On Friday, March 27, 2020, the CARES Act became law. The Act includes a wide range of financial and tax relief for businesses and individuals. It is the largest stimulus package ever passed.
The Rudler Team can provide support and insight with your evaluation of benefits, coordinate assistance under different provisions of the Act, and assist you in your application for benefits. The Team has members with a broad range of expertise and deep experience working together, and can provide the coordination and timely delivery of support you need to overcome the current challenges.
Below are additional details on key tax-related provisions of the Act:
Net Operating Loss Rules Provide Tax Refund Opportunity:
Any Net Operating Losses (NOLs) incurred in tax years 2018, 2019 or 2020 can be carried back for five years. For NOLs that have occurred in 2018 and 2019, the time requirement to waive the carryback election is extended to 120 days after the enactment of the CARES Act (3/27/2020). The original time requirement to waive the carryback election is by the due date (including extensions) of the return. NOLs incurred in a tax year beginning after December 31, 2017 and before January 1, 2021 can be carried forward indefinitely while NOLs incurred prior are still subject to the 20 year carryforward period. Finally, all NOLs incurred in tax years beginning after December 31, 2017 and before January 1, 2021 are not subject to the 80% taxable income limitation and instead can be used to offset all taxable income. This provision can not only allow for tax refunds but can also recapture tax that was paid at higher tax rates in prior years.
Payroll Tax Deferral:
Employers and self-employed individuals can defer the payment of 50% of the employer’s portion of Federal social security payroll taxes and 50% of self-employment taxes due from the date of the enactment of the Act through December 31, 2020. One half of the taxes deferred will be due by December 31, 2021 and one half will be due by December 31, 2022. Employers who receive Small Business Act loans that were forgiven under the CARES Act are not eligible for this payroll tax deferral.
Employee Retention Tax Credits:
Any employer carrying on a trade or business in 2020 and whose business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority as a result of COVID-19 or such business that have seen a decline in gross receipts of at least 50% starting with the first quarter of 2020 as compared to the same quarter in the prior year can receive a credit for each quarter equal to 50% of the qualified wages (including health care costs) with respect to each employee. Up to $10,000 of qualified wages per employee is taken into account. Any amounts in excess of federal payroll taxes will be refunded. The employee retention credit is effective for wages paid after March 12, 2020 and before January 1, 2021. Employers with greater than 100 full-time employees are entitled to the credit for any employee not providing services for the employer due to COVID-19 causes. However this credit will not be available to any taxpayer which avails themselves of a payroll protection-covered loan.
Business Interest Limitation Relief:
The 30% business interest limitation as part of the Tax Cuts and Jobs Act (TCJA), is increased to 50% for the years beginning with 2019 and 2020. For partnerships this will not apply to years beginning with 2019, but only for 2020 and the taxpayer can elect to use their 2019 Adjusted Taxable Income to compute the limitation for 2020. Assuming the taxpayer’s adjusted taxable income for 2020 would be lower than that of 2019, electing to use 2019 would result in a higher interest deduction. Under the TCJA, if a real estate company elected out of the interest limitation, the election was permanent. The CARES Act does not address any relief to a taxpayer that made such an election. Partners of a partnership can deduct 50% of the 2019 excess business interest expense in 2020.
Qualified Improvement Property (QIP) for Non-Residential Properties:
Both the House and Senate acknowledged that an error was made in drafting the TCJA as it related to QIP. The TCJA made QIP a 39-year asset and therefore not eligible for bonus depreciation. The CARES Act corrects this error retroactively to years beginning after December 31, 2017. Therefore Qualified Improvement Property is now depreciable over 15 years and is eligible for bonus depreciation. Taxpayers will likely have the option of amending prior tax returns or taking the benefit on their next filed return with applying for an accounting method change. This provision could provide an opportunity for tax refunds in certain cases.
Corporate Charitable Contribution Limitations Relaxed:
For corporate taxpayers, the act increases the limitation for 2020 on charitable contributions from 10 to 25 percent of taxable income. Similar to act changes for individuals, only cash contributions to public charities qualify. The taxpayer must make an election on their 2020 return. Additionally the limitation on donations of certain food inventory increased from 15 to 25 percent in 2020.
We have summarized certain key provisions of the CARE Act.
The Act offers many businesses and individuals opportunities for significant cash flow relief. However, the various provisions are complex and include options to access cash by amending prior year’s tax returns and other means.
Taxpayers must evaluate their options before acting, and carefully consider how to maximize their benefits, the timing of the benefits and the impact on other tax filing positions, and on their shareholders or partners.
The Rudler Team can help provide guidance and clarity through its team of experienced specialists. Please contact your Rudler, PSC advisor at 859-331-1717.
Disclaimer: Please note this is based on the information that is currently available and is subject to change.
