On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus package thought to be the largest in U.S. history.
The CARES Act contains several key measures intended to provide expedited tax relief to business and individual taxpayers.
- First, the CARES Act establishes a new refundable tax credit for businesses that retain employees during the COVID-19 crisis. This credit is in addition to the new refundable payroll tax credits for businesses for the cost of paid sick leave and paid family leave enacted earlier this month and described in this Client Alert. Since these tax credits apply to payroll, not income, tax, a wide range of businesses (including businesses that are not expected to pay income taxes in 2020) are expected to benefit. In addition, the CARES Act allows most employers to defer certain 2020 payroll taxes until 2021 and 2022.
- Second, the CARES Act makes several U.S. federal income tax changes intended to benefit businesses navigating the COVID-19 crisis, including increasing interest deduction allowances and temporarily relaxing certain limitations on the use and carryback of net operating losses (NOLs).
Payroll Tax Measures
- Employee Retention Credit (Section 2301)—The CARES Act establishes a new refundable tax credit against the 6.2 percent Social Security payroll tax (Old-Age, Survivor, and Disability Insurance (OASDI) tax) imposed on employers by Section 3111(a) of the U.S. Internal Revenue Code of 1986, as amended (the Code) to assist employers that retain employees through the COVID-19 crisis. The amount of the credit is 50 percent of "qualifying wages" paid to an employee after March 12, 2020 and before January 1, 2021 and is capped at $10,000 of qualifying wages per employee (giving a maximum credit of $5,000 per employee).
- Triggering conditions—The credit is available to employers engaged in a trade or business that i) are subject to closure due to COVID-19 orders or ii) experience a "significant decline" in gross receipts. "Closure" means a full or partial suspension of business activity due to orders from an appropriate governmental authority due to COVID-19. A "significant decline" in gross receipts occurs during the period beginning with the first calendar quarter beginning after December 31, 2019 in which the employer's gross receipts drop to less than 50 percent of gross receipts for the same quarter in the prior year and ending with the first quarter in which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in the prior year.
- Application based on number of employees—Small employers (with 100 or fewer employees) are eligible for the credit for any wages paid during a closure or a period of significant decline in gross receipts. Larger employers (with more than 100 employees) are eligible for the credit only for wages paid with respect to employees who are not providing services due to closure or a significant decline in gross receipts.
- No overlap with other tax credits—Qualifying wages do not include wages taken into account for the new employer tax credits for COVID-19-related paid sick leave and paid family leave enacted earlier this month or the existing credit for paid family and medical leave under Section 45S of the Code, but do include certain expenses incurred by the employer to maintain a group health plan that are allocable to the wages.
- SBA Loan recipients ineligible—Any employer that receives a PPP Loan as described in this Client Alert is not eligible for the credit.
- Payroll Tax Deferral (Section 2302)—Employers may defer deposit and payment of the 6.2 percent Social Security payroll tax for the remainder of 2020 beginning with the date of enactment of the CARES Act. Fifty percent of the tax deposits may be deferred until December 31, 2021, and the remaining 50 percent may be deferred until December 31, 2022. The deferral does not apply to the employee portion of payroll taxes or the Medicare tax imposed on employers. Employers are not eligible for the deferral if they have PPP Loans forgiven, as described in this Client Alert, (including comparable loans provided by newly participating financial institutions under the CARES Act).
Net Operating Loss Provisions (Section 2303)
Key changes to the rules for using corporate NOLs are summarized below. This Client Alert explains the changes to the NOL rules in greater detail.
- Suspension of 80 Percent Limitation—Under current Section 172 of the Code, a taxpayer's NOL deduction with respect to NOLs arising in taxable years beginning after December 31, 2017 (NOLs arising post-2017) is limited to no more than 80 percent of the taxpayer's taxable income (the 80 Percent Limitation). The CARES Act suspends the 80 Percent Limitation for taxable years beginning before January 1, 2021. For calendar year taxpayers, this means that NOLs carried forward or back to taxable years 2018, 2019, or 2020 could offset up to 100 percent of the taxpayer's taxable income in such year.
- 5-Year Carryback of Certain NOLs—Under current law, NOLs arising post-2017 generally cannot be carried back. The CARES Act generally allows a five-year carryback (the 5-Year Carryback) for NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021 (taxable years 2018, 2019, and 2020, for a calendar year taxpayer).
- Other Amendments—The CARES Act contains a number of amendments to the NOL provisions, including provisions that address the overlap of the Section 965 "transition tax" and the new 5-Year Carryback and clarify the application of the 80 Percent Limitation when both NOLs arising post-2017 and other NOLs are carried to the same year.
Other Business Tax Measures
Acceleration of Credit for Corporate AMT (Section 2305)
- Under current Section 53 of the Code, corporate taxpayers are allowed a refundable credit in respect of alternative minimum tax (AMT) that was paid before the repeal of the corporate AMT by the Tax Cuts and Jobs Act (and not previously credited). The credit could be claimed over a four-year period ending with the corporation's taxable year beginning in 2021. The CARES Act accelerates the refundable credit so that the credit can be claimed in full by the first tax year beginning in 2019. In addition, a corporate taxpayer may elect to accelerate the entire credit to the corporation's taxable year beginning in 2018. In that case, the procedures applicable to tentative carryback adjustments (so-called "quickie refunds") apply for purposes of seeking a refund for the credit. For further information, see this Client Alert.
Business Interest Limitation (Section 2306)
- Increase of 30 Percent Limitation to 50 Percent—Under current Section 163(j) of the Code, a taxpayer is generally permitted to deduct business interest paid or accrued only to the extent of business interest income, plus 30 percent of "adjusted taxable income." The CARES Act increases the limitation from 30 percent to 50 percent of adjusted taxable income for taxable years beginning in 2019 or 2020, except the 50 percent limitation applies only for taxable years beginning in 2020 for entities taxed as partnerships for U.S. tax purposes. Additionally, a partner is allowed to deduct in its first taxable year beginning in 2020 (without regard to the adjusted taxable income limitation) 50 percent of the partner's share of the excess business interest for any taxable year of a partnership beginning in 2019 (with the balance subject to the normal rules, as amended by the CARES Act). Taxpayers are permitted to elect out of some of these rules.
- Election to Use 2019 Adjusted Taxable Income—The CARES Act further allows a taxpayer to calculate the limitation for a taxable year beginning in 2020 based on its adjusted taxable income for its last taxable year beginning in 2019.
- For further information, see this Client Alert.
SBA Loan Forgiveness Income Exclusion (Section 1106)
- As described in this Client Alert, an SBA PPP Loan recipient is eligible for forgiveness on an SBA loan in an amount equal to certain payroll and other expenses. For tax purposes, loan forgiveness generally results in income from discharge of indebtedness that is in includible in a taxpayer's gross income unless a specific exclusion applies. The CARES Act provides a new exclusion from gross income for discharge of indebtedness income arising from qualifying forgiveness of an SBA PPP loan.