Tag Archives: Coronavirus Aid Relief and Economic Security Act

IRS Releases Guidance for Retirement Plan Related Relief under the CARES Act

As discussed in our prior blog post, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides special relief provisions for individuals in relation to their retirement plans. The provisions of the CARES Act, however, created uncertainties for both plan administrators and individuals when dealing with the administration of their respective retirement plans. On June 22 and June 23, the IRS issued Notice 2020-50 and Notice 2020-51, respectively, which provide guidance related to treatment of coronavirus-related distributions and the 2020 waiver of required minimum distributions (“RMDs”). On July 17, the IRS issued News Release 2020-162 to remind individuals about the CARES Act relief related to RMDs.

Notice 2020-50: IRS Guidance on Coronavirus-Related Distributions

Notice 2020-50 expands the definition of a qualified individual (i.e. the individuals who are able to take advantage of the retirement plan related relief provided under the CARES Act) and provides helpful guidance for reporting coronavirus-related distributions from retirement plans. As a reminder, a coronavirus-related distribution is a distribution from an eligible retirement plan to a Qualified Individual (defined below) between January 1, 2020 and December 30, 2020.

Definition of a Qualified Individual

As provided in an IRS News Release, the definition of qualified individual, as expanded under Notice 2020-50, is anyone who

  • is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):
    • being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
    • being unable to work due to lack of childcare due to COVID-19;
    • closing or reducing hours of a business that they own or operate due to COVID-19;
    • having pay or self-employment income reduced due to COVID-19; or
    • having a job offer rescinded or start date for a job delayed due to COVID-19.

This expanded definition will allow more individuals to reap the benefits associated with receiving coronavirus-related distributions.

Reporting a Coronavirus-Related Distributions

For the Qualified Individual to receive favorable tax treatment, the Qualified Individual must report the distribution on his or her for Form 1040 (Individual Income Tax Return) (if applicable) and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments) for 2020. Form 8915-E is expected to be available before the end of 2020. The favorable tax treatment includes the waiver of the 10-percent additional tax, the allowance of the pro-rata inclusion in income, and recontribution benefits. For more information on these benefits, please see our prior blog post.

If the Qualified Individual recontributes his or her coronavirus-related distributions to an eligible retirement plan, the method to report such recontribution depends on whether the Qualified Individual elected to include the coronavirus-related distribution ratably over a 3-year period. If the Qualified Individual reports the entire coronavirus-related distribution in the year of distribution and recontributes such distribution in a later year, the Qualified Individual is required to file a revised Form 8915-E (and amended Form 1040, if applicable).

If the Qualified Individual instead elects the ratable inclusion, then the amount of the recontribution will decrease the amount of the coronavirus-related distribution included in income for that year. The recontribution will be reported on Form 8915-E. Further, if a Qualified Individual recontributes an amount that is greater than the amount included in gross income for the taxable year, the excess recontribution amount may be carried forward, or carried back, to reduce the amount of the coronavirus-related distribution included in income in the future year, or prior year, respectively.  If the excess recontribution amount is carried back, a revised Form 8915-E (and amended Form 1040, if applicable) must be filed.

Notice 2020-50 also provides detailed guidance for plan administrators for retirement plan loans.

Notice 2020-51: IRS Guidance on Waiver of Required Minimum Distributions

As discussed in our prior blog post, the CARES Act provides a waiver of RMDs from certain retirement accounts. This new waiver rule may certainly be beneficial for individuals who wish for their retirement plan funds to grow tax-deferred in 2020; however, it also created uncertainty, especially in relation to options for rollovers.

Fortunately, Notice 2020-51 provides that distributions from a retirement plan that would have been an RMD but for the CARES Act are eligible for rollover into an eligible retirement plan, as long as other general rollover requirements are met. Further, an IRA owner or beneficiary who already received an amount that would have been an RMD but for the CARES Act may repay such distribution to the distributing IRA. Such repayment will be treated as a rollover for income tax purposes, which means the owner or beneficiary will not have to pay income tax on the distribution.

Generally, an individual must rollover a payment within 60 days to avoid tax and penalties and is only allowed one rollover within a 12-moth period. In Notice 2020-23, the IRS previously extended the rollover deadline to July 15 for RMDs distributed after January 2020. To provide further relief for individuals who already received distributions in 2020, Notice 2020-51 provides a special rule that the deadline to rollover a payment described above is extended to August 31, 2020. Thus, pursuant to Notice 2020-51, individuals who received distributions in January are now also eligible for rollover relief.

Further, these rollovers will not count towards the one rollover per 12-months limitation and are not restricted by the general rule against rollovers for non-spousal beneficiaries.

Notice 2020-51 also provides information related to the SECURE Act, guidance about plan amendments, and advice regarding other various issues addressed by FAQs.

Attorney Colton F. Castro contributed to this blog post.

PPP Flexibility Act Expected to Be Signed into Law

On Wednesday, June 3, 2020, the U.S. Senate passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), which was approved by the House late last week. President Trump is expected to sign the Act into law. As a part of the larger Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the Paycheck Protection Program (“PPP”) provides loans to small-to-mid-sized businesses suffering from the COVID-19 pandemic. As enacted, the PPP loans are to be forgivable when used for specific business and payroll expenses during a specified timeframe. Any forgiven loan amounts are excluded from businesses’ taxable income. However, due to insufficient funding and lengthier pandemic-related shutdowns, the PPP relief became inaccessible for many businesses.

The changes made to the PPP by the new legislation include:

  • Allowing businesses 24 weeks (or until December 31, 2020, if it comes first) post-loan origination to use loan money that will qualify for forgiveness. This applies to both new and existing loans.
  • Reducing the amount of loan money required to be spent on payroll expenses from 75 percent to 60 percent, allowing more funds to be spent on rent, utility payments, and mortgage interest.
  • Extending the time period for the rehiring exception to forgiveness reduction from June 30, 2020 to December 31, 2020 and adding new exceptions for employers who could not find qualified employees or were unable to restore business operations to February 15, 2020 levels due to COVID-19-related operating restrictions.
  • Extending the loan terms from two to five years, unless otherwise modified by lenders and borrowers.
  • Permitting payroll tax deferment for businesses that receive PPP loans regardless of loan forgiveness. Under the CARES Act and subsequent interpretive guidance, payroll tax deferral could only be utilized up until a business received notification of loan forgiveness.
  • Replacing the six-month deferral of PPP payments due with deferral until the date on which the amount of loan forgiveness is provided to the lender.

The legislation does not clarify the parameters of the required PPP certification that “[c]urrent economic uncertainty makes [a] loan request necessary to support the ongoing operations of the Applicant.” It also does not address the deductibility of expenses paid for by PPP loan funds, as previously discussed in a prior post. Further PPP corrections and guidance are expected.

Why Individuals Should Care About the CARES Act: Retirement Plans and Charitable Contributions

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides various relief provisions for individuals, including provisions that benefit individuals in relation to their retirement plans and that provide an increase in allowable charitable deductions. Continue reading

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

Application of CARES Act to Tax-Exempt Organizations

The CARES Act provides enhanced financial support for businesses and other eligible entities suffering from the continuing COVID-19 pandemic.  While much of the CARES Act provides relief to for-profit businesses (see our previous post), there are specific provisions for nonprofits and tax-exempt organizations (collectively “TEOs”) which help support the operations and fundraising needs of TEOs during the COVID-19 pandemic and recovery.

Operations support for TEOs

Small Business Loan Program.  The CARES Act created a new business loan program known as the “Paycheck Protection Program.”  In addition to certain other businesses, the Paycheck Protection Program is available to TEOs described in either 501(c)(3) (public charities) or 501(c)(19) (veterans organizations).  TEOs falling within these categories are eligible for loans under the Paycheck Protection Program, subject to other eligibility criteria, while TEOs not falling within these categories are excluded from the benefits of the Paycheck Protection Program.  TEOs interested in the Paycheck Protection Program should see our previous posts on this subject.

Economic Injury Disaster Loans.  The CARES Act specifically includes the COVID-19 pandemic as a disaster for which most TEOs could obtain disaster assistance loans under the SBA’s 7(b)(2) program.  Qualifying small TEOs may receive a $10,000 advance if the TEO’s number of employees or annual receipts qualify.  The advance under this program is not required to be repaid.

Emergency Relief and Taxpayer Protections.  The CARES Act allocates $500 billion for loans, loan guarantees, and other investments to eligible businesses including TEOs with between 500 and 10,000 employees.  The emergency relief loans are subject to a favorable interest rate (no higher than 2% per annum) and no principal or interest is due during the first six months.

Employee Retention Credit and Delay of Payroll Taxes.  TEOs are eligible for the dollar-for-dollar employee retention credit against payroll tax liability.  The amount of the credit is equal to 50% of the first $10,000 in wages per employee.  TEOs who qualify may delay the employer’s share of payroll taxes through the end of 2020.  The delayed payroll taxes are repaid in two installments, with the first due by December 31, 2021 and the second due by December 31, 2022.

Fundraising support for TEOs

In addition, as we previously discussed, the CARES Act allows a partial above the line deduction of up to $300 of cash contributions to charitable organizations and churches, whether the taxpayer itemizes deductions or not, suspends the 50% of adjusted gross income limitation for charitable deductions by individuals, and increases the 10% limitation for corporations to 25% of taxable income and increases the limitation on deductions for contributions of food inventory from 15 % to 25%.

Attorney Susan B. Hecker contributed to this post. 

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.

The IRS Issues Guidance for Partnerships on Amended Returns


On April 8, the IRS released guidance through Revenue Procedure 2020-23 that will allow partnerships to take advantage of certain tax benefits granted by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act grants certain businesses tax relief in the way of bonus depreciation deductions and an increased business interest deduction limit. This tax relief has been applied retroactively to affect 2018 and 2019 tax years. Partnerships will be allowed to file amended returns for the 2018 and 2019 tax years without first making a request for IRS approval for such changes.

Under the Bipartisan Budget Act of 2017 (the “BBA”), partnerships which have not elected out of the centralized partnership regime are required to file a tax return for the tax year while also furnishing to its partners tax information regarding the partnership, including each partner’s Schedule K-1. Under the BBA, a Schedule K-1 could not be amended without prior IRS approval once the partnership’s tax return due date has passed. This created an inconsistency with the CARES Act, causing a partnership to be unable to take advantage of retroactive tax benefits without first jumping over a number of IRS procedural hurdles.

To alleviate the stress the ongoing COVID-19 pandemic has brought to partnerships, Revenue Procedure 2020-23 allows partnerships that have filed a tax return for tax years beginning in 2018 or 2019 to file amended partnership returns and furnish amended Schedule K-1s to partners before September 30, 2020. The amended returns may take into account tax changes brought about by the CARES Act affecting a partnership’s tax attributes.

Jamie E. Koepsel
jkoepsel@williamsparker.com
(941) 552-2562

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