On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) became law. We have already provided a summary of the provisions of the CARES Act relating to expanded small business loan opportunities. In this alert, we will summarize some key business tax relief and the relaxation of some qualified retirement plan rules to provide employees access to additional sources of funds during 2020.
Summary of CARES Act Business Tax Relief
The CARES Act provides a number of temporary changes which may provide immediate and long-term cash relief to businesses, including:
- the removal of the 80% limitation on the use of corporate net operating losses (“NOLs”) and the ability to carry back NOLs from tax years beginning after December 31, 2017 through December 31, 2021 over 5 years, subject to certain exceptions and special rules;
- an increase in the allowance for certain business interest expense deductions from 30% of adjusted taxable income to 50% for 2020;
- accelerated tax credit refunds for corporations that previously paid alternative minimum tax (“AMT”);
- the deferral of the employer portion of Social Security taxes for periods ending before January 1, 2021 over a two-year period beginning in 2021 (note that employers who receive a PPP loan as described in our prior alert are ineligible to take advantage of this provision);
- a quarterly refundable payroll tax credit for 50% of the wages paid or incurred from March 13, 2020 through December 31, 2020 (up to $10,000 per employee for all calendar quarters), for certain employers whose operations were all or partially suspended by government orders as a result of COVID-19 and who are not the recipient of a PPP loan as described in our prior alert;
- an allowance for excess business losses by non-corporate taxpayers for tax years beginning before 2021; and
- a technical correction that shortens the depreciable life of, and allows taxpayers to take bonus depreciation on, qualified improvement property.
The Internal Revenue Service has released initial guidance explaining the process for small and mid-size businesses to obtain tax credits for required COVID-19 related paid leave. The guidance includes what information you should receive from an employee in order to substantiate eligibility for the FFCRA tax credits. The guidance specifies that employers should receive a written request for the COVID-19 related paid leave from the employee that contains, among other things, a “statement of the COVID-19 related reason the employee is requesting leave and written support for such reason.” However, no description of what constitutes “written support” is given. It is unclear whether employers can permissibly ask for doctors or other potentially protected information. We recommend that any employee certification forms state that “additional documentation may be required” so that employers can seek further information from employees if new guidance indicates that more written support is required.
The payroll tax credit for qualified paid sick leave and FMLA is allowed against the taxes imposed on employers by section 3111(a) of the Internal Revenue Code (the “Code”) (the Old-Age, Survivors and Disability Insurance tax (social security tax)) and section 3221(a) of the Code (the Railroad Retirement Tax Act Tier 1 rate) on all wages and compensation paid to all employees. If the amount of the credit exceeds the employer portion of these federal employment taxes, then the excess is treated as an overpayment and refunded to the employer under sections 6402(a) or 6413(a) of the Code. The qualified sick leave wages and qualified family leave wages are not subject to the taxes imposed on employers by sections 3111(a) and 3221(a) of the Code and employers (other than those that are subject to the Railroad Retirement Tax Act) are entitled to an additional credit for the taxes on employers imposed by section 3111(b) of the Code (Hospital Insurance (Medicare tax)) on such wages.
Eligible employers that pay qualified leave wages will be able to retain an amount of all federal employment taxes equal to the amount of the qualified leave wages paid, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, rather than depositing them with the IRS. The federal employment taxes that are available for retention by eligible employers include federal income taxes withheld from employees, the employees’ share of social security and Medicare taxes and the employer’s share of social security and Medicare taxes with respect to all employees.
If the federal employment taxes yet to be deposited are not sufficient to cover the eligible employer’s cost of qualified leave wages, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, the employer will be able file a request for an advance payment from the IRS on a Form 7200. The IRS expects to begin processing these requests in April 2020.
Employers claiming the credits for qualified leave wages, plus allocable qualified health plan expenses and the eligible employer’s share of Medicare taxes, must retain records and documentation related to and supporting each employee’s leave to substantiate the claim for the credits, as well as retaining the Forms 941, Employer's Quarterly Federal Tax Return, and 7200, Advance of Employer Credits Due To COVID-19 and any other applicable filings made to the IRS requesting the credit. We recommend that employers retain the following information for each employee taking qualified paid leave to ease the tax credit process:
- written request for Emergency Paid Sick Leave of Emergency FMLA Leave from the employee
- dates leave is requested
- documentation showing how you determined the amount of qualified sick and FMLA wages paid to each employee
- documentation showing how you determine the amount of qualified health plan expenses that the employer allocated to the wages (FAQs 31-36 in the IRS guidance linked above)
- if the employer will need to complete Forms 7200 to receive an advance of employer credits, then retain copies
- copies of the completed Forms 941, Employer’s Quarterly Federal Tax Return submitted to the IRS or copies of the information provided to third-party payroll providers to complete the Form 941s
- The reason for the leave and a statement that the employee is unable to work or telework for COVID-19 related reasons (see DOL Guidance)
We further recommend that businesses evaluate their eligibility for the business tax relief under the CARES Act, and reach out to their external payroll providers to provide the information required to process any payroll tax credits which they may be eligible to receive if they are not seeking a Payment Protection Program Loan.
Temporary Permitted Relief from Retirement Plan Accounts
The CARES Act provides individuals with the ability to use funds from retirement savings to aid them financially during the coronavirus response.
- Retirement plan participants may take a coronavirus related distribution from their plan account of up to $100,000, without being subject to the typical 10% penalty applied to early withdrawals. This applies to qualified defined contribution retirement plans (such as 401(k) plans), IRAs and plans described under 403(a), 408(b) and 457 of the Code. The distribution will be included in the participant's income ratably over a three-year period, beginning with 2020, unless the participant elects to have it all taxed in 2020.
- If participants repay all or a portion of any coronavirus related distribution to the plan in one or a series of payments within 3 years from the date after the date the distribution was received, the repayment will be treated as if the amount was an eligible rollover for tax purposes.
- Coronavirus related distributions are defined as any distribution made from an eligible retirement plan between January 1 and December 31, 2020 to an individual (i) who is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC, (ii) whose spouse or dependent is diagnosed with either SARS-CoV-2 or COVID-19 by such a test or (iii) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off or subject to hours reduction due to SARS-CoV-2 or COVID-19, being unable to work due to lack of childcare due to SARS-CoV-2 or COVID-19 or other factors to be determined by the Secretary of the Treasury. Employers and plan administrators may rely on a certification from the participant that they meet the criteria for the coronavirus related distribution.
- Qualified retirement plans may now allow for plan loans to be taken up to a maximum of $100,000 (instead of $50,000) during the period beginning on March 27, 2020 and ending December 31, 2020.
- The CARES Act also provides for a one-year delay in plan loan repayments.
We advise employers to talk to their plan administration providers about the administration of existing participant loans, new loans under the temporary changes from the CARES Act, coronavirus related distributions and any planned communications to participants about the how the CARES Act impacts them.