loans Modified under the CARES Act

The cornerstone of the CARES Act to small business owners, primarily those who employ 500 or fewer individuals, will be administered through SBA 7(a) loans that are provided by private lending institutions. The CARES Act appropriated $350 billion towards this loan program. The program includes a loan forgiveness feature if the funds are used for qualifying expenses.

We suggest that all businesses impacted by the COVID-19 pandemic consult with their banker or lender as soon as possible to learn more and begin the application process. Access a detailed summary of the CARES Act SBA 7(a) program.

Employee Retention Payroll Tax Credit for Employers Subject to Closure due to COVID-19

The employee retention payroll tax credit is another incentive in the CARES Act aimed at encouraging employers to retain their employees.

According to a summary from the Senate:

“The provision provides a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, OR (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers 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. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.”

It’s important to note that these wages cannot be double counted with another tax credit. In addition, if an employer receives a covered loan under the SBA 7(a) program, the employer would not be eligible for this tax credit.

Delay in employer-side Social Security payroll tax until 2021 and 2022

According to a summary from the Senate:

“The CARES Act includes a provision that allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. The provision allows employers to increase their cash flow during this period. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.”

It is important to note, if a taxpayer has an SBA 7(a) loan forgiven, the employer would not be eligible for this deferral.

Modifications related to Net Operating Losses (NOLs)

According to a summary from the Senate:

“The provision relaxes the limitations on a company’s use of losses. NOLs are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.”

A tax planning strategy would be for companies to push as many deductions into the tax year as possible. The potential NOL could be carried back to utilize higher tax rates before the Tax Cuts and Jobs Act (TCJA) was enacted (i.e., the deduction would be more valuable). Taxpayers should also review NOLs from 2018 and 2019 to see if there is carryback potential to the previous five years.

CARES Act Removes the Limitation on Losses for Pass-through Businesses

The TCJA enacted a provision that limited excess business losses from being deductible. According to a summary from the Senate:

“The CARES Act modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.”

CARES Act Accelerates Refunds for Prior Year AMT Paid by Corporations

According to a summary from the Senate:

Corporate AMT was repealed as part of the TCJA, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The CARES Act accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.”

CARES Act Modifies the Interest Expense Limitation Enacted under TCJA

The TCJA included a provision that, under certain circumstances, reduced the interest expense businesses could deduct. According to a summary from the Senate:

“The CARES Act temporarily increases the amount of interest expense businesses can deduct on their tax returns, by increasing the 30-percent limitation to 50percent of taxable income (with adjustments) for 2019 and 2020. This provision allows businesses to increase liquidity with a reduced cost of capital so that they can continue operations and keep employees on payroll.”

Note that the treatment differs between partnerships and corporations. Please contact your tax advisor for more information.

Technical Correction to Allow Immediate Write-offs of Qualified Improvement Property

One of the biggest controversies of the TCJA was a drafting error in the bill which intended to allow businesses to immediately write-off qualified improvement property. Due to the drafting error, businesses had been forced to depreciate these assets over 39 years. This error was particularly detrimental to those in the hospitality industry. The CARES Act corrects this error retroactive to 2018. The provision will increase cash flow to businesses by allowing them to amend a prior year return and encourages them to invest in improvements as the country recovers from the COVID-19 emergency.

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