Author Archives: Christina Strasser

Christina Strasser

About Christina Strasser

Christy is a corporate and tax attorney with Williams Parker. She can be reached at cstrasser@williamsparker.com.

IRS Issues Expanded FAQ Guidance on Employee Retention Credit

The Internal Revenue Service (“IRS”) has expanded its FAQ guidance on the Employee Retention Credit (“ERC”), which has been discussed in greater detail in a prior post. Enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the ERC provides a refundable tax credit to eligible employers for certain employment taxes equal to 50 percent of up to $10,000 in qualified wages paid per employee, effective March 12, 2020 through December 31, 2020. However, employers that received loans under the Paycheck Protection Program (“PPP”) are not eligible for the ERC.

The ERC FAQ was originally posted in late March, and the IRS has since continued to update it. The FAQ now has nearly 100 questions posed and answered on major-issue areas such as:

A more recent update relates to the eligibility of an employer who repays its PPP loan in accordance with the Small Business Administration (“SBA”) requirement that a business recertify in good-faith that the PPP loan was “necessary to support ongoing business operations” (previously discussed here, here, and here). Released May 8, 2020, the IRS FAQ 79 states that an employer that applied for the PPP loan, received payment, and “repays the loan by May 14, 2020 . . . will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit.” Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer.

The original deadline for PPP loan repayment was May 7, 2020, but was extended to May 14, 2020 with FAQ 43 of the SBA’s PPP FAQs. The SBA then further extended the repayment deadline to Monday, May 18, 2020 in SBA FAQ 47, following its release of guidance which relieved borrowers with loans of less than $2 million from the “necessity” recertification. While the IRS ERC FAQ has not been updated to reflect the new May 18 deadline, we can only assume that those employers who do make repayment by this time would qualify for the ERC all the same. We note, however, that implicit in IRS FAQ 79 is that employers who do not voluntarily make timely repayment may not claim the ERC. In other words, any employer who is ultimately forced by the SBA to repay the loan would not be allowed to take the ERC.

While the PPP loan was at the top of most employers’ COVID-relief wish lists, and for obvious reasons, the ERC may be the next best option for those who erred on the side of repayment. We are happy to answer any questions employers that opted for repayment may have.

PPP Loans Less Than $2 Million Deemed Certified in Good Faith; Larger Loans Get Penalty Relief But Remain In Cloud of Repayment Uncertainty

On Wednesday, May 13, 2020, just a day before the deadline to recertify or repay Paycheck Protection Program (“PPP”) loans (previously discussed here), the Small Business Association (“SBA”) made good on its promise to provide further guidance as to what circumstances necessitate repayment with its release of FAQ 46. The new FAQ asks the following question:

“How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

The first part of the SBA’s answer reveals a safe harbor for borrowers of PPP loans with an original principal amount of less than $2 million. Borrowers who received loans below this threshold will be deemed to have certified in good faith that the loan was necessary, because they “are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.” The SBA also admitted that it has bigger fish to fry, as removing these borrowers from the PPP loan pool will allow it to “conserve its finite audit resources and focus its reviews on larger loans.”

As for the $2 million-and-above borrowers, the FAQ goes on to say that they may still have an adequate basis for making the required good-faith certification depending on their circumstances. If, however, the SBA determines by its review that a borrower lacked an adequate basis for its PPP loan, the SBA will seek repayment of such loan and notify the lender that the borrower is ineligible for loan forgiveness. Further, the SBA will not take administrative enforcement action to collect repayment or make referrals to other agencies if the borrower voluntarily repays the loan after receiving notification from the SBA. The SBA did not offer a specific timeframe within which repayment would prevent administrative enforcement.

Borrowers who did receive loans of $2 million or more should consider setting aside enough funds to make a repayment should the SBA require it, though one wonders whether the SBA could use retention of such reserves as a basis to question the necessity—and hence the qualification—of the loan. That seems like an unfair catch-22, motivating “larger” small businesses to stop paying employees after the PPP measuring period ends. We hope the SBA will provide more clarification to help these businesses avoid that dilemma and to encourage businesses to continue deploying funds to keep their workforces in place after the PPP measurement period ends.

The SBA also released FAQ 47 later in the day on May 13, which automatically extends the repayment date to Monday, May 18, 2020. The stated reason for this extension is “to give borrowers an opportunity to review and consider FAQ 46.” The practical significance of FAQ 47 as it relates to the necessary-ness certification is unclear, given the penalty relief provided by FAQ 46.

PPP Repayment Deadline Extended But Confusion Remains

On May 5, 2020, the Small Business Administration (“SBA”) in consultation with the Department of Treasury (“Treasury”) announced in a new online FAQ that it is giving extra time for companies to repay loans they applied for and received in good faith under the initial guidance provided by the SBA to the Paycheck Protection Program (“PPP”). Originally set for May 7, 2020, the deadline to repay the loan without incurring penalties is now extended to May 14, 2020. The SBA also stated that it plans to issue “additional guidance on how it will review certification prior to May 14, 2020.” Continue reading

No Deduction for Expenses Paid with Forgiven PPP Loan Funds

One of the major business-tax relief provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act is the paycheck protection program (“PPP”) loan forgiveness and the accompanying exclusion of the forgiven amounts from taxable income. Over the past month since the CARES Act’s enactment, the IRS has released guidance clarifying the interaction between PPP loan forgiveness and other provisions of the Act. However, a lingering, big-picture question regarding the deductibility of certain business expenses paid for with later forgiven PPP loan funds remained. Such expenses include mortgage interest, rent obligations, utility payments, and payroll costs—all covered uses of a PPP loan.  Continue reading

IRS Releases Guidance on CARES Changes to Business Interest Expense Limitation and Bonus Depreciation for Qualified Improvement Property

The IRS has released guidance on certain business tax provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  Released on Friday, April 10, Rev. Proc. 2020-22 informs taxpayers how to make certain elections with respect to the newly relaxed business interest expense limitation and provides real estate and farming businesses with the option to make late elections or withdraw pre-CARES elections. One week later, on Friday, April 17, 2020, the IRS announced in Rev. Proc. 2020-25 that  taxpayers may change their depreciation for certain qualified improvement property. It also allows taxpayers to make late, revoke, or withdraw certain depreciation elections. While both revenue procedures are separately significant, their interplay, and the interplay of the associated CARES provisions, may be especially important for certain electing real property and farming businesses.

Continue reading

IRS Clarifies Interplay Between Employment Tax Deferral and Loan Forgiveness

On Friday, April 10, 2020, the IRS launched a new frequently asked questions (FAQ) page on the deferral of employment tax deposits and payments. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allows employers to defer the deposit and payment of the employer’s share of social security taxes and self-employed individuals to defer payment of certain self-employment taxes between March 27, 2020 and January 1, 2021. As discussed in our previous blog post, payment of half of these deferred amounts would not become due until December 31, 2021. The second half would be due a year later on December 31, 2022.

Such deferral is, however, prohibited for an employer who receives loan forgiveness under the CARES Paycheck Protection Program (“PPP”). Because the language of the CARES Act makes clear that employment-tax deferral is not disallowed until PPP loan forgiveness actually occurs, it appeared that employers could currently take advantage of such deferral while in the midst of the loan application and forgiveness processes. What remained more uncertain was how the IRS planned to treat previously deferred employment-tax payments once an employer did receive a decision that its lender would forgive the loan.

Question 4 of the FAQ clarifies this interplay between the employment-tax deferral and PPP loan forgiveness as follows:

  • Employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer’s share of social security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan.
  • Employers who do so will not incur failure-to-deposit and failure-to-pay penalties.
  • Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of social security tax due after that date.
  • The amount of the deposit and payment of the employer’s share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the “applicable dates” (50% on December 31, 2021 and the remaining amount on December 31, 2022).

The IRS has ensured that information will be provided in the near future to instruct employers how to reflect the deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January through March 2020). Employers will not be required to make a special election to be able to defer deposits and payments of these employment taxes.

The FAQ also makes clear that the ability to defer deposit and payment of the employer’s share of social security tax is in addition to the relief provided in Notice 2020-22, which provides relief from the failure-to-deposit penalty for not making deposits of employment taxes (including taxes withheld from employees) in anticipation of the Families First Coronavirus Relief Act (FFCRA) paid leave credits and the CARES Act Employee Retention Tax Credit (ERTC). An employer is therefore entitled to defer deposit and payment of its share of social security tax prior to:

  • determining whether it is entitled to the paid leave credits under the FFCRA or the ERTC;
  • determining the amount of employment tax deposits that it may retain in anticipation of these credits (FFCRA and ERTC), the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits; and
  • receiving a determination of PPP loan forgiveness from its lender.

Keep in mind that an employer who has received a loan under the PPP is not eligible for the ERTC. The FAQ, however, essentially provides that employers can defer deposit and payment of their share of social security tax while in limbo with any of these relief provisions. Additionally, while deferral in anticipation of the ERTC may not be warranted (i.e., because an employer has already received a PPP loan), general deferral would still be permissible until that employer receives official notice of loan forgiveness.

Larger employers who are ineligible for the PPP loans, or employers who choose not to apply for these loans, will be able to utilize both the ERTC (if eligible based on economic decline) and employment-tax deferral. The ERTC and other credits that reduce payroll taxes will reduce the amount eligible for deferral.

IRS Extends Additional Key Tax Deadlines, Provides CARES NOL Guidance

On Thursday, April 9, 2020, the Internal Revenue Service (“IRS”) released two notices and one revenue procedure offering additional filing and payment relief for taxpayers and providing procedural guidance on a main business tax provision of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

Extension of Deadlines for Generally All Federal Tax Filings

Notice 2020-23 which “amplifies” Notice 2020-18 and Notice 2020-20 (discussed in a previous blog post) to include any person with a specified Federal tax payment obligation or Federal tax return or other form filing obligation due on or after April 1, 2020 and before July 15, 2020 in the definition of Affected Taxpayer. This includes individuals, trusts, estates, corporations, and other non-corporate tax filers, including Americans who live and work abroad. The deadline is automatically postponed to July 15, 2020.

Among other payment and filing obligations, the following are specifically included in Notice 2020-23:

  • U.S. Estate (and Generation-Skipping Transfer) Tax Returns (Form 706)
  • U.S. Income Tax Returns for Estates and Trusts (Form 1041)
  • Information Regarding Beneficiaries Acquiring Property from a Decedent (Form 8971)
  • U.S. Nonresident Alien Income Tax Returns (Form 1040-NR)
  • U.S. Corporation Income Tax Returns (Form 1120)
  • U.S. Income Tax Returns for S Corporations (Form 1120-S)
  • U.S. Returns of Partnership Income (Form 1065)
  • Exempt Organization Business Income Tax Returns (Form 990-T)
  • Estimated Tax for Individuals (Form 1040-ES)
  • Estimated Income Tax for Estates and Trusts (Form 1041-ES)

The three-month relief provided under Notice 2020-23 to an Affected Taxpayer is automatic, and therefore, there is no requirement to file an Application for Automatic Extension to obtain the benefit of the filing and payment postponement deadline of July 15, 2020. However, the Affected Taxpayer must file the appropriate form for an extension of time by July 15, 2020 to obtain an extension to file until October 15, 2020. Nevertheless, any tax payments will still be due on July 15, 2020.

Accordingly, the period beginning on April 15, 2020 and ending on July 15, 2020 will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file or to pay. Interest, penalties, and additions to tax with respect to such postponed Federal tax filings and payments will begin to accrue on July 16, 2020.

CARES NOL Guidance

Just one day after the issuance of Revenue Procedure 2020-23, allowing eligible partnerships to file amended partnership returns, as discussed previously, the IRS followed up with procedural guidance with regard to making certain NOL elections under the CARES Act. The IRS also extended the deadline for taxpayers seeking “quick refunds” for 2018 net operating losses (NOLs).

Revenue Procedure 2020-24 provides guidance to taxpayers with net operating losses that are carried back under the CARES Act. The specific guidance includes procedures for:

  • waiving the carryback period in the case of an NOL arising in taxable years beginning in 2018, 2019, and 2020;
  • disregarding certain amounts of foreign income subject to transition tax that would normally have been included as income during the five-year carryback period; and
  • waiving a carryback period, reducing a carryback period, or revoking an election to waive a carryback period for a taxable year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.

As stated in our previous post, taxpayers must elect out of the CARES Act NOL carryback. An election to waive the carryback for NOLs arising in tax years beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020. A taxpayer makes the election by attaching to its federal income tax return filed for the first tax year ending after March 27, 2020, a separate statement for each of the tax years 2018 or 2019 for which the taxpayer intends to make the election. The election statement must state that the taxpayer is electing to apply Internal Revenue Code section 172(b)(3) under Rev. Proc. 2020-24 and the tax year for which the statement applies.

Notice 2020-26 grants a six-month extension of time to file Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund, 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.  To file for these quick refunds, individuals, trusts, and estates would file Form 1045, and corporations would file Form 1139.

Starting on April 17, 2020 and until further notice, the IRS will accept eligible refund claims on Form 1139 submitted via Fax to 844-249-6236 and eligible refund claims on Form 1045 submitted via fax to 844-249-6237. These fax numbers will not be operational prior to April 17. The IRS is encouraging taxpayers to wait until this procedure is available rather than mailing their Forms 1139 and 1045, as mail processing is being impacted by the COVID-19 emergency. This same procedure may be used by a corporate taxpayer claiming a refund for the acceleration of the recovery of remaining minimum tax credits for its 2018 or 2019 taxable years.

The IRS has released an FAQ to answer common questions associated with this new procedure.

This was post was co-Authored by Alyssa L. Shook and Christina J. Strasser.

Business Tax Relief in the CARES Act

This post was updated April 6. 

On March 27, 2020, President Trump signed into law the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (“CARES”) Act (H.R. 748). The CARES Act is the third stimulus package enacted amid the COVID-19 public health emergency, and while not the Act’s primary focus, it contains significant business tax relief. In a previous post, we provided an overview of the entire Act. This post covers the business tax changes and additions.

The key business tax provisions include:

  • The creation of an employee retention credit of up to 50% of the first $10,000 paid to each employee;
  • For taxable years 2018, 2019, and 2020, net operating loss carryovers (“NOLs”) are no longer subject to an 80% cap based on taxable income, and NOLS from 2018, 2019, and 2020 can be carried back five years;
  • For taxable years prior to January 1, 2021, the excess business loss limitation that applies to noncorporate taxpayers is repealed;
  • For taxable years beginning in 2019 or 2020, the interest expense limitation is increased to 50%, and taxpayers can use their 2019 adjusted taxable income for purposes of the 2020 calculation;
  • A technical correction to the depreciation treatment of qualified improvement property;
  • Unused corporate AMT credits through 2021 are accelerated for current full use and refundable for tax years 2018 and 2019;
  • Employer-side Social Security payroll tax payments may be delayed until January 1, 2021, with the first half due December 31, 2021 and the remainder due December 31, 2022;
  • An exclusion from income for certain loan forgiveness on loans taken out pursuant to other provisions of the CARES Act.

Employee Retention Credit

Effective for wages paid between March 13, 2020, and before January 1, 2021, the CARES Act allows for a refundable credit against Social Security taxes for each calendar quarter equal to 50% of the qualified wages paid to each employee. Employers may only take up to $10,000 of qualified wages into account for each employee for all calendar quarters, and the credit may be applied to the first $10,000 of compensation (including health benefits) paid to an eligible employee. This means that an eligible employer may receive a credit of up to $5,000 per employee, and there is no cap on the number of employees an employer may include in calculating the amount of the total aggregated credit. If the amount of an employer’s combined employee credits exceeds its quarterly employment taxes (as reduced by other credits), the excess will be treated as a refundable overpayment.

An “eligible employer” with respect to a calendar quarter, is an employer that had been carrying on a trade or business during the 2020 calendar year and (i) has operations that were fully or partially suspended during such calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19, or (ii) has a significant decline in gross receipts for such calendar quarter. A significant decline begins with the quarter in which the gross receipts for the quarter were less than 50% of those in the same quarter in the prior calendar year. The decline ends with the quarter in which gross receipts are greater than 80% of the gross receipts for the same quarter in the prior calendar year.

For employers with more than 100 full-time employees, qualified wages are wages paid to employees currently retained even though not providing services for such employers due to either of the COVID-19-related reasons listed above. For employers with less than 100 employees, all wages paid to their retained employees are qualified wages even if the employees are currently still providing services for such employers. Qualified wages may not exceed the amount an employee would have received for working an equivalent amount of time during the 30 days prior a specified period affected by COV1D-19.

The credit is reduced by any credits taken by employers for qualified veterans and research expenditures for small businesses. Additionally, the amount of qualified wages for which an eligible employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act (FFCRA).

There are other limitations that apply to certain employers. Specifically, any eligible employers that receive a covered loan under the Paycheck Protection Program of the CARES Act are not eligible for this credit. Further, if an employer is allowed a Work Opportunity Tax Credit with respect to an employee, then that employee is not included for purposes of this credit for any period with respect to the employer. Keeping in mind that the Paycheck Protection Program is only available for business with fewer than 500 employees, the Employee Retention Credit is therefore available to larger employers who meet the distressed business criteria listed above. Employers qualifying for both the Paycheck Protection Program and the Employee Retention Credit will have to determine which of the two is more advantageous for its particular business. Eligible employers may elect out of the credit for any calendar quarter.

Further, just as with the credits for paid family and sick leave under the FFCRA, these credits do not apply to certain United States government or State government employers. The credit does, however, apply to tax-exempt organizations described under section 501(c) of the Code, which covers everything from charities to business leagues to social clubs to credit unions, etc. Any of these tax-exempt employers is deemed to be an eligible employer with respect to all of its operations (notwithstanding that such operations may not be a trade or business), and the same exclusion for participation in the Paycheck Protection Program applies.

Relaxation of Net Operating Loss Rules

The Tax Cuts and Jobs Act (“TJCA”) only just recently changed the net operating loss (“NOL”) rules. For taxable years ending after December 31, 2017, NOLs were allowed to be carried forward indefinitely but could offset only 80% of a taxpayer’s taxable income (a change from 100%) and could no longer be carried back to prior years (previously a two-year carryback was allowed).

The CARES Act now provides that, for tax years beginning before January 1, 2021, the 80% taxable income limit does not apply, which means corporate and noncorporate taxpayers are allowed to use NOLs to fully offset taxable income. It also clarifies how the 80% limitation is to be applied when it goes back into effect for any taxable year beginning after December 31, 2020.

The CARES Act also provides that NOLs arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 are to be treated automatically as a carryback to each of the five preceding taxable years, unless the taxpayer elects out of the carryback. The carryback therefore operates on an all-or-nothing basis, meaning taxpayers may not choose to carry NOLs back to one particular year within the five-year carryback period. An NOL arising in a tax year beginning in 2018, 2019, or 2020 must be carried back to the earliest year within the five-year carryback period in which there is taxable income, as early as 2013, 2014, and 2015, respectively. Considering the pre-2018 corporate tax rate was 35% (versus 21% now) and the top individual rate was 39.6% (versus 37% now), this carryback could be extremely valuable to certain taxpayers.

A taxpayer must make the election to forgo these NOL carrybacks for 2018, 2019, and 2020 at least by the filing deadline for one’s 2020 income tax return (including extensions). The decision to elect out is, however, allowed to be made for each year. This means that a taxpayer may opt out of the 2018 carryback without limiting its decision for 2019 and 2020. The IRS will likely release guidance advising taxpayers how to request refunds for NOL carrybacks or elect out of the automatic carryback. No refund can be claimed until the return for the tax year in which the NOL arises has been filed. For most taxpayers, the 2018 income tax return has been filed, meaning they may request a refund for a year to which a 2018 NOL is carried (the earliest of five prior years with taxable income). This can be done by filing an amended return or by filing a request for tentative refund. Taxpayers who have already filed for 2019 may do the same to make use of any NOLs for that year. No NOL may be carried back from 2020 until the tax year closes.

Remembering that you cannot pick and choose the year(s) to which an NOL is carried back, taxpayers should consider the opportunity to use an NOL to reduce or clear an underpayment of tax for a year within the five-year carryback range.

Special rules apply to real estate investment trusts (REITS) and life insurance companies. A REIT is not allowed to carry back any NOL, nor may an NOL be carried back to any year in which a taxpayer was formerly a REIT.

Suspended Excess Business Loss Rules

For years before January 1, 2021, the CARES Act repeals the excess business loss limitation that applies to noncorporate taxpayers (individual’s, partnerships, or S corporations) after the passive loss rules, and which disallows the use of a business loss in excess of $250,000, or $500,000 for joint filers against nonbusiness income, and treats such loss as an NOL carryover to the next tax year. This means noncorporate taxpayers with business losses arising in 2018, 2019, and 2020 can enjoy the five-year carryback without regard to the excess business loss rules. If you had a business loss that was limited in 2018 or 2019 under the excess business loss rules, then you may be able to obtain a refund by filing an amended tax return.         

Increased Business Interest Expense Limitation

Current law generally limits taxpayers’ deduction for a business interest expense to the sum of business interest income and 30% of adjusted taxable income. For most taxpayers, the CARES Act increases this 30% limit up to 50% of a taxpayer’s adjusted taxable income for tax years 2019 and 2020. A taxpayer may elect to not apply this increased limitation, but once the election is made, it can only be revoked by the Secretary of the Department of Treasury.

Special rules apply for partnerships. For partners in a partnership, the increase to 50% applies only to taxable years beginning in 2020 (therefore, excluding 2019), but a partner can carry over to 2020 any business interest that was disallowed in 2019 and deduct 50% of that amount, with the remaining 50% subject to the otherwise applicable rules. The CARES Act also allows any taxpayer to elect to use its 2019 adjusted taxable income instead of its 2020 adjusted taxable income when computing the business interest limitation for 2020. This will increase the amount of business interest expense most taxpayers are able to deduct, assuming their income was higher in 2019.

Technical Correction for Qualified Improvement Property

The TCJA mistakenly defined the term “qualified improvement property” in a way that prevented such property from being eligible for the intended 100% bonus depreciation. Qualified improvement property is generally defined as any improvement to an interior of a nonresidential building that is placed in service post-improvement, following the original date on which the building was placed in service. The CARES Act makes a technical amendment to Code section 168(e)(3)(E) correcting a drafting error by including qualified improvement property as “15-year property” instead of the mistaken recovery period of 39 years. This amendment applies retroactively to property placed in service after December 31, 2017. This provision is meant to not only increase a business’s cash flow by allowing them to amend a prior year’s return, but it is also meant to incentivize them to continue to invest in improvements during this public health emergency.

The IRS is expected to release guidance as to how taxpayers may claim the greater depreciation deduction through automatic accounting method change procedures. In the meantime, taxpayers may have the option of amending previously filed returns to retroactively claim any missed deductions.

Credit for Corporate Alternative Minimum Tax

Prior to the TCJA, the amount of alternative minimum tax (“AMT”) paid by a corporation was allowed as a credit in a subsequent taxable year. The TCJA repealed the AMT for corporations for taxable years beginning after December 31, 2017, but allowed corporations to treat 50% of any unused AMT credit as refundable in 2018, 2019, 2020, and 100% as refundable in 2021. The CARES Act accelerates this timeline, making the AMT credit 100% refundable for taxable years beginning in 2018 and 2019. Accordingly, the new law provides relief to corporate taxpayers with non-refunded AMT credits in 2018, who should be able to amend their 2018 returns (assuming they have been previously filed) and be refunded for those amounts.

Delay of Employer-Side Social Security Payroll Tax Payments

The employer’s portion of Social Security taxes for the period from enactment (March 27, 2020) up to January 1, 2021 will not be due until December 31, 2021, when half of the deferred amount is due, and December 31, 2022, when the other half is due. Similar rules allow deferral of 50% of the corresponding Federal self-employment taxes.

Federal withholding taxes, Medicare taxes and withholding, and employee social security withholding are not eligible for the deferral.

All employers are eligible for the deferral other than those who have loans forgiven under the CARES Act’s Paycheck Protection Program. However, there is some tension in the timing of potential loan forgiveness and at least the first payroll tax payment deadline. This means an employer could apply for a loan under the Paycheck Protection Program and not receive a loan until after the first payroll tax payment is due. In this situation, an employer is allowed to defer payroll tax payments until the employer subsequently receives loan forgiveness, because deferral is not disallowed until an employer has actually had loan amounts forgiven. We expect the IRS to release guidance as to how it plans to handle this situation. It may be that the IRS will not expect payment of any payroll taxes deferred prior to loan forgiveness until the first due date (December 31, 2021), or it may provide for a sooner claw back of any deferred payments.

Payroll tax deferral can be used in conjunction with the Employee Retention Credit, so long as the credit does not result in a refund to the employer.

Certain Loan Forgiveness Excluded from Income

The CARES Act allows certain small business loan forgiveness necessary to maintain payroll or pay mortgages, rent, or utilities incurred or paid by the borrower during the 8-week period beginning on the loan origination date. If a business applied for and received a $10,000 advance under the Economic Injury Disaster Loan provisions before transferring into the Paycheck Protection Program, such advance will be deducted from the total loan forgiveness amount. Any portion of the loan that is forgiven pursuant to the Act is excluded from taxable income.

There are numerous tax provisions in the CARES Act that could be beneficial to a business, including multiple opportunities to amend a prior year’s return to increase liquidity. Please do not hesitate to call us if we can assist you in taking advantage of any part of this legislation.

Christina J. Strasser
(941) 536-2048
cstrasser@williamsparker.com

CARES ACT Becomes Law

A third stimulus package to combat the COVID-19 public health emergency, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748), became law on Friday, March 27, 2020, with President Trump’s signature, just hours after it cleared the House. As discussed in detail in our previous post, the CARES Act builds tremendously on two previously enacted pieces of legislation and provides enhanced financial support for both individuals and businesses suffering from the continuing COVID-19 pandemic. Tax policy is front and center, with a focus on getting money directly into the hands of millions of individuals and providing liquidity for small businesses.

CARES Act Expands COVID-19 Relief

UPDATE: As of March 27, the CARES ACT has been signed into law.

A third stimulus package to combat the COVID-19 public health emergency, the Coronavirus Aid, Relief, and Economic Security (CARES) Act builds tremendously on two previously enacted pieces of legislation and provides enhanced financial support for both individuals and businesses suffering from the continuing COVID-19 pandemic. Tax policy is front and center, with a focus on getting money directly into the hands of millions of individuals and providing liquidity for small businesses. A summary of the Act’s business tax and other significant provisions follows, with more specific details to come.

Business Tax Relief Provisions
The tax relief for businesses includes the following:

  • A dollar-for-dollar employee retention credit against payroll tax liability equal to 50% of the first $10,000 in wages per employee paid after March 12, 2020 and before January 1, 2021. Eligible employers must have carried on a trade or business during 2020 and must either (1) have business operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings due to COVID-19 or (2) experience a significant year over year reduction in profits (looking at calendar quarters) within a certain time period.
  • Employer-side Social Security payroll tax payments attributable to wages paid in 2020 may be delayed and paid back over the next two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. A general fund transfer will replace these employer payments to make the Social Security Trust Fund whole. This provision also covers self-employed individuals.
  • Net operating losses (NOLs) earned in 2018, 2019, or 2020 can be carried back five (5) years. The NOL limit of 80 percent of taxable income is also temporarily suspended, so businesses may use any NOLs they have to fully offset their taxable income. Corporations, pass-through business, and sole proprietors will be able to take NOLs in accordance with these provisions.
  • Suspends the limitations on excess farm losses as well as excess business losses of pass-through businesses and sole proprietors for 2018, 2019, and 2020 tax years.
  • An increase in the net interest deduction amount from 30% to 50% of taxable income for 2019 and 2020. There are special rules that apply to partnerships’ 2019 tax year.
  • Current deduction for qualified improvement property costs instead of being depreciated over many years; prior year’s returns may be amended to take advantage of this provision.
  • The acceleration of corporate AMT credits available through 2021 for current use, allowing businesses the chance to claim a current refund.
  • A waiver of the federal excise tax on any distilled spirits for or contained in hand sanitizer for 2020. The hand sanitizer must be produced and distributed according to guidance issued by the FDA in order to be qualify under this provision of the Act.

Small Business Loan Program Provisions
The CARES Act also amends the Small Business Act (SBA) to create a new business loan program category that will provide 100% federally-backed loans to eligible small businesses to help cover costs of operation such as payroll, rent, health benefits, and insurance premiums. Key aspects of these provisions include the following:

  • Eligible entities include certain nonprofit organizations employing no more than 500 employees.
  • Certain loan forgiveness allowed for business loans will be excluded from gross income. Loan forgiveness will be allowed in an amount equal to the cost of maintaining payroll continuity and costs related to debt obligations during period of March 1, 2020 through June 30, 2020, and is reduced for employee cuts or reductions. Employers with tipped employees may receive loan forgiveness for additional wages paid to those employees.
  • The CARES Act also expands on the SBA’s Disaster Loan Program for a period from January 31, 2020 to December 31, 2020. If a business that receives an emergency advance transfers into the main business loan program, the advanced amount will be reduced from any payroll cost forgiveness amounts.

Individual Tax Provisions
The individual tax provisions of the CARES Act range from individual rebates to expanded charitable deduction limits. The Act specifically provides for:

  • Advanced refundable tax credits (rebate checks) of up to $1,200 for eligible individuals, $2,400 for eligible joint filers, and an additional $500 per child. These numbers begin to phase out for individuals earning $75,000 and joint filers earning $150,000, with the IRS using taxpayers’ 2019 returns if filed, or 2018 returns in the alternative, to determine these amounts. There is a complete phaseout for incomes exceeding $99,000 for individuals and $198,000 for joint filers, but there is no minimum income requirement. The CARES Act exempts the rebates from offset to pay debts owed to other federal agencies, state income tax obligations, and unemployment compensation debts (except for support that is past due).
  • Retirement account distributions up to $100,000 will not be subject to the 10% early withdrawal penalty for any “coronavirus-related distribution,” meaning a distribution by a person who has been diagnosed with COVID-19, whose spouse or dependent has been diagnosed with COVID-19, or who experiences financial hardship as a result of being quarantined, furloughed, laid off, caring for children, or working reduced hours due to such virus. This provision covers retirement plans and IRAs. Taxpayers can recontribute the withdrawn funds into their retirement accounts at any time for three years from the date of distribution without affecting retirement account caps. To the extent these amounts are not repaid the income inclusion with respect to any COVID-19 distribution can be included ratably over the same three-year period.
  • A waiver of the required minimum distributions for certain contribution plans and IRAs for calendar year 2020. The delay applies to both 2019 required minimum distributions that need to be taken by April 1, 2020, and the 2020 required minimum distributions. There is a special rollover rule allowing amounts subject to required minimum distribution in 2020 to be rolled over. The CARES Act also delays the due date for certain amendments to plans, as well as delays the minimum funding contributions for qualified plans, including quarterly contributions until January 1, 2021.
  • A charitable contribution deduction of up to $300 in cash contributions in addition to the standard deduction. For those who itemize, the CARES Act also expands the limit on charitable contributions by suspending the 50% limitation on individuals, increasing the 10% limit on corporations to 25%, and increasing the 15% limitation on food inventory to 25%.
  • An expanded definition of employer-provided educational assistance that is excluded from gross income to include up to $5,250 in student loan payments made by an employer between the date of the CARES Act and the end of 2020. The CARES Act also suspends involuntary collections on student loans.

Assistance for Severely Distressed Economic Sectors Provisions
This portion of the CARES Act focuses on airlines and other businesses determined to have received inadequate economic relief through other provisions of the CARES Act. More specifically:

  • It authorizes the Treasury Secretary to make loans, loan guarantees, and other investments in support of these sectors of up to $500 billion.
  • $25 billion will be available for air carriers, $4 billion will be available for air cargo carriers, $17 billion will be available for businesses critical to maintaining national security, and $454 billion will be available in support of facilities established by the Federal Reserve to support lending to eligible businesses, states, and municipalities.
  • In order to participate in these funding programs, borrowers must agree to cap all employee compensation for a period ending one year after their loan is repaid. This provision is aimed at excessive executive compensation.
  • It provides that a borrower with a federally-back mortgage loan may request forbearance, regardless of delinquency status and without penalties, fees, or interest for those affirming financial hardship due to COVID-19.
  • It prevents landlords from bringing legal causes of action to recover possession from a tenant for nonpayment of rent or other fees or charges for 120 days if the dwelling is insured, guaranteed, supplemented, etc. by the U.S. government.
  • It provides credit-reporting relief for accounts impacted by COVID-19.
  • It provides an excise tax holiday for aviation ticket taxes to both passengers and freight from the date of enactment through the end of 2020, as well as for taxes on kerosene used in commercial aviation.

Support for U.S. Healthcare System Provisions
The healthcare provisions of the CARES Act address everything from supply shortages and access to health care, to specific aid for our healthcare providers. They also provide a few clarifications and small changes to the family and sick leave provisions of the previous Families First relief package. Certain key provisions include:

  • Increased funding for various healthcare agencies and programs.
  • Expanded coverage for certain testing and expedited coverage for any service, treatment, or immunization that is intended to prevent or treat COVID-19.
  • Clarification that for health savings account (HSA) plan years beginning on or before December 31, 2021, a plan will not fail to be a high deductible health plan by failing to have a deductible for telehealth and other remote care services. The CARES Act also repeals the rule enacted in the Affordable Care Act that prohibited the use of HSA funds for over-the-counter medicines.
  • Clarification that paid leave dollar limits in the Families First Act is applied per employee.

Individual Unemployment Insurance Provisions
Beyond individual tax relief provisions, the other major form of relief for individuals is unemployment compensation. More specifically, the CARES Act provides for:

  • Expanded unemployment assistance (Pandemic Unemployment Assistance) through December 31, 2020, to provide payments to those who are traditionally ineligible for unemployment benefits (self-employed individuals and independent contractors) and are unable to work as a direct result of COVID-19. This expansion largely covers gig-economy workers.
  • Payments of an additional $600 per week will be given to recipients of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
  • Emergency unemployment relief payments to states, which allow them to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur to pay unemployment benefits from December 31, 2020.

Other Provisions
Other provisions in the CARES Act include:

  • $150 billion appropriated to states, territories, Indian tribes, and local governments to help these bodies respond to the COVID-19 public health emergency.
  • Emergency appropriations for various federal programs that may be available to companies during this financial downturn.

There is already talk of a fourth stimulus bill. Certain provisions that were cut from the CARES Act during negotiations are expected to resurface in proposals for the fourth bill.

Christina J. Strasser
(941) 536-2048
cstrasser@williamsparker.com