On March 27, 2020, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The new legislation is considered the third phase of legislation enacted in response to the public health and economic crisis resulting from the COVID-19 pandemic. As summarized in more detail below, the CARES Act includes a number of targeted tax provisions designed to allow businesses deeply affected by COVID-19 to maintain operations and keep their workforce in place through the crisis. As part of such relief, the legislation temporarily reverses certain taxpayer-unfavorable changes to the Internal Revenue Code (the Code) that occurred under legislation enacted in late 2017, commonly referred to as the Tax Cuts and Jobs Act (TCJA).
New Refundable Employee Retention Tax Credit
The new law provides eligible employers with a refundable payroll tax credit in an amount of 50 percent of eligible wages paid to employees during each calendar-year quarter for the period from March 13, 2020, through Dec. 31, 2020. Eligible employers are those employers whose (1) operations were fully or partially suspended as a result of a COVID-19 related shutdown order, or (2) gross receipts declined by more than 50 percent during a calendar-year quarter in 2020 when compared to the same quarter in 2019.
The credit is a maximum of $5,000 per employee, computed based on the first $10,000 of qualified wages (including compensation and health benefits) paid to each eligible employee during the specified period. The total credit for an employer may not exceed the total employment taxes for all employees for each calendar-year quarter. For employers with 100 or more full-time employees, qualified wages include wages paid to employees only when they are not providing services due to COVID-19 related circumstances. For employers with fewer than 100 full-time employees, all employee wages are qualified wages, regardless of whether the employer is open for business or subject to a shutdown order. Aggregation rules apply for purposes of determining whether entities under common control are treated as a single employer.
Employer Payroll Tax Deferral
The legislation contains a new provision allowing employers and self-employed individuals to defer payment of the employer share of the employment tax with respect to their employees during the remainder of the 2020 calendar year. The amount of the tax is generally 6.2 percent of employee wages subject to a wage ceiling. The new law permits any deferred tax to be paid over the following two-year period, with 50 percent of the deferred amount due by Dec. 31, 2021, and the other 50 percent by Dec. 31, 2022. The provision will treat employers as having made all required deposits during the interim period.
Changes to Net Operating Loss Limitations
The CARES Act temporarily reverses and modifies the changes made by the TCJA to Section 172 of the Code, which imposed limitations on the deductibility of net operating losses (NOLs) by businesses. The new law permits businesses to carryback NOLs generated in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021, to the taxpayer’s preceding five taxable years and allows the use of NOLs to offset 100 percent of a taxpayer’s taxable income, temporarily removing the 80 percent taxable income limitation imposed by the TCJA for taxable years beginning before Jan. 1, 2021. A taxpayer may make an irrevocable election to waive the five-year carryback period for NOLs.
This new provision could be beneficial to taxpayers with net taxable income in prior years, allowing the carry back of 2018, 2019 and 2020 losses to offset pre-2018 taxable income that was taxed at rates of up to 35 percent, thereby generating a current refund. Taxpayers may also consider filing accounting method changes for 2019 or 2020 to accelerate deductions or defer revenue and thereby increase the NOLs in those years. In carrying back losses to earlier years, taxpayers will need to consider the impact to various tax calculations in those years, including the Section 163(j) interest deduction limitation and the Section 250(a)(2) limitation on the global intangible low-taxed income (GILTI)/foreign-derived intangible income (FDII) deduction.
Changes to “Excess Business Loss” Limitations
Following enactment of the TCJA, Section 461(l) of the Code prevented a taxpayer from deducting a net pass-through business loss in excess of $250,000 (or $500,000 in the case of taxpayers filing a joint return). The CARES Act repeals such excess loss limitation for tax years beginning prior to Jan. 1, 2021, with such repeal effective on a retroactive basis to Dec. 31, 2017 (i.e., for calendar years 2018, 2019 and 2020). The excess business loss limitation will now only apply for any tax year beginning after Dec. 31, 2020, and before Jan. 1, 2026. The provision also provides a technical correction to the TCJA to permit any limited excess business losses to be treated as NOL carryovers in a later year.
Acceleration of Corporate AMT Credits
The corporate alternative minimum tax (AMT) was repealed as part of the TCJA, but corporate AMT credits are allowed as refundable credits over several years, ending in 2021. This provision accelerates the ability of companies to recover the AMT credits, permitting companies to claim a refund now.
Modification of Business Interest Limitation
Under the TCJA, the amount of a taxpayer’s business interest expense under Section 163(j) of the Code was limited to 30 percent of a taxpayer’s adjusted taxable income (ATI). The CARES Act temporarily increases the limitation to 50 percent of ATI for 2019 and 2020, so taxpayers will be able to deduct more interest expense. A taxpayer may elect to use 2019 ATI in lieu of 2020 ATI for purposes of calculating the 2020 limitation.
Increased Charitable Contribution Limitation for 2020
For the 2020 taxable year, the new law increases the corporate limitation on charitable contribution deductions from 10 percent of taxable income to 25 percent of taxable income. In addition, the limitation on deductions for contributions of food inventory (e.g., those eligible for an enhanced charitable deduction) is increased from 15 percent to 25 percent.
Expensing for Qualified Improvement Property
The legislation classifies “qualified improvement property” as 15-year Modified Accelerated Cost Recovery System (MACRS) property, thereby allowing businesses to immediately deduct the costs associated with improving nonresidential real property, instead of being required to amortize such costs over the 39-year life of the building. This provision is a technical correction to the TCJA and is effective as of the enactment of the TCJA, allowing taxpayers to amend a prior-year return to claim a refund.
Temporary Excise Tax Exemption for Hand Sanitizer
The new law temporarily waives the federal excise tax on any distilled spirits used in or contained in hand sanitizer produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration and is effective for calendar year 2020.
Temporary Federal Aviation Excise Tax Holiday
Effective upon the date of enactment through Dec. 31, 2020, the new law provides an exemption from the excise taxes imposed by Sections 4261 and 4271 of the Code for amounts paid for transportation by air of persons and property.
The CARES Act enacts changes to the Code that provide opportunity for all types of businesses and may impact tax considerations for M&A and private equity transactions. Businesses and their owners should consider their current business structure and tax profile to maximize the benefits provided by the new law.
McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.