By Demetrius Robinson & Kyle Stroup
The historic Coronavirus Aid, Relief, and Economic Security Act, otherwise known as the CARES Act, contains many tax provisions that affect businesses of all sizes as well as individuals. These provisions are geared toward providing businesses and individuals with cash infusions so that they can manage their cash flow efficiently and effectively to help them come out of the COVID-19 coronavirus pandemic strong.
Employers May Carry Over Losses From 2018, 2019 & 2020
Businesses and individuals can now carry-back their Net-Operating Losses (NOL), similar to how the NOL carryback worked prior to the Tax Cut & Jobs Act (TCJA). For tax years 2018, 2019 and 2020, a taxpayer may now use 100% of NOL for that tax year to receive a cash infusion. In addition, taxpayers with NOL arising after Dec. 31, 2017 and before Jan. 1, 2021 may carry-back any NOL to a previous tax year not to exceed five years. Previously, NOL was limited to 80% of taxable income in that tax year with any remaining NOL being carried forward to future tax years.
Carrying back net operating losses to zero-out taxable income is a savvy way for a business to receive an influx of cash and gain flexibility in cash flow and cash management plans. When combined with a small business loan, the infusion of capital provides businesses with the ability to remain healthy.
An individual or corporate taxpayer looking to claim a refund related to an NOL carryback must do so by filing IRS Form 1045, Application for Tentative Refund (Individual) or IRS Form 1139, Corporation Application for Tentative Refund (Corporate). A claim for refund will be treated as timely filed if filed within 120 days of March 27, 2020 for previous tax years. For NOLs incurred for 2020, an application for a refund must be made on the date of the tax filing deadline (including extensions) or before 12 months after that taxable year.
Employers Can Defer Some Payroll Taxes
Under the CARES Act, for the remainder of 2020, employers and self-employed individuals may begin deferring employment taxes. The 6.2% employer portion of Social Security tax on wages paid to an employee can now be deferred. Deferring these tax payments now may allow your business the cash flow flexibility it needs. It is important to note that an employer who receives a Small Business Interruption Loan under Section 7(a) of the Small Business Act is not eligible for the payroll tax deferral.
However, an employer is still responsible for the employer portion of Medicare tax payments (1.45%) and must continue to remit the employee portion of Social Security and Medicare taxes (7.65%). An employer who defers payment under this section will then pay the deferred taxes over a two-year period. At least 50% of the deferred tax must be paid before Dec. 31, 2021, and the remaining portion is due by Dec. 31, 2022. In addition, a self-employed taxpayer, responsible for self-employment taxes may defer up to 50% of Social Security taxes (6.2%), including estimated quarterly tax payments in the same manner.
As Much as $5,000 per Employee Is Available as a Tax Credit
The CARES Act provides a quarterly refundable payroll tax credit to an eligible employer for qualified wages paid to each employee. The payroll tax credit will apply against Social Security (Sec. 3111(a)) or Tier 1 Railroad Retirement Act (Sec. 3221(a)) taxes. The credit is equal to 50% of qualified wages for each employee, not to exceed $10,000 in qualified wages. In other words, employers can receive up to a $5,000 tax credit for each employee dependent upon the amount of qualified wages.
The eligible credit amount is dependent upon the size of the employer. An employer with less than 100 employees can use all employee wages for calculation of the credit, but an employer with greater than 100 employees may only use the wages for employees who were actually furloughed or had their hours reduced due to the government mandate or reduced gross receipts.
To be eligible, the employer must have carried out a trade or business in 2020, but business operations were either fully or partially interrupted due to a government mandate to limit commerce, travel or gatherings in response to the novel coronavirus pandemic. Or, the employer must have had gross receipts reduced by 50% when compared to the gross receipts achieved in the same calendar quarter of 2019, e.g. Q1 2020 gross receipts are 50% less than Q1 2019.
The tax credit provides a temporary mechanism to enable businesses to withstand government mandates and lack of revenues.
Nonbusiness Income Deduction Limit Is Now Extinguished Until December 31, 2020
As part of the TCJA, taxpayers, excluding corporations, could not deduct business losses in excess of $250,000 (or $500,000 if married filing jointly) against nonbusiness income. The CARES Act, however, suspends this limitation until after Dec. 31, 2020. Therefore, a taxpayer, other than a corporation, may now deduct excess business losses against nonbusiness income. Taxpayers are encouraged to review their previous tax filings to determine if an amended tax return should be filed for tax years after 2017. A taxpayer may usually file an amended tax return by filing Form 1040-X, Amended U.S. Individual Income Tax return, for up to three years prior to the date of the tax filing deadline (including any extensions).
Corporations Can Now Take the Remaining Alternative Minimum Tax Credit Rather Than Waiting
The TCJA repealed the corporate alternative minimum tax. However, companies that may have had a refundable alternative minimum tax (“AMT”) credit had to claim the credit over a four-year period, which was scheduled to end in 2021. Under the CARES Act, a corporation may elect to accelerate its AMT credit.
For example, a corporation with a $30 million AMT credit no longer needs to take the $7.5 million credit generated, but can now take the full $15 million, assuming that the $15 million AMT was taken in 2018.
A corporation that wishes to accelerate its AMT credit may file IRS Form 1139, Corporation Application for Tentative Refund before December 31, 2020, and indicate that it is making an election under Section 53(e)(5) of the Code.
Business Interest Expenses Are Now Increased to 50% of Adjusted Gross Income for 2019 & 2020
The TCJA limited the ability of taxpayers to deduct trade or business expenses to just 30% of adjusted gross income. Under the CARES Act, this limitation has temporarily been increased to 50% of adjusted gross income for tax years 2019 and 2020. For the tax year 2020, a taxpayer may elect to use the adjusted gross income from 2019 in substitution for the tax year 2020, if there is insufficient income for the 2020 tax year.
15-Year Depreciation Schedule for Qualified Improvement Properties
Under the TCJA, Congress had intended that Qualified Improvement Property (QIP) have a depreciation life of 15 years. However, a drafting error in the legislation neglected to provide for this 15-year depreciation schedule. The CARES Act corrected this technical error to provide a 15-year depreciation schedule. The correction is back dated to apply to property placed in service in 2018 and after. In addition, QIP is now eligible for 100% bonus depreciation. QIP is usually defined as improvements to the interior of a building that has been placed into service after the building’s original in-service date. This technical correction allows businesses to amend previous tax returns to provide an influx of cash now.
Employers May Now Make Payments on an Employee’s Qualified Student Loans
Under previous law, an employer could pay up to $5,250 of employee education expenses, including tuition, books and fees, without including such payments as income to the employee. However, an employee was prohibited from making payments on an employee’s student loans without including such payments as income to the employee. Under the CARES Act, an employer may make payments on an employee’s qualified education loans, including principal and interest. Payments may be made either directly to the employee or the lender but cannot exceed $5,250. Any payments under this provision must be made before Jan. 1, 2021.
Retirement Funds & Charitable Contributions
The CARES Act made several changes to rules on retirement plan loans and required minimum distributions, and temporarily removed caps on charitable contributions among other changes. See “COVID-19: What the CARES Act Means for Your Retirement Plans” for more information on these and other elements of the CARES Act that impact individuals.
Most Americans Eligible for up to $1,200 Rebate
As part of the CARES Act, certain taxpayers are eligible for an income tax rebate. Initial checks are expected to be received within the next three weeks. To be eligible, you must be a U.S. resident who is not claimed as a dependent with a work-eligible Social Security number. If so, the individual is eligible for a rebate check of up to $1,200 ($2,400 married filing jointly). In addition, a rebate of $500 is available for each dependent child (under 17).
For taxpayers who earn more than $75,000 ($112,500 for head of household and $150,000 married (filing-jointly)), known as the “phase-out threshold,” the total rebate amount will be reduced by $5 for every $100 that the taxpayer’s adjusted gross income exceeds the phase-out threshold. The rebate will be completely phased-out for individuals with adjusted gross incomes greater than $99,000 ($146,500 for head of household and $198,000 married (filing-jointly)). Adjusted gross income will be based on the taxpayers’ 2019 or 2018 (if tax return for 2019 has not been filed) tax return filings (Form 1040, U.S. Individual Income Tax Return).
If you have any questions or would like to discuss further, please reach out to Demetrius Robinson at djr@kjk.com or 614.427.5749, or contact any of our Tax professionals.