Editor’s note: For the most up-to-date information on the Employee Retention Tax Credit, please visit our ERTC Eligibility page.
The largest federal stimulus bill in U.S. history was signed into law on March 27, triggering $2.2 trillion in spending and relief measures for businesses and families grappling with the impact of coronavirus on their livelihoods and bottom lines. In addition to the loan and payment aspects, the Coronavirus Aid, Relief and Economic Security (CARES) Act also changes a number of federal tax provisions. Let’s take a look at all of these changes and pinpoint opportunities to help businesses manage cash flow in these uncertain times.
Cash Flow Considerations of New Federal Tax Landscape
Federal income taxes: The new due date for 2019 tax returns and payments is July 15, 2020. Taxpayers should consider a refund if 2019 taxes were overpaid.
Federal employer share of payroll taxes: Employers can defer paying 50 percent of 2020 portion until December 31, 2021 and the other half of 2020 portion until December 31, 2022. Please note, if an employer receives forgiveness on a Payroll Protection Loan as part of the CARES Act, they are not eligible for this deferral.
Tax credits: Employers should consider new coronavirus relief options made possible through recent legislation. There are new paid sick and/or paid family leave credits for employers in the Families First Coronavirus Response Act, while the CARES Act offers a new Employee Retention Tax Credit. Please note, if an employer receives forgiveness on a Payroll Protection Loan as part of the CARES Act, they are not eligible to take the ERTC credit.
Net Operating Loss Rule Changes
Prior to 2018, net operating losses (NOLs) could be carried back two years and forward 20 and offset 100% of taxable income. When tax reform took effect on January 1, 2018, the rules were changed to preclude carrybacks of NOLs and limited losses carried forward to 80 percent of taxable income. Now, as part of the CARES Act, losses from 2018, 2019 and 2020 can be carried back five years and can offset 100 percent of taxable income.
Action item: Business owners should consider the impact of pre-and post-tax reform rates. The carryback of NOLs can offset taxes paid at a prior higher rate (i.e., 21 percent versus 35 percent for C corporations).
Other Tax Changes
- Section 461(l) – Net Business Loss Limitations: As part of the Tax Cuts and Jobs Act effective for the 2018 tax year and beyond, there were new limits on excess business losses permitted to offset other income on individual returns. These losses were capped at $250,000 for single individuals and $500,000 for married joint filers. Disallowed losses were converted to net operating loss carryforwards. The CARES Act retroactively eliminates this limitation starting with the 2018 tax year and will be in place through 2020. Action item: Discuss amending returns with your advisor if this limitation originally applied on your 2018 or 2019 individual tax return.
- Section 163(j) – Interest Deductibility Limitation: Also, as part of the Tax Cuts and Jobs Act effective for the 2018 tax year and beyond, Internal Revenue Code Section 163(j) limited the business interest expense deduction for larger taxpayers to 30 percent of their adjusted taxable income. Entities (excluding partnerships) will be able to deduct interest up to 50 percent of adjusted taxable income for both 2019 and 2020. Partnerships will only be permitted to use the 50 percent limitation in 2020. However, special rules apply to the 2019 limited interest for partners of partnerships in that they will be able to fully deduct 50 percent of the limited interest from 2019 on their 2020 return. The remaining half of the 2019 limited interest will carryforward under the previous 163(j) limitation rules.
- Qualified Improvement Property (QIP) technical correction: Ever since tax reform, businesses and their tax advisors have been eagerly awaiting the correction of a drafting error that excluded QIP from bonus depreciation eligibility. The CARES Act revised the recovery period for this property type from 39-year to 15-year, retroactive to January 1, 2018. Action item: Discuss amended returns with your tax advisor to recoup bonus depreciation.
- Charitable contribution change: C corporations may now offset 25 percent of charitable contributions, up from the previously permitted 10 percent.
If you have questions about these or other aspects of the CARES Act, contact your RKL advisor or reach out to the RKL team using the form at the bottom of this page. Visit RKL’s Coronavirus Employer Resource Center to learn more about the CARES Act, read our latest guidance and register for our weekly webinar series.