The massive stimulus package bill approved by both the U.S. Senate and the House last week and signed into law by President Trump on March 27, 2020, includes many provisions businesses can use to aid them through the financial crisis brought about by the COVID-19 pandemic. In addition to provisions aimed at helping individuals and those in the health care industry weather the storm, a sizable section of the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) contains provisions intended to help large and small businesses, as well as eligible self-employed individuals, who have been affected.
Refundable Credit Against Payroll Tax Encourages Employee Retention
Businesses seeking help to keep their workforces intact can look to the CARES Act for a new refundable credit against payroll tax. This credit, designed to help employers retain their employees, is generally available to those employers who have:
- Fully or partially suspended operations due to a COVID-19-related governmental shutdown order, or
- Gross receipts which have decreased more than 50% over the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter).
If an employer has over 100 employees on staff, they are eligible to take advantage of the help offered for their business through the CARES Act by taking the credit for those employees who are on leave or who have had a reduction in their hours due to either of the above-mentioned reasons. Businesses with 100 or fewer employees are eligible to receive the credit regardless of whether employees meet either of the conditions, above.
The credit equals 50% of up to $10,000 in compensation (including health care benefits) paid to an eligible employee from March 13, 2020, through December 31, 2020 (though additional rules and limits may apply).
Delaying Payment of Social Security Payroll Tax
Business owners can also receive help under the CARES Act by deferring payment for their share of Social Security payroll tax (or 6.2% of wages) to a later date. Tax payments can be made over the next two years, though the first half must be paid by December 31, 2021 and the second half is due by December 31, 2022. Similar accommodations are made for self-employed individuals.
Net Operating Loss Restrictions Loosened
Though business owners may need to file amended tax returns to capitalize fully on net operating loss (NOL) changes offered in the CARES Act, some helpful relief measures are available.
Prior to the Tax Cuts and Jobs Act (TCJA), business owners who had NOLs could offset taxable income by carrying these losses back two years or forward 20 years. Under the TCJA, the deduction was limited to 80% of taxable annual income, the carryback provision was eliminated, and NOLs could be carried forward indefinitely.
The TCJA restrictions on NOLs have now been relaxed by the CARES Act. NOLs incurred in 2018, 2019, or 2020 can now be carried back five years. Additionally, the taxable income limitation for years beginning prior to 2021 have been temporarily removed through the new law so that NOLs can fully offset income.
The CARES Act also amends the TCJA to temporarily eliminate the limitation on excess business losses for pass-through entities and sole proprietors and allows these taxpayers to now deduct excess business losses occurring in 2018, 2019, and 2020.
Increase in Adjusted Taxable Income Deduction for Business Interest
The TCJA effectively limited the deduction corporate and noncorporate taxpayers were able to take for business interest incurred in tax years beginning after 2017 to 30% of the taxpayer’s annual adjusted taxable income (ATI).
The CARES Act revises this to afford businesses up to a 50% deduction of their ATI for tax years 2019 and 2020 (though special partnership rules apply for 2019). Businesses can also receive deduction help by exercising the new law’s option to elect to use 2019 ATI instead of 2020 ATI for the calculation. Performing the calculation in this way will increase the deduction amount for many businesses.
“The Retail Glitch” Fixed for Qualified Improvement Property
Before the TCJA era, qualified retail improvement property, leasehold improvement property, and restaurant property were depreciated over the course of 15 years under the modified accelerated cost recovery system (MACRS). Under the TCJA, these three types of properties were deemed as qualified improvement properties (QIP).
When the TCJA was enacted, what is now referred to as “the retail glitch” became apparent in the statutory language of the legislation. While it seemed evident that Congress meant for QIP placed into service after 2017 to have a 15-year recovery period and qualify for 100% bonus depreciation through 2023 (at which point the allowable deduction was scheduled to enter a phaseout period), the statutory language made this intention unclear. Because the language failed to properly define the QIP as a 15-year property, QIP defaulted to a 39-year recovery period, making it ineligible for the bonus depreciation.
Business owners looking for help in claiming the bonus depreciation since the drafting error came to light will now get that relief through the CARES Act which includes a technical correction to fix the issue. Those hotels, restaurants, and retailers that have made qualified improvements in the past two years can claim an immediate tax refund for the bonus depreciation they missed as well as a go-forward bonus depreciation, according to the phaseout schedule.
New Provisions Give Small Businesses Extra Assistance
Small businesses especially hard hit by the COVID-19 pandemic will be helped by new provisions included in the CARES Act. The law expands the ways the Small Business Administration (SBA) can help small businesses remain open and meet their payroll. For example, the maximum loan amount under the SBA’s primary low-interest loan program temporarily doubles the amount from $5 million to $10 million (or 2.5 times the average total monthly payroll costs for the prior year, whichever is less).
The law expands the allowable use of the “Section 7(a)” funds to include payroll support, including paid leave, insurance premiums, debt obligations, and mortgage payments, and waives many of the usual requirements, such as collateral and personal guarantees. In addition, the portion of the loan applied to payroll, mortgage interest, rent, and utilities will be forgiven if employers maintain their payrolls for eight weeks after the loan origination.
Businesses must generally have 500 or fewer employees to qualify for this assistance and must also have been operational on February 15, 2020. Sole proprietors, independent contractors, and others who are self-employed may also qualify for these benefits.
Amendments to Paid Leave Outlined in the Families First Coronavirus Response Act
The Families First Coronavirus Response Act (FFCRA), signed into law on March 18. 2020, was created to temporarily require certain employers to provide eligible employees with expanded sick pay and family leave for those experiencing hardships due to COVID-19.
The CARES Act amended some of the details included in the FFCRA, further clarifying who qualifies as an “eligible employee” for purposes of sick pay and family leave. Under the new definition, eligible employees are those who: (1) were laid off by their employer on March 1, 2020 or after, (2) worked for their employer for at least 30 days in the 60 calendar days prior to the layoff, and (3) were rehired by their employer.
The CARES Act also permits advances on anticipated tax credits for paid leave costs an employer incurs and offers penalty relief for employers who don’t deposit tax amounts because they expect credits.
The CARES Act provides a wealth of beneficial benefits for businesses that need help in minimizing their financial hardships during the time of the COVID-19 pandemic. Additional Federal legislation offering other types of relief may also appear over the course of the next several months. Untracht Early’s advisors are here to help you review these provisions and discern which may be beneficial to you and your business. We will keep you updated on all impactful business legislation as it becomes available.