The Coronavirus Aid, Relief, and Economic Security Act (the Act) provides mechanisms for businesses to improve their cash flow over the short-term with the deferral of the payment of payroll taxes, ability to claim losses against taxable income and the acceleration of depreciation expenses. Charitable organizations and donors also receive benefits under the Act with easing of restrictions on the deductibility of charitable contributions, and stimulus payments to individuals are also provided.
Tax Deferral of Employer Social Security Taxes to Free Up Cash for Businesses and Encourage Retention of Employees
The Act defers 6.2% employer social security taxes due after the date of enactment through December 31, 2020. The deferred employer payroll taxes will be paid over two years through 2022. Half the payment is due on December 31, 2021, and the other half is due on December 31, 2022. The measure also defers 50% of self-employed social security tax payments.
However, the provision does not apply to employers that participate in the Paycheck Protection Program for debt forgiven under the Act. This delay is expected to provide businesses with approximately $300 billion of cash flow.
Employee Retention Credit for Closures Due to COVID-19 to Encourage Employers to Maintain Their Workforce
The Act provides for a refundable payroll tax credit equal to 50% of qualified wages paid to employees during the outbreak by employers whose operations were fully or partially closed due to a COVID-19 related shut-down order, or whose gross receipts declined by more than 50% as compared to the prior-year same quarter. The credit is available for each calendar quarter from March 13, 2020, through December 31, 2020, based upon the first $10,000 of qualified wages paid during the quarter, including health insurance premiums paid. Qualified wages do not include wages on which employers claimed the payroll tax credit for paid sick leave and paid FMLA leave under the Families First Coronavirus Response Act enacted several days ago. Employers that participate in the Paycheck Protection Program for debt forgiven under the Act also are not eligible for the refundable credit.
For employers with 100 or fewer employees, all employee wages can potentially qualify for the credit, regardless of whether the business is subject to shut-down order. For employers with more than 100 full-time employees, qualified wages are only those paid to employees when they are not providing services because of COVID-19 related closure or a decline of gross receipts of more than 50%.
Business Losses Modification to Carryback Business Losses and Access Cash
The Act allows business losses from tax years after December 31, 2017, and before January 1, 2021, to be carried back five years (as far back as 2013) to offset prior years taxable income. In addition, the new Act will allow the full amount of NOL’s to be used for tax years beginning before January 1, 2021. Previously, the 2017 Tax Cuts and Jobs Act (TCJA) eliminated net operating loss (NOL) carrybacks for most businesses and limited the deduction for NOL’s to only 80% of taxable income.
The new Act also modifies the deduction of losses from pass-through businesses and sole proprietorships. The new Act suspends the section 461(l) limitation on excess business losses ($250,000 or $500,000 on joint returns) for pass-through businesses and sole proprietorships for 2018, 2019 and 2020. Similarly, the new Act provides for a five-year carryback of such pass-through losses for 2018, 2019 and 2020.
Businesses may be able to take advantage of the new NOL carryback and limitation rules to file amended returns applying NOL’s to prior years to claim refunds.
Increase in the Deduction for Interest Expenses to Increase Liquidity
The Act permits a corporation to increase the deduction for interest expense under section 163(j) to 50% of its taxable income, with adjustments, in 2019 and 2020. The TCJA limited this deduction to 30% of adjusted taxable income (ATI).
Partnerships remain subject to the 30% of ATI limit for 2019. However, for any 2019 business interest expense allocated to a partner that exceeds the 30% ATI limit for 2019, (1) 50% of the excess may be deductible in 2020 in full (not subject to the 50% (formerly 30%) ATI limit), and (2) the remaining 50% of the excess may be deductible in 2020 but is subject to the 50% ATI limit.
For business interest expense arising in 2020, the 50% ATI limit applies. Partnerships may elect to use 2019 partnership ATI in calculating their 2020 ATI limitation.
Depreciation Deduction Fix to Continue Investments in Improvements
The TCJA eliminated the separate definitions of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property, and provided a general definition of qualified improvement property ("QIP"), but the TCJA failed to include an intended 15-year recovery period for QIP. The new Act fixes the so-called “retail glitch” by classifying QIP as 15-year property for regular depreciation (20-year property for the alternative depreciation method), and confirms QIP only includes improvements made by the taxpayer.
More importantly, however, this classification would make the property eligible for temporary bonus depreciation under the TCJA and, therefore, an immediate write off. These changes are effective retroactive to the TCJA enactment date (meaning taxpayers may be able to file amended returns claiming larger depreciation deductions and potential NOL’s and/or refunds for prior years).
Alternative Minimum Tax (AMT) Credits Acceleration to Permit Corporations to Obtain a Refund Now
The TCJA eliminated the corporate AMT and made AMT credits refundable over several years through 2021. The new Act provides that any remaining AMT credits can now be more quickly accessed.
Employer Student Loan Repayment Assistance to Encourage Assistance for Employees with Their Student Loan Debt
Employer repayment assistance of principal and interest on qualified educational loans paid from the date of enactment through December 31, 2020, will be excluded from employees’ income. This form of payment assistance will be deductible by the employer as an employer-provided education assistance up to the $5,250 amount currently permitted for other forms of employer-provided education assistance.
Charitable Contribution Deduction Expansion to Promote Philanthropy
The Act provides for an above-the-line charitable contribution of up to $300 for individuals who don’t claim itemized deductions on their tax returns starting this year.
For individual taxpayers who do itemize the 60% of income limitation on the deduction for charitable contributions will be suspended for 2020.
Corporations’ charitable deduction limitation will increase to 25% (rather than 10%) of corporate taxable income for 2020. The corporate deduction for food inventory contributions will likewise increase to 25% (from 15%).
COVID-19 Recovery Checks for Individuals to Help Stimulate the Economy
The Act provides for distribution of checks of up to $1,200 ($2,400 for those married filing jointly) to qualifying individual U.S. taxpayers, which are increased by $500 for each qualifying child. Payment amounts begin to phase out for taxpayers with adjusted gross income of $75,000 for single, $112,500 for head-of-household filers, and $150,000 for married filing jointly. AGI is based on the taxpayer’s filed tax return for 2019, or for 2018 if a 2019 return is not yet filed.
There are additional tax benefits included in the Act that will be the subject of a future alert. As with all tax planning, please consult an experienced advisor.
The Hirschler Recovery Team: It may soon be a rare business enterprise that is able to insulate itself from the negative economic effects of the COVID-19 pandemic. While we hope the economy will rebound once the pandemic begins to abate, until then, the Hirschler Restructuring and Creditors Rights Group stands ready to assist clients in addressing the financial challenges of these economically unsettled times. Whether you are facing the loss or interruption of business, challenging financing relationships, the need to downsize or restructure, or other creditors’ rights issues, the Hirschler team will work with you toward a successful outcome. Contact us to understand your options and devise a recovery strategy that protects your business and financial health.
Kristen M. Chatterton