The CARES Act contains a few additional tax provisions, including provisions on the non‐taxability of certain loan forgiveness, advance refunding of certain credits and the suspension of certain aviation taxes. We will provide information about these additional tax provisions in a future update.
New law. This provision provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID‐19 crisis.
Eligible employers. The credit is available to employers, including non‐profits, 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 provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year‐over‐year basis.
The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act.
Wages paid to which employees? For employers who had an average number of full‐time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full‐time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers' closure or reduced gross receipts are eligible for the credit.
No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit (Code Sec. 21) with respect to the employee.
Wages. The term "wages" includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee.
Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus Act, nor for wages taken into account for the Code Sec. 45S employer credit for paid family and medical leave.
Other. IRS is granted authority to advance payments to eligible employers and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit.
Effective date. The credit applies to wages paid after March 12, 2020 and before Jan. 1, 2021.
Background. Employers are required to withhold social security taxes and tax under the Railroad Retirement Tax Act (RRTA) from wages paid to employees. Self‐employed individuals are subject to self-employment (SECA) tax.
New law. The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. Thus, notwithstanding any other provision of law, the payment for "applicable employment taxes" for the "payroll tax deferral period" won't be due before the "applicable date."
For the purposes of the above rules, the term "applicable employment taxes" means:
The term "payroll tax deferral period" means the period beginning on the date of enactment of the Act and ending before Jan. 1, 2021.
The term "applicable date" means:
Notwithstanding Code Sec. 6302 (which authorizes IRS to set deadlines for tax deposits), an employer will be treated as having timely made all deposits of applicable employment taxes required to be made during the payroll tax deferral period if all such deposits are made not later than the applicable date.
The above rules won't apply to any taxpayer which has had indebtedness forgiven under Act Sec. 1106 with respect to a loan under Small Business Act Sec. 7(a)(36), as added by Act Sec. 1102, or indebtedness forgiven under Act Sec. 1109.
Notwithstanding any other provision of law, the payment for 50% of self‐employment taxes for the payroll tax deferral period won't be due before the applicable date.
For purposes of applying the requirements on individuals to make estimated tax payments to any tax year which includes any part of the payroll tax deferral period, 50% of the self‐employment taxes imposed for the payroll tax deferral period won't be treated as taxes to which the estimated tax payment requirements apply.
Effective date. The provisions apply to the period beginning on the date of enactment of the Act.
Old law. Under Code Sec. 172(a) the amount of the NOL deduction is equal to the lesser of (1) the aggregate of the NOL carryovers to such year and NOL carrybacks to such year, or (2) 80% of taxable income computed without regard to the deduction allowable in this section. Thus, NOLs are currently subject to a taxable‐income limitation and can't fully offset income.
New law. The CARES Act temporarily removes the taxable income limitation to allow an NOL to fully offset income.
Effective date. The amendments apply to tax years beginning after Dec. 31, 2017, and to tax years beginning on or before Dec. 31, 2017, to which NOLs arising in tax years beginning afterDec. 31, 2017 are carried.
Old law. Code Sec. 172(b)(1) provides that, except for farming losses and losses of property and casualty insurance companies, an NOL for any tax year is carried forward to each tax year following the tax year of the loss but isn't carried back to any tax year preceding the tax year of the loss.
New law. The CARES Act provides that NOLs arising in a tax year beginning after Dec. 31, 2018 and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss.
Effective date. The amendments apply to NOLs arising in tax years beginning after Dec. 31, 2017 and to tax years beginning before, on or after such date to which such NOLs are carried.
Old law. Code Sec. 461(l)(1) disallows the deduction of excess business losses by noncorporate taxpayers for tax years beginning after Dec. 31, 2017 and ending before Jan. 1, 2026. Generally, Code Sec. 461(l)(3)(A) provides that an "excess business loss" is the excess of the (1) taxpayer's aggregate trade or business deductions for the tax year over (2) the sum of the taxpayer's aggregate trade or business gross income or gain plus $250,000 (as adjusted for inflation).
New law. The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can
deduct excess business losses arising in 2018, 2019, and 2020.
Effective date. The amendments apply to tax years beginning after Dec. 31, 2017.
Background.Corporations (for which the alternative minimum tax was repealed for tax years after 2017) may claim outstanding MTCs (subject to limits) for tax years before2021, at which time any remaining MTC may be claimed as fully refundable. Thus, the MTC is refundable for any tax year beginning in 2018, 2019, 2020, or 2021, in an amount equal to 50% (100% for tax years beginning in 2021) of the excessMTC for the tax year, over the amount of the credit allowable for the year against regular tax liability.
New law. The CARES Act changes ''2018, 2019, 2020, or 2021'' (above) to''2018 or 2019," and changes"(100%for tax years beginning in 2021)" to "(100% for tax years beginning in 2019)"
Observation: Thus, the CARES Act allows corporations to claim 100% of AMT credits in 2019.
TheCARES Act also provides for an election to take the entire refundable credit amount in 2018.
Under the CARES Act, a claim for credit or refund where a corporation elects to take the entire refundable credit amount in 2018 must be treated as a tentative carryback refund claim.
Taxpayers may file an application for a tentative refund of any amount for which a refund is due by reason of an election under Code Sec. 53(e)(5). The application, which must be filed before Dec. 31, 2020, must be in the manner and form IRS provides, must be verified in the same manner as an application for a tentative carryback adjustment, and must set forth: (a) the amount of the refundable credit claimed under Code Sec. 53(e) for the tax year, (b) the amount of the refundable credit claimed under Code Sec. 53(e) for any previously filed return for the tax year, and (c) the amount of the refund claimed.
Within 90 days from the date the application is filed, IRS must: (i) review the application, (ii) determine the amount of the overpayment, and (iii) apply, credit, or refund the overpayment, in a manner similar to that provided in Code Sec. 6411(b) (allowance of tentative carryback adjustments).
For an application made by a corporation filing a consolidated return, the rules of Code Sec. 6411(c) apply to an adjustment, to the extent IRS provides.
Effective date. The amendments apply to tax years beginning after December 31, 2017.
Background. The Tax Cuts and Jobs Act of 2017 (“TCJA”) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.
New law. The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020.
Special rules for partnerships. Under a special rule for partnerships, the increase in the limitation will not apply to partners in partnerships for 2019 (it applies only in 2020). For partners that don't elect out, any excess business interest of the partnership for any tax year beginning in 2019 that is allocated to the
partner will be treated as follows:
Election out of the increased limitation. Taxpayers may elect out of the increase, for any tax year, in the time and manner IRS prescribes. Once made, the election can be revoked only with IRS consent. For partnerships, the election must be made by the partnership and can be made only for tax years beginning in 2020.
Election to calculate 2020 interest limitation using 2019 adjusted taxable income. In addition, taxpayers can elect to calculate the interest limitation for their tax year beginning in 2020 using the adjusted taxable income for their last tax year beginning in 2019 as the relevant base. For partnerships, this election must be made by the partnership.
If an election is made to calculate the interest limitation using 2019 adjusted taxable income for a tax year that is a short tax year, the adjusted taxable income for the taxpayer's last tax year beginning in 2019 which is substituted under the election will be equal to the amount which bears the same ratio to such adjusted taxable income as the number of months in the short taxable year bears to 12.
Effective date. The amendments apply to tax years beginning after Dec. 31, 2018.
Background. The Tax Cuts and Jobs Act of 2017 ("TCJA") amended Code Sec. 168 to allow 100% additional first‐year depreciation deductions ("100% Bonus Depreciation") for certain qualified property. The TCJA eliminated pre‐existing definitions for (1) qualified leasehold improvement property, (2) qualified restaurant property, and (3) qualified retail improvement property. It replaced those definitions with one category called qualified improvement property ("QI Property"). A general 15‐year recovery period was intended to have been provided for QI Property. However, that specific recovery period failed to be reflected in the statutory text of the TCJA. Thus, under the TCJA, QI Property falls into the 39‐year recovery period for nonresidential rental property. That makes the QI Property category ineligible for 100% Bonus Depreciation.
New law. The CARES Act provides a technical correction to the TCJA, and specifically designates QI Property as 15‐year property for depreciation purposes. This makes QI Property a category eligible for 100% Bonus Depreciation.
Effective date. The amendments are effective for property placed in service after Dec. 31, 2017.
Background. A corporation's charitable deduction cannot exceed 10% of its taxable income, as computed with certain modifications. If a corporation's charitable contributions for a year exceed the 10% limitation, the excess is carried over and deducted for each of the five succeeding years in order of time, to the extent the sum of carryovers and contributions for each of those years does not exceed 10% of taxable income.
New law. The CARES Act provides that (except as stated below) qualified contributions (see above) are disregarded in applying the 10% limit on charitable contributions of corporations and the Code Sec. 170(d)(1) rules on carryovers of excess contributions.
Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of 25% of the corporation's taxable income (as computed under Code Sec. 170(b)(2)) over the amount of all other charitable contributions allowed to the corporation as deductions for the contribution year.
Effective date. The amendments apply to tax years beginning after Dec. 31, 2019.
Background. A donation of food inventory to a charitable organization that will use it for the care of the ill, the needy, or infants is deductible in an amount up to basis plus half the gain that would be realized on the sale of the food (not to exceed twice the basis). In the case of a C corporation, the deduction cannot exceed 15% of the corporation's income. In the case of a taxpayer other than a C corporation, the deduction cannot exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer's charitable deductions for the year.
New Law. In the case of any charitable contribution of food during 2020, the taxable income limits are
25% rather than 15%.
Effective date. The amendments apply to tax years beginning after Dec. 31, 2019.