Employee retention credit
for employers
Eligible employers can
qualify for a refundable credit against, generally, the employer’s 6.2% portion
of the Social Security (OASDI) payroll tax (or against the Railroad Retirement
tax) for 50% of certain wages (below) paid to employees during the COVID-19
crisis.
The credit is available to
employers carrying on business during 2020, including non-profits (but not
government entities), whose operations for a calendar quarter 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 more than 50% reduction in quarterly receipts, measured on a
year-over-year basis relative to the corresponding 2019 quarter, with the
eligible quarters continuing until the quarter after there is a quarter in
which receipts are greater than 80% of the receipts for the corresponding 2019
quarter.
For employers with more than
100 employees in 2019, the eligible wages are wages of employees who aren’t
providing services because of the business suspension or reduction in gross
receipts described above.
For employers with 100 or
fewer full-time employees in 2019, all employee wages are eligible, even if
employees haven’t been prevented from providing services. The credit is
provided for wages and compensation, including health benefits, and is provided
for the first $10,000 in eligible wages and compensation paid by the employer
to an employee. Thus, the credit is a maximum $5,000 per employee.
Wages don’t include (1) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) wages taken into account for the employer income tax credit for paid family and medical leave (under Code Sec. 45S) or (3) wages in a period in which an employer is allowed for an employee a work opportunity credit (under Code Sec. 51). An employer can elect to not have the credit apply on a quarter-by-quarter basis.
The IRS has authority to
advance payments to eligible employers and to waive penalties for employers who
do not deposit applicable payroll taxes in reasonable anticipation of receiving
the credit. The credit is not available to employers receiving Small Business
Interruption Loans. The credit is provided for wages paid after March 12, 2020
through December 31, 2020.
Delayed payment of employer
payroll taxes
Taxpayers (including
self-employeds) will be able to defer paying the employer portion of certain
payroll taxes through the end of 2020, with all 2020 deferred amounts due in
two equal installments, one at the end of 2021, the other at the end of 2022.
Taxes that can be deferred include the 6.2% employer portion of the Social
Security (OASDI) payroll tax and the employer and employee representative
portion of Railroad Retirement taxes (that are attributable to the employer
6.2% Social Security (OASDI) rate). The relief isn’t available if the taxpayer
has had debt forgiveness under the CARES Act for certain loans under the Small
Business Act as modified by the CARES Act (see below). For self-employeds, the
deferral applies to 50% of the Self-Employment Contributions Act tax liability
(including any related estimated tax liability).
Accelerated payment of
credits for required paid sick leave and family leave
The CARES Act authorizes IRS
broadly to allow employers an accelerated benefit of the paid sick leave and
paid family leave credits allowed by the Families First Coronavirus Response
Act by, for example, not requiring deposits of payroll taxes in the amount of
credits earned.
Pension funding delay
The CARES Act gives single
employer pension plan companies more time to meet their funding
obligations by delaying the due date for any contribution otherwise due during
2020 until January 1, 2021. At that time, contributions due earlier will be due
with interest. Also, a plan can treat its status for benefit restrictions
as of December 31, 2019 as applying throughout 2020.
Certain SBA loan debt
forgiveness isn’t taxable
Amounts of Small Business
Administration Section 7(a)(36) guaranteed loans that are forgiven under the
CARES Act aren’t taxable as discharge of indebtedness income if the forgiven
amounts are used for one of several permitted purposes. The loans have to be
made during the period beginning on February 15, 2020 and ending on June 30,
2020.
Net operating loss
liberalizations
The 2017 Tax Cuts and Jobs
Act (the 2017 Tax Law) limited NOLs arising after 2017 to 80% of taxable income
and eliminated the ability to carry NOLs back to prior tax years. For NOLs
arising in tax years beginning before 2021, the CARES Act allows taxpayers to
carryback 100% of NOLs to the prior five tax years, effectively delaying for
carrybacks the 80% taxable income limitation and carryback prohibition until
2021.
The Act also temporarily
liberalizes the treatment of NOL carryforwards. For tax years beginning before
2021, taxpayers can take an NOL deduction equal to 100% of taxable income
(rather than the present 80% limit). For tax years beginning after 2021,
taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax
years before 2018, and (2) a deduction limited to 80% of taxable income for
NOLs arising in tax years after 2017.
The provision also includes special rules for REITS, life insurance companies, and the Code Sec. 965 transition tax. There are also technical corrections to the 2017 Tax Law effective dates for NOL changes.
Relaxation of business
interest deduction limit
The 2017 Tax Law generally
limited the amount of business interest allowed as a deduction to 30% of
adjusted taxable income (ATI). The CARES Act generally allows businesses,
unless they elect otherwise, to increase the interest limitation to 50% of ATI
for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020
limitation. For partnerships, the 30% of ATI limit remains in place for 2019
but is 50% for 2020. However, unless a partner elects otherwise, 50% of any
business interest allocated to a partner in 2019 is deductible in 2020 and not
subject to the 50% (formerly 30%) ATI limitation. The remaining 50% of excess
business interest from 2019 allocated to the partner is subject to the ATI
limitations. Partnerships, like other businesses, may elect to use 2019
partnership ATI in calculating their 2020 limitation.
Technical correction to
restore faster write-offs for interior building improvements
The CARES Act makes a technical
correction to the 2017 Tax Law that retroactively treats (1) a wide variety of
interior, non-load-bearing building improvements (qualified improvement
property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off)
or for treatment as 15-year MACRS property or (2) if required to be treated as
alternative depreciation system property, as eligible for a write-off over 20
years. The correction of the error in the 2017 Tax Law restores the eligibility
of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores
15-year MACRS write-offs for many leasehold, restaurant and retail
improvements.
IRS information website
Ongoing information on the IRS and tax legislation response to COVID- 19 can be found at https://www.irs.gov/coronavirus
As always, if you have any questions
about this information, please feel free to reach out to us. We you the very best during this difficult
time.
