Employer Tax Credit Availability
Certain employers may be entitled to a tax credit against employment taxes if the operation of the employer’s trade or business is fully or partially suspended during the calendar quarter due to orders of a governmental authority that limited commerce, travel, or group meetings. Employers are also eligible for this credit in the first calendar quarter in which the employer has a reduction of gross receipts of more than 50% compared to the same calendar quarter in the prior year, and eligibility for the credit continues in each calendar quarter as long as the employer has a reduction of gross receipts of more than 80% of gross receipts from the calendar quarter in the prior year.
The amount of the tax credit is 50% of the qualifying wages of the employer, and generally qualifying wages for each employee are limited to $10,000 for all quarters, and wages paid to certain employees are subject to additional limitations or exclusions. This credit is not available if the employer is a borrower under the Paycheck Protection Program. For further information on the Paycheck Protection Program, please refer to Small Business Relief Through the Paycheck Protection Program. Further, the amount of the credit is reduced by any credits allowed under the Families First Coronavirus Relief Act.
Delay of Payment of Employer Payroll Taxes
From the time the CARES Act is signed into law through December 31, 2020, employers will be allowed to defer paying their share of the 6.2% Social Security tax imposed on them. And 50% of any deferred amount would be due on December 31, 2021, and the other 50% would be due by December 31, 2022. Similar provisions apply to self-employed individuals; however, 50% of the self-employment tax still needs to be remitted on the existing deadlines. Employers may not take advantage of this Social Security tax deferral if they elect to take advantage of the loan forgiveness provisions contained in the Paycheck Protection Program.
Net Operating Loss Modification
The Tax Cuts and Jobs Act (TCJA) added Section 461(I) to the Internal Revenue Code, which limited non-corporate taxpayers’ (individuals, trusts, estates) ability to deduct excess business losses. Excess business losses are defined as the excess of aggregate business gross deductions over aggregate business gross income. Deduction of these excess business losses by a non-corporate taxpayer was limited to $250,000 per year ($500,000 married filing jointly). Unused excess business losses are then carried forward as a Net Operating Loss (NOL). These limitations continue through the 2026 tax years, however, the CARES Act delays the application of the excess business loss limitation until 2021. This may allow non-corporate taxpayers to deduct all excess business losses through the end of the 2020 tax year. Taxpayers with losses in 2018 and 2019 also may be permitted to file for refunds. This is potentially a very significant benefit to many business such as individuals in the real estate business that may be able to deduct large losses arising from the 100% bonus depreciation provision in the TCJA (as well as other losses) that would otherwise be limited.
Additionally, due to an error in drafting, the TCJA increased the period for deducting the cost of qualified improvement property, such as qualified leasehold, restaurant, and retail property improvements. As a result of the error known as the “retail glitch,” qualified improvement property depreciates over a 39-year period and does not qualify for bonus depreciation. Fortunately, the CARES Act includes the highly anticipated technical correction by defining qualified improvement property as 15-year property to be expensed immediately.
Relaxation of Limitations on Business Interest Expense Deduction
The CARES Act temporarily increases the amount of interest expense a business is permitted to deduct on their tax returns by increasing the adjusted taxable income limitation from 30% to 50% for 2019 and 2020. Additionally, the CARES Act allows a taxpayer to elect to treat its 2020 adjusted income as if it were the same amount as its 2019 adjusted taxable income for purposes of applying the interest expense limitation. This may be a significant benefit to some taxpayers and may create additional NOL’s in 2020, which could be carried back to previous tax years under the NOL modifications listed previously.
