Coronavirus: BUSINESS TAX CREDITS, DEFERRALS AND DEDUCTIONS IN THE ‘CARES’ ACT
Although not given as much attention as the Payroll Protection Program, the Federal Coronavirus Aid, Relief and Economic Security (CARES) Act also provides new tax credit, deferral and net operating loss deductions which may be beneficial for your business.
Section 2301 Employee Retention Credit
Section 2301 gives eligible employers a tax credit against the 6.2% Social Security payroll taxes that the employer pays for an eligible employee between March 13th and December 31, 2020 (the “covered period”). The credit is dollar for dollar, up to 50% of “qualified wages” (discussed below). The credit may not exceed $5,000 per employee.
Eligibility: the business must: (1) suffer a full or partial suspension for one or more calendar quarters due to a government act limiting commerce, travel or meetings; or (2) show that quarterly gross receipts were less than 50% of gross receipts for the same quarter last year. The credit may continue until gross income reaches 80% of gross receipts for the same quarter last year.
Qualified wages: Up to $10,000 for all quarters. For business with 100 or fewer full-time employees in 2019, qualifying wages include wages paid during the work slowdown regardless of whether the employee actually provides services. For businesses with more than 100 employees, only wages paid for employees who not providing services are deemed to qualify. Qualified wages may include health plan expenses which are not already included in an employee’s gross income.
Example: ABC Corp., an engineering firm, had 20 full-time employees and $2 million in gross receipts in the second calendar quarter of 2019. For the same period in 2020, the company had $500,000 in gross receipts due to the freeze on non-essential businesses. The company is eligible.
Jane Doe is a full-time project manager with an annual salary of $120,000. Her qualified wages are $10,000, and the maximum credit available to ABC Corp. is $5,000 (50% of her qualified wages). If ABC Corp. pays $5,270 in social security payroll tax for Jane Doe over the covered period, the company is eligible for a tax credit of $5,000. If her salary were $70,000 and the company paid $3,074 on her behalf over the covered period, the company would receive a credit equal to the full $3,074.
IMPORTANT: Paycheck protection recipients not eligible: Businesses receiving loans under the Payment Protection Program are not eligible for a Section 2301 credit. Businesses should consider whether that program or the Section 2301 credit better suits their needs. (This may also provide some benefit to 501(c) nonprofits, cooperatives and condominium associations if they continue to be denied PPP benefits.)
Section 2302 Payroll and Self-Employment Tax Deferral
Section 2302 of the Act permits eligible employers and self-employed individuals to defer their Social Security payroll or self-employment tax obligations payable between March 27, 2020 through January 1, 2021. The amount that can be deferred is the “employer’s share” (50% of the total Social Security tax obligation of employers and employees combined). 50% of the deferred amount is payable by December 31, 2021, and the remaining 50% by December 31, 2022.
However, companies that receive small business loan forgiveness under the PPP may not defer their tax payments. Ramifications of the PPP loan, if any, on Social Security payroll tax payments should be considered.
Section 2303 Modification for Net Operating Losses
Section 2303 of the Act now allows businesses to carry net operating losses incurred in tax years 2018, 2019 and 2020 back five years. (Carrybacks were previously barred) You may amend your prior year’s tax return to do so.
For instance, if ABC Corp. had a net profit of $200,000 in 2017 but saw a net loss of $50,000 in 2020, ABC Corp presumably can file an amended tax return for 2017 to apply the $50,000 loss as a deduction and potential basis for a tax refund.
“Qualified Improvement Property” Expense Deductions Accelerated to 15 Years
The CARES Act fixes a technical glitch in the 2018 tax law which prevented interior improvements to non-residential property from being expensed over 15 years instead of 39 years (the useful life of a building).
Deductions for Interest on Borrowed Funds Increased from 30% to 50% of Earnings
The CARES Act now allows corporations to deduct interest on borrowed moneys in the amount of up to 50% of their “adjusted taxable income.” Under prior law, the interest deduction was limited to 30%.
What should you do?
Tax rules are inherently complex, and this summary is by necessity incomplete. The CARES Act does not simplify the tax code, but the new rules discussed here may give you valuable tax relief during these difficult times. Careful consideration should be given to whether these and other provision of the CARES Act meet your needs.
We will continue to keep you updated about relevant business issues as the governmental response to the COVID-19 epidemic evolves. Please stay safe and healthy in the meantime!