CARES Act: Tax Relief for Businesses
The Coronavirus Aid, Relief, and Economic Assistance Security Act (“CARES Act”), signed into law on March 27, 2020, provides significant relief provisions for small businesses by making changes to certain tax provisions enacted under the 2017 Tax Cuts and Jobs Act (“TCJA”). This client alert briefly summarizes these changes which may provide relief to businesses immediately, prospectively and retroactively. In addition, we will share some insights on the practical applications of these rules to help you identify which may be relevant to your business.
- Net Operating Losses (NOLs) – For tax years after 2017, TCJA prohibited NOLs from being carried back to a prior year, they could only be carried forward, and the resulting deduction was limited to 80% of the carryforward year’s taxable income. Under the CARES Act, businesses may amend tax returns and claim refunds for tax years dating back as far as 2013 because NOLs incurred in tax years 2018, 2019 and 2020 can now be carried back up to 5 years to fully offset income in prior years at 100%, without the 80% limitations of TCJA. In addition to this relief, the act provides that pre-TCJA NOLs could be carried forward, even to tax years after 2020, and be utilized at 100%, and that similarly any NOLs deductible in 2018, 2019, and 2020 would also be at 100%.
- Our Insights – This is reminiscent of the relief provided during the financial crisis in 2008 and 2009. It will be immediately helpful to businesses with losses in 2018 or 2019 (although there may be precious few businesses with losses in those good years) that could retroactively claim refunds from the years when they were profitable and had paid income taxes at higher pre-TCJA rates applicable (e.g. 35% for corporations and 39.6% for individuals). Businesses with losses in 2020 must wait for relief until early 2021, after the 2020 tax returns are filed, although it is possible to adjust 2020 estimated tax payments to obtain some immediate benefits.
- Limitation on Losses – The CARES Act extends NOL relief to non-corporate entities by allowing excess active business losses incurred in tax years 2018, 2019 and 2020, temporarily repealing limitations imposed by TCJA which had suspended losses above $250,000 for single filers and $500,000 for joint filers for tax years after 2017 and before 2026.
- Our Insights – This provides current and future cashflow to businesses operating as sole proprietorships, partnerships, and S corporations by allowing them or their partners and shareholders to claim business losses to offset non-business income (e.g. stock sales, dividends, interest, etc.) for tax years 2018 to 2020.
- Business Interest Expense Limitation – The CARES Act temporarily increases the amount of interest expense a business can deduct on their tax returns by raising the adjusted taxable income limitation from 30% to 50% for the 2019 and 2020 tax years. In addition, it allows businesses to elect to use adjusted taxable income from the 2019 tax year (rather than 2020 adjusted taxable income) when calculating the limitation for the 2020 tax year. For partnerships, the 30% of adjusted taxable income limit remains in place for 2019 but is 50% for 2020. There are more special rules that apply to partnerships.
- Our Insights – For highly leveraged businesses subject to the interest limitation, this will improve liquidity with a reduced cost of capital (due to the ability to deduct more interest expense) so that businesses are able to continue operations and keep employees on payroll. In addition, the choice between the 2019 and 2020 tax year will provide prospective relief in the event the business has lower income in 2020 (as expected) than it did in 2019.
- Qualified Improvement Property Deduction – The CARES Act has corrected a drafting error in TCJA, effectively allowing taxpayers to amend returns for the 2018 and 2019 tax years to claim refunds for capital improvements costs to nonresidential property that previously had to be depreciated. As such, businesses that make and have made improvements to their buildings (placed in service after December 31, 2017) will be able to deduct those costs immediately, instead of depreciating those costs over time.
- Our Insights – This will provide immediate relief to businesses, particularly restaurants and local retail stores, which have been impacted the most, by accelerating the deduction of capital expenses incurred for improvements to the physical premises related to these businesses. It may also incentivize continued investment in future improvements.
- Payroll Tax Deferral and Credit – In addition to those discussed above, the CARES Act made the following two important changes that businesses could take advantage of to improve cash flow in 2020: (1) Taxpayers (including self-employed individuals) can defer paying the employer portion of certain payroll taxes (the Social Security or FICA portion but not the Medicare portion of the payroll taxes) through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022; and (2) eligible employers can qualify for a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis, limited to $10,000 of wages per employee which equates to a maximum credit of $5,000 per employee. The deferral benefit is not available if you had debt forgiveness for certain SBA loans.
- Our Insights – This may provide additional relief beyond the Families First Act to businesses that are subject to the paid family leave and paid sick leave requirements of both bills.
Check with your attorney at ECJ for additional guidance or details related to any aspect of the CARES Act. You may also review other CARES Act articles and valuable updates prepared by ECJ attorneys by accessing our Newsroom.
Gary Michel, Vanja Habekovic and Mayer Nazarian are Partners in the Business, Corporate & Tax Group of Ervin Cohen & Jessup LLP.