While the main focus of the CARES Act has been the PPP loans and the related forgiveness, the CARES Act also contained several favorable tax provisions designed to provide many businesses with the ability to create some additional liquidity in a time when current and future cash flow is uncertain. The following is a high-level summary of the major provisions.
Net Operating Losses
Due to the COVID-19 crisis there will likely be many businesses that will end the year with a net operating loss (NOL). The CARES Act has modified the current federal tax rules to allow taxpayers who incur (or have incurred) losses in 2018, 2019, or 2020 to carryback those losses to the five prior tax years to recoup taxes previously paid. Under the tax rules, taxpayers are required to carryback these losses, however, an election can be made by taxpayers who do not want to follow this rule.
Business Interest Expense
Under the current federal tax rules, the deductibility of business interest expense for certain taxpayers is limited to 30% of adjusted taxable income (essentially the equivalent of EBITDA). The CARES Act temporarily and retroactively increased the threshold to 50% of adjusted taxable income. This change is applicable to 2019 and 2020 tax years only. There may be an opportunity for taxpayers who have already filed their 2019 returns to file amended returns to take advantage of this change. While most taxpayers will benefit from this change in both years, partners in a partnership (or members in an LLC) will not benefit from this change until 2020. As with the NOL provision discussed above, this provision is also mandatory but taxpayers not wishing to follow these rules can elect out.
Employee Retention Credit
This provision provides a refundable payroll tax credit equal to 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit can be used to offset the employer’s share of social security taxes that are due to be paid. If the credit is expected to exceed the employer portion of social security taxes the excess can be refunded. If you have received a PPP loan, then you are NOT eligible for this credit. In addition to this credit, there is a similar credit that may be available if you are required to make mandatory sick or family leave payments under the provisions of the Families First Corona-virus Relief Act (FFCRA). There are many caveats related to these credits so analyzing the requirements is critical to understanding whether you qualify.
Payroll Tax Deferral
Another provision aimed to help businesses retain cash during this crisis is the payroll tax deferral. Employers can defer the deposit and payment of the employer’s share of social security taxes. The deferral applies to taxes that would have been required to be deposited during the period March 27th through December 31st. The taxes deferred will be required to be paid in two equal installments – half by December 31, 2021 and half by December 31, 2022. Taxpayers will continue to be eligible for this deferral until such time that they have received notification that their application for forgiveness of their PPP loan has been approved.
Qualified Improvement Property (QIP)
Under the current federal tax rules, property meeting the definition of QIP is subject to a 39-year recovery period for depreciation purposes. The CARES Act has retroactively changed the recovery period for QIP to a more favorable 15-year period back to the 2018 tax year. With this shortened recovery period, QIP is now eligible for 100% bonus depreciation. Procedures are available for taxpayers wishing to retroactively change their depreciation calculations and claim these benefits. Additionally, this change opens the door for taxpayers who made a permanent election under the business interest expense rules to revoke that election. As there is much coordination between the QIP provision and the business interest expense rules, a thorough analysis of the implications of filing an amended return should be performed.
As with most tax law changes, there are nuances to each provision that should be thoroughly analyzed to ensure you receive the maximum allowable benefit. Please consult your WG advisor for additional information or if you have any questions.