On Friday, March 27th President Trump signed the Coronavirus Aid, Relief and Economic Stimulus Act (CARES Act) which provides financial support to both individuals and businesses. There are a number of provisions included within the CARES Act and we have summarized the sections we believe are most applicable to our clients. Our News page includes additional posts regarding CARES Act changes to Unemployment Insurance, Individual Tax Provisions and Stimulus Loans Available.
Net Operating Losses
The Tax Cuts and Jobs Act (TCJA) modified several provisions related to net operating losses beginning with 2018 tax returns. First, under the TCJA net operating losses were limited to 80% of taxable income which prevented losses from fully offsetting income. Second, the TCJA disallowed the carryback of net operating losses except in the cases of farming losses and casualty insurance carriers.
Under the CARES Act both of these provisions have been modified. Net operating losses can be used to fully offset income starting with the 2018 tax year. Net operating loss carrybacks are also once again allowed for losses incurred in tax years beginning after 12/31/17 and before 1/1/21. These losses can be carried back five years.
Deductibility of Interest Expense Temporarily Increased
Under the Tax Cuts and Jobs Act the business interest deduction was generally limited to 30% of adjusted taxable income. The CARES Act temporarily and retroactively increases the deduction from 30% to 50% for the tax years 2019 and 2020. Special rules apply for partnerships which can impact the year in which the change applies.
Bonus Depreciation Technical Correction for Qualified Improvement Property
The TCJA eliminated several pre-existing definitions and created a new category called Qualified Improvement Property. The intention was that this new category have a 15 year depreciable life and be eligible for 100% bonus depreciation. However, the new Qualified Improvement property with a 15 year life was not reflected in the text of the TCJA. This caused the Qualified Improvement Property to be treated as 39 year depreciable property which is not eligible for the accelerated depreciation.
The CARES Act provides a technical correction to the TCJA to designate Qualified Improvement Property as 15 year property and eligible for bonus depreciation. Property purchased after 12/31/17 is eligible for this treatment.
Employee Retention Credit for employers
This provision provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. This credit is available to employers whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a greater than 50% reduction in quarterly receipts. However, this credit is not available to businesses receiving small business interruption loans.
Delay of Payment of Employer Payroll Taxes
The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. 50% of the deferred payroll taxes become due on 12/31/21 with the remaining 50% due on 12/31/22.
We will continue to keep you updated with new developments as they become available. We remain fully committed to serving and supporting our clients during these challenging times.
*This article reflects tax law as of March 27, 2020. Some material may be affected by subsequent changes in the laws or in the interpretation of such laws.