Part 3 – CARES Act: Tax Relief Provisions

While the CARES Act is not “tax legislation”, it provides for significant tax relief for businesses and individuals. The main tax relief provisions are:

  • NOL carrybacks– Net operating losses (NOLs) generated in 2018, 2019 or 2020 are not subject the 80% taxable income limitation and NOLs from 2018, 2019 or 2020 can be carried back 5 years.
  • Excess business losses for noncorporate entities – noncorporate entities can carryback losses as well for the same years.
  • Interest limitation Increased – For 2019 and 2020, the interest expense limitation was increased to 50% from 30% of adjusted taxable income.
  • AMT – Corporate AMT credits are 100% refundable in 2018 and 2019.
  • Employee tax credits – Established an employer credit of up to $10,000 per employee.
  • Employer share of SSA tax deferred – Beginning March 31, 2020, employers can defer their share of Social Security Tax through December 31, 2020.
  • Changes in depreciable lives for qualified improvement property – Business will be able to depreciate the cost of building improvements faster.

 

NOL Carrybacks

The CARES Act provides that, for a taxable year beginning before January 1, 2021, NOLs can now offset 100% of a corporation’s taxable income. In addition, NOLs generated in 2018, 2019 and 2020 can be carried back 5 years. This carryback can be of significant value as the corporate tax rate in 2013, 2014 and 2015 was 35% compared to 21% today. Important considerations when making elections must be carefully thought through on carry backs and will require some analysis. Any carryback elections made will of course require the taxpayer to file amended income tax returns. A taxpayer’s election to forego carrybacks must be made at the date of filing the taxpayers return plus extension. We expect procedural guidance on this shortly from the Internal Revenue Service.  

Excess Business Loss Limitations Lifted through December 31, 2020

The CARES Act repeals the excess business loss limitation for taxable years beginning before January 1, 2021.  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. This could be significant to individuals in the real estate business with losses limited to their business income. 

Alternative Minimum Tax Refunds

The CARE Act allows for the refund of AMT tax credits to the years 2018 and 2019. In many cases, our C corps have allowed for AMT credits that might not be realized. This will need to be considered in the tax provisions in the March 31, 2020 quarter. 

Employer Tax Credits

A tax credit against employment taxes is available for certain businesses.  An employer is eligible for this credit if the operation of the trade or business is fully or partially suspended during the calendar quarter fully or partially suspended due to orders of a governmental authority that limited commerce, travel or group meetings.  An employer is also eligible for this credit in the first calendar quarter in which the employer has a reduction of gross receipts of more than 50% in a calendar quarter as compared to the same calendar quarter in the prior year, and eligibility for the credit continues in each calendar quarter as long as the employer has a reduction of gross receipts of more than 80% reduction of gross receipts from the calendar quarter in the prior year.

The amount of the tax credit is 50% of the qualifying wages of the employer. The qualifying wages for each employee are limited to $10,000 for all quarters and wages paid to certain employees are subject to additional limitation or exclusions. Please note that f you are claiming credits under the Families First Coronavirus Relief Act (sick leave and family leave credits) the CARES Act benefit is reduced by those credits. 

Delays in the Payment of Employer Payroll Taxes 

Section 2302 of the CARES Act allows employers and self-employed individuals to defer payment of all (in the case of employers) or half (in the case of the self-employed) the employers share of the Social Security Tax of 6.25% that they are responsible for paying to the federal government through December 31, 2020. One-half of the deferred amount will be due on December 31, 2021 and the other half on December 31, 2022. 

Shorter Lives for Qualified Improvement Property

The CARES Act enables businesses, especially in the real estate and hospitality industries, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act, increases companies’ access to cash flow by allowing them to amend a prior year return.

Contact your BKM Sowan Horan client service team or our associates at Visorie (www.visorie.com ) to help walk you through these changes and what impact they may have on previously filed tax returns and filing amended returns.