Sean Kelly, CPA
Senior Tax Manager
April 9, 2020
The recently enacted Coronavirus Aid, Relief, and Economic Security or CARES Act provided much needed financial relief to millions of individuals and businesses impacted by the near-global economic shutdown. This $2 trillion package contains key provisions in a variety of areas for businesses including paycheck protection, employee retention, and other incentives.
This guide provides businesses with the information they need to navigate and take advantage of the incentives in the CARES Act. For individuals, please read Key Components of the CARES Act for Individuals.
Under the paycheck protection program, small businesses with fewer than 500 employees will be able to take out loans up to $10M or 2.5 times the average monthly payroll costs over the previous year (up to $100,000 per employee). For these purposes, small businesses include sole proprietors and nonprofits. The loan proceeds must be used for payroll costs, group health insurance premiums or other healthcare costs, salaries and/or commissions, rent, mortgage interest, utilities, and certain other business expenses incurred before February 15, 2020. Payroll costs are defined broadly to include wages, salaries, retirement contributions, healthcare benefits, covered leave, and other expenses.
These loans will be made by the Small Business Association (SBA) and include a huge benefit—they may be partially or totally forgiven. Even better, any portion that is forgiven is also tax-free. Once the loan is made, the amount spent during the first 8 weeks after the loan is made for payroll costs (up to $100,000 per employee), rent pursuant to a lease in effect before February 15, 2020, electricity, gas, water, transportation, telephone, or internet expenses which began before February 15, 2020, and group health insurance premiums and other healthcare costs may be forgiven. The caveat is the business must maintain the same number of employees from February 15, 2020, through June 30, 2020, as it did during the same period in 2019 or from January 1, 2020, to February 15, 2020.
Additional benefits include:
Please keep in mind that additional guidance from SBA is expected.
For more information, read our Paycheck Protection Program FAQs.
Another business incentive is the Employee Retention Credit. A company may become eligible if their operations have been fully or partially suspended during a quarter either as a result of a governmental authority or in which revenue in 2020 is less than 50% of revenue from the same quarter in 2019. The credit equals 50% of the wages paid to each employee, up to a maximum of $10,000 of qualified wages per employee, including health benefits (meaning the credit is capped at $5,000).
More caveats: For businesses with fewer than 100 employees, all wages are eligible. However, for employers with more than 100 employees, only wages paid to individuals who are not working due to the suspension of the business or a drop in gross receipts are eligible to count towards the credit. The business will continue to qualify for the credit until the earlier of the end of 2020 or if there is either a quarter with a government suspension of operations or gross revenue for the quarter exceeds 80% of the gross revenue from the calendar quarter in 2019. The credit is provided for wages paid or incurred from March 13, 2020, through December 13, 2020.
For more information, read our Employee Retention Credit FAQs.
Before we provide the details of this program, it’s important to note that the Payroll Tax Credit and the Payroll Tax Deferral cannot be used by businesses that are using the PPP. The IRS recently issued FAQs which clarify that employers may defer payroll taxes up until the date that their PPP loan is forgiven, and the payroll taxes deferred during that time period will also be subject to the favorable payment dates below.
The CARES Act contains a favorable payroll tax deferral for businesses. Employers are eligible to defer their 6.2% share of Social Security tax on wages paid for the period from March 27 to December 31, 2020. 50% of the payroll taxes that would be due during this period are deferred but must be paid by December 31, 2021, and the remaining 50% is due by December 31, 2022. Importantly, businesses who have had debt forgiven under the paycheck protection program are ineligible for this deferral.
The Tax Cuts and Jobs Act (TCJA) of 2017 repealed the corporate alternative minimum tax but made the alternative minimum tax credits available as refundable credits through 2021. The CARES Act permits taxpayers to accelerate the ability to recover the entire refundable credit amount. This will provide companies with alternative minimum tax credits with additional cash flow.
The net operating rules have also been favorably changed. Net operating losses of corporations (other than REITs) from 2018, 2019 or 2020 can be carried back up to five years. The 80% of taxable income limitation has also been increased to 100% for 2018, 2019 and 2020, meaning that net operating losses can be used to fully offset taxable income. Individuals can also benefit from the repeal of the $500,000 loss limitation for 2018, 2019 and 2020. The Act generally permits net operating losses that arise in those tax years to fully offset prior-year taxable income. This provision will provide companies to immediately utilize net operating losses and receive refunds for prior tax year taxes to the extent a company incurs a net operation loss.
The 30% business interest deduction created under the Tax Cuts and Jobs Act (TCJA) has been increased to 50% of business adjusted taxable income, plus any interest income for taxable years beginning in 2019 and 2020. Furthermore, in the case of taxable years beginning in 2020, taxpayers may elect to substitute their adjusted taxable income for their taxable year beginning in 2019 for their adjusted taxable income for their taxable year beginning in 2020.
Finally, the long-awaited technical correction allowing qualified improvement property to be classified as 15-year property, and thus qualify for bonus depreciation has been made. Qualified Improvement Property includes any interior improvements made by the taxpayer to nonresidential real property after the date the property was first placed in service. This makes tenant improvements much cheaper on an after-tax basis. The provision applies to qualified improvements property placed in service after December 31, 2017, so taxpayers can amend 2018 and 2019 returns to claim this bonus depreciation for qualified improvement property placed in service in 2018 and 2019.
An employer now may pay an employee’s student loan obligations and such payments will not constitute taxable income to the employee. This benefit is subject to the current $5,250 cap on overall employer-provided educational assistance.
Corporations may now take deductions for their charitable contributions up to 25% of their taxable income, as opposed to prior 10% limit. The Act also increases the limit on deductions for contributions of food inventory from 15% to 25%.
Unemployment coverage is temporarily available to those who have used up their regular unemployment benefits, as well as to individuals who don’t normally qualify for unemployment benefits, such as self-employed proprietors and part-time workers. The enhancements extend unemployment for up to 39 weeks, as well as up to an additional $600 per week. More details can be found in the Department of Labor’s Unemployment Insurance Program Letter.
Be sure to contact your advisor, tax professional or business consultant if you think any of the above provisions applies to you. There are still many unanswered questions and strict rules to follow, and we will provide updates with any future changes or additional guidance as they become available.
Also, read our Families First Coronavirus Response Act FAQs