Covid-19 coronavirus: the potential tax impact of the U.S. CARES Act
02 April 2020
The Potential Tax Impact of the U.S. CARES Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law, providing economic relief to businesses and individuals affected by the coronavirus outbreak (Covid-19). This article discusses certain provisions of the CARES Act that may impact corporate and other taxpayers.
Employee Retention Credit
"Eligible employers" are allowed a refundable payroll tax credit equal to 50% of "qualified wages" paid to certain employees from March 13, 2020 to December 31, 2020, up to $10,000 per employee.
An employer is an "eligible employer" for any calendar quarter (i) during which its operations were fully or partially suspended due to orders from a governmental authority relating to Covid-19; or (ii) during the period beginning with the first calendar quarter in 2020 for which the employer's gross receipts declined by more than 50% measured on a year-over-year basis and ending with the 2020 calendar quarter following the calendar quarter for which such eligible employer's gross receipts exceed 80% of gross receipts measured on a year-over-year basis.
"Qualified wages" include wages and compensation, including health benefits and, (i) with respect to eligible employers that, on average, employed more than 100 full-time employees during 2019, only include wages paid to employees not providing services due to the circumstances described above (i.e. wages paid to a furloughed employee); and (ii) with respect to employers that, on average, employed 100 or fewer full-time employees during 2019, include all wages paid to employees during the time periods described above, regardless of whether the employees are furloughed or actively working.
This credit is not available to employers that receive a small business interruption loan under the CARES Act.
Delay of Payment of Employer Payroll Taxes
Employers and self-employed individuals may postpone the employer portion of certain payroll taxes otherwise due between the date the CARES Act was enacted and January 1, 2021. Deferred payments are due in two equal installments, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022.
This deferral is not available to employers that had certain loans forgiven under various provisions of the CARES Act.
Modification of Net Operating Loss (NOL) Rules
The 2017 Tax Cuts and Jobs Act (TCJA) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carryback NOLs to prior taxable years.
The CARES Act temporarily modifies this provision for taxable years beginning before January 1, 2021 by delaying the 80% limitation for 2020 and prior taxable years and allowing corporate NOLs from 2018, 2019 and 2020 to be carried back for up to five years. This allows corporations to carryback NOLs to taxable years for which the corporate tax rate was 35%, as compared with the current corporate tax rate of 21%.
The CARES Act does not permit a taxpayer to use NOL carrybacks to offset the repatriation tax under Section 965 of the U.S. Internal Revenue Code of 1986, as amended (the Code). However, the CARES Act does allow a taxpayer to elect to exclude any taxable year to which Code Section 965 applies from its NOL carryback.
The CARES Act also relaxes certain taxable income limitations on the use of corporate NOLs that would otherwise apply for taxable years beginning in 2021 and provides special carryback rules for real estate investment trusts and life insurance companies.
Acceleration of Corporate Alternative Minimum Tax (AMT) Credits
The TCJA repealed the corporate AMT and allowed corporations to recover certain AMT amounts paid as a refundable credit against their regular tax liability, but only over a four-year period beginning in 2018. The CARES Act accelerates the refund timeline by allowing corporate taxpayers to claim the full refund over 2018 and 2019, or if the taxpayer elects, entirely in 2018.
Relaxation of Business Interest Deductions
The TCJA generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income (ATI). The CARES Act increases this limitation to 50% of ATI for 2019 and 2020, except for taxpayers that elect out of this increase. Taxpayers may elect to use their 2019 ATI in calculating their 2020 deductible interest expense. Special rules apply to partnerships.
Tax Treatment of Relief Program Loans
The CARES Act provides that loans made or guaranteed by the U.S. Department of the Treasury under the CARES Act will be treated as indebtedness for U.S. federal income tax purposes. Such loans will be treated as issued for their stated principal amount for U.S. federal income tax purposes and any stated interest will be treated as qualified stated interest and, subject to limitations, may be deductible for U.S. federal income tax purposes. In addition, the CARES Act provides the U.S. Department of the Treasury with authority to issue regulations carrying out the intent of these relief measures, including regulations providing that the issuance of certain interests do not trigger limitations on the ability of a taxpayer to utilize NOLs and other tax attributes under Code Section 382.