What's in the CARES Act? Part Two - Business Tax Provisions

March 28, 2020 | Kristine A. Tidgren

Update: On April 9, 2020, IRS issued Rev. Proc. 2020-24, providing guidance to taxpayers with net operating losses that are carried back under the CARES Act.

Update: On April 9, 2020, IRS issued Notice 2020-26, granting a six-month extension of time to file Form 1045 or Form 1139, as applicable, with respect to the carryback of a net operating loss that arose in any taxable year that began during calendar year 2018 and that ended on or before June 30, 2019. 

Update: On April 8, 2020, IRS issued Rev. Proc. 2020-23, allowing eligible partnerships to file amended returns for tax years beginning in 2018 and 2019 using a Form 1065, and to issue an amended Schedule K-1, to each of its partners instead of filing an administrative adjustment request (AAR).This applies only to partnerships that have not opted out of the centralized partnership audit regime.

On Friday, March 27, 2020, the President signed into law H.R. 748, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act contains a number of relief provisions—including tax provisions—designed to sustain Americans during the COVID-19 health and economic crisis. This post provides an overview of key business tax provisions implemented by the law. A separate post looks at individual tax provisions and the Paycheck Protection Program.

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Employee Retention Credit for Employers Subject to Closure Due to COVID-19 (§ 2301)

Section 2301 of the CARES Act allows “eligible employers” a fully refundable payroll tax credit equal to 50 percent of qualified wages paid to each employee for each calendar quarter during the COVID-19 crisis. The qualified wages which may be taken into account cannot exceed $10,000 per employee for all quarters. The credit is taken against the applicable employment taxes on the qualified wages (reduced by any credits taken under the Families First Coronavirus Response Act or the employer credit for paid family and medical leave).

Eligible employers” are those employers (including non-profit employers) whose businesses were fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. The definition for “eligible employers” also includes those employers that experienced a “significant decline in gross receipts” for a given calendar quarter.  An employer becomes an “eligible employer” under the “significant decline in gross receipts” test during the first calendar quarter for which gross receipts for that quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year. The eligibility period ends in the calendar quarter following the first calendar quarter in which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in the prior year.

The definition of "qualified wages" depends upon the size of the employer. Eligible employers that had an average of 100 or fewer full-time employees in 2019 may take the credit for all employee wages, whether or not the employee was furloughed. For eligible employers with more than 100 average employees in 2019, the employer may take the credit only for the wages of employees who were actually furloughed or placed on reduced hours because of a business closure or reduced gross receipts. The definition of "qualified wages" includes the cost of health benefits.

This credit is not available to those employers who are receiving Small Business Interruption Loans (through the Paycheck Protection Program) or for wages of an employee for whom the employer is allowed a Work Opportunity Credit.

Note: On March 31, IRS issued Notice 2020-22, offering penalty relief to employers that reduce employment tax deposits in anticipation of the credits with respect to Qualified Retention Wages paid with respect to the period beginning on March 13, 2020, and ending December 31, 2020.

Delay of Payments of Payroll Taxes, RRTA Tax, and SECA (§ 2302)

Section 2302 of the CARES Act allows employers to temporarily defer payment of the employer’s portion of social security and RRTA payroll taxes. It provides the same opportunity to self-employed individuals for ½ of the self-employment tax. The requirement to deposit these taxes is delayed through the end of 2020. The delayed taxes must then be repaid in two equal installments, one due by December 31, 2021, and the other due by December 31, 2022.

The payroll tax delay does not apply to any taxpayer who has had debt forgiven with respect to a loan under the Small Business Act or under § 1109 of the CARES Act.

Net Operating Loss Modifications (§ 2303)

Section § 2303(b) of the CARES Act allows net operating losses arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years. The Tax Cuts and Jobs Act had eliminated carrybacks for net operating losses arising in businesses other than farming businesses and casualty insurance companies (which were allowed a two-year carryback). The new five-year rule applies to all businesses, including farming businesses and casualty insurance companies. Taxpayers may continue to elect out of the carryback and carry the loss forward during these years. Such elections for taxable years beginning in 2018 and 2019 must be made by the due date (including extensions) for filing the taxpayer’s return for the first taxable year ending after the law was enacted (March 27, 2020).

Section 2303(a) of the CARES Act temporarily increases the amount of taxable income a net operating loss carryback or carryforward can offset to 100 percent. This taxable income limit was set to 80 percent by the Tax Cuts and Jobs Act. Specifically, net operating loss carryforwards and carrybacks can offset 100 percent of taxable income in tax years arising before 2021, regardless of the year in which they arose. The 80 percent taxable income limitation, however, will be reinstated for tax years beginning after December 31, 2020.

Technical Correction for TCJA Net Operating Loss Change (§ 2303(c))

The Tax Cuts and Jobs Act provided that the changes to net operating loss carryforwards and carrybacks were effective for “taxable years ending after December 31, 2017.” The committee report, however, stated that the effective date for the changes would be tax years “beginning after December 31, 2017.” As written, fiscal year taxpayers with years ending in 2018 were subject to the new restrictions for their 2017 fiscal year, even if the majority of their tax year was in 2017. Section 2303(c) of the CARES Act corrects this error by providing that the modified carryover and carryback provisions apply to net operating losses arising in taxable years beginning after December 31, 2017. Impacted taxpayers have 120 days from the date of enactment to adjust their elections accordingly.

Modification of Credit for Prior Year Minimum Tax Liability for Corporations (§ 2305)

The Tax Cuts and Jobs Act repealed the corporate alternative minimum tax for taxable years beginning after Dec. 31, 2017. Corporations with AMT credits from prior taxable years could use them as refundable tax credits. The credits were to be used over tax years beginning after 2017 and before 2022. Section 2305 of the CARES Act accelerates use of these credits by allowing the full amount of the remaining refundable AMT credit to be available for the corporation’s first taxable year beginning in 2019. The corporation may also elect to use all of its AMT credits in its first taxable year beginning in 2018. 

Modification of Business Loss Limits for Taxpayers other than Corporations (§ 2304)

The Tax Cuts and Jobs Act enacted an “excess business loss” rule, restricting a noncorporate business taxpayer’s loss to $250,000 ($500,000 in the case of a joint return). Section 2304 of the CARES Act temporarily suspends this loss limitation, allowing these taxpayers to deduct excess business losses arising in tax years 2018-2020.

Modification of Business Interest Deduction Limitation Rule (§ 2306)

The Tax Cuts and Jobs Act generally limited the deduction for business interest to 30 percent of adjusted taxable income for businesses with gross receipts in excess of $26 million (in 2019). Section 2306 of the CARES Act temporarily and retroactively increases the business interest deduction limit from 30 percent to 50 percent for taxable years beginning in 2019 and 2020. A special rule applies to partnerships.

Technical Correction for Qualified Improvement Property (§ 2307)

The Tax Cuts and Jobs Act eliminated the separate definitions for "qualified leasehold improvement property," "qualified restaurant property" and "qualified retail improvement property," which were previously provided a statutory 15-year recovery period. It then expanded the definition of "qualified improvement property" to include "any improvement to the interior of building if that building is nonresidential real property and such improvement is placed in service after the date such building was first placed in service." IRC 168(e)(6). Lawmakers intended to provide a 15-year MACRS recovery period for qualified improvement property." This 15-year life would mean that QIP would also qualify for bonus depreciation. This 15-year class-life provision, however, was not added to IRC § 168(e)(3)(E). As such, "qualified improvement property" remained 39-year non-residential property, not eligible for bonus depreciation.

Section 2307 of the CARES Act provides a fix to this error and modifies IRC § 168(e)(3)(E)(vii) to include “qualified improvement property” as 15-year MACRS property (20-year ADS). Qualified improvement property is thus eligible for bonus depreciation. This amendment is effective for property placed in service after December 31, 2017.

Temporary Exception from Excise Tax (§ 2308)

Section 2308 of the CARES Act waives for calendar year 2020 the federal excise tax on any distilled spirits used to produce hand sanitizers.