The CARES Act includes several tax provisions for businesses. Most of these provisions are designed to provide businesses immediate (or near term) liquidity, but one major provision provides incentives to retain employees who have been idled by COVID-19.
The primary provisions addressing liquidity are Section 2302 and 2306 that apply to all businesses. Section 2302 provides businesses the option to defer payroll tax payable in 2020 with half of the deferred amount due at the end of 2021 and the other half at the end of 2022. Section 2036 increases the interest expense that may be deducted from 30% to 50% of taxable income for the 2019 and 2020 tax years. Recognizing that many businesses may face significantly reduced taxable income in 2020, the section also allows businesses to elect to use 2019’s taxable income as the basis for calculating the 50% deduction for 2020.
Other provisions addressing liquidity only apply to certain kinds of business. Section 2303 provides corporations the ability to use 100% of net operating losses in tax years 2018, 2019 and 2020. The section also allows corporations to carry these losses back up to five years. This will allow corporations to utilize losses to amend prior year tax returns and thereby generate liquidity. Section 2305 provides corporations the ability to immediately claim (and thereby monetize) alternative minimum tax (AMT) credits that would otherwise not be available until they file returns for 2020 and 2021. While Sections 2303 and 2305 apply only to corporations, Section 2304 applies only to individual owners of pass-through businesses. The section grants these taxpayers temporary relief from loss limitation rules. It suspends the $250,000 ($500,000 married filing jointly) individual limitation on losses for 2017, 2018 and 2020, and allowing a five-year carryback for each of those years.
Two other general provisions are available to businesses with specific tax situations. Section 2307 is a technical amendment to the depreciation rules that treats qualified improvement property (improvements to the interior of nonresidential buildings) as depreciable over 15 years as opposed to 39.5 years under current law. Finally, Section 2308 exempts distillers from paying tax on distilled spirits used to make hand sanitizer.
The CARES Act also includes Section 2301, an employee retention credit available to all businesses. The credit allows a 50% credit of up to $10,000 in wages for employees. The credit is determined on a quarterly basis, but the wage limit applies to all quarters. The credit is taken against payroll tax and is refundable. It is available to businesses, except those that receive an SBA business interruption loan, that have either been required to fully or partially suspend business operations due to COVID-19 or have experienced a decline of more than 50% of gross receipts compared to the same period in 2019.
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