CARES Act Business Provisions

Rödl & Partner Tax Matters Vol 2020 – 5, published April 1, 2020

On Friday March 27, 2020, President Trump signed the new Coronavirus Aid, Relief, and Economic Security Act ("CARES Act" or the "Act") into law. Major provisions of the Act affecting business taxpayers are discussed below. More details regarding the specifics of each provision are emerging daily. If you have questions, please contact your Rödl & Partner representative.

Business Provisions

1. Refundable payroll tax credit for employee retention

An eligible employer may take a credit against old-age, survivors and disability insurance taxes imposed by Internal Revenue Code Sec. 3111(a) ("Social Security taxes) for each calendar quarter. The credit is equal to 50 percent of the qualified wages with respect to each employee for such calendar quarter. A maximum of $10,000 of wages per employee may be taken into account for all calendar quarters. Additionally, the credit allowed for any calendar quarter shall not exceed the applicable employment taxes on the wages paid with respect to the employment of all the employer's employees for such calendar quarter. If the credit exceeds the applicable employment taxes for any calendar quarter, the excess may first be applied against other outstanding internal revenue tax liabilities of the employer, with any remaining excess refunded.

Eligible Employer

The credit is available to employers whose (1) operations were fully or partially suspended due to a COVID-19-related shut-down order or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. The testing period for gross receipts begins with the first calendar quarter beginning after December 31, 2019 and ends with the first subsequent calendar quarter in which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in the prior year.

Qualified Wages

Qualified wages generally include wages paid after March 12, 2020 and before January 1, 2021.

For eligible employers with an average of more than 100 full-time employees during 2019, qualified wages include wages paid to an employee who is not providing services due to the full or partial suspension of business operations as described above, or wages paid to an employee who is not providing services during a calendar quarter within the gross receipts testing period.

For eligible employers with an average of less than 100 full-time employees during 2019, qualified wages include wages paid to an employee during a period of full or partial suspension of business operations as well as wages paid to an employee during a calendar quarter within the gross receipts testing period, regardless of whether the employee is providing services.

Importantly, qualified wages do not include any wages taken into account under section 7001 (payroll credit for required paid sick leave) or section 7003 (payroll credit for required paid family leave) of the Families First Coronavirus Response Act.

Generally, qualified wages for purposes of the credit may not exceed the amount that an employee would have been paid for working an equivalent duration during the 30 days immediately preceding the full or partial suspension of business activities due to COVID-19.

Finally, qualified wages may include amounts paid or incurred by the eligible employer to provide and maintain a group health plan to the extent that such amounts are excluded from the gross income of the employees.

Aggregation and Other Rules

Generally, all persons treated as a single employer shall be treated as one employer for purposes of this provision.

An eligible employer may elect not to have this provision apply for any calendar quarter.

This credit is not available to eligible employers who receive Small Business Interruption Loans under the Act.

2. Delayed payment of employer payroll taxes

Employers and self-employed individuals can defer payment of the employer's share of the Social Security taxes incurred from March 27, 2020 through January 1, 2021.

The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.

An employer that receives funds under the PPP loan program is permitted to defer deposit and payment of the employer’s shares of social security taxes payable up to the date on which a lender agrees to forgive the loan balance due.

3. Modifications for net operating losses

The 2017 Tax Cuts and Jobs Act eliminated net operating loss ("NOL") carrybacks and generally limited the use of NOL carryforwards generated in tax years beginning after December 31, 2017 to 80 percent of the current year's taxable income.

This provision of the Act temporarily removes the 80 percent taxable income limitation to allow an NOL to fully offset income for tax years beginning before January 1, 2021.

NOLs arising in a tax year beginning in 2018, 2019, or 2020 may now be carried back to each of the five tax years preceding the year of the loss.

Carrybacks to Years in Which Section 965 ("Repatriation Tax") Applies

The 2017 Tax Cuts and Jobs Act contained a provision regarding the deemed repatriation of accumulated earnings of foreign subsidiaries. Such amounts were generally subject to U.S. taxation in tax year 2017. The Act provides that if the five year carryback period described above includes one or more tax years in which the taxpayer had an inclusion under Section 965(a), the taxpayer will be treated as having made the election under section 965(n) (regarding not utilizing NOLs against the 965 inclusion amount).

However, the Act also permits the taxpayer to elect to exclude such tax years from such carryback period entirely. The election must be made by the extended due date of the taxpayer's tax return for the first taxable year ending after March 27, 2020.

"Straddle" Years

For taxpayers whose tax year begins before January 1, 2018 and ends after December 31, 2017 (the enactment date of the 2017 Tax Cuts and Jobs Act), the taxpayer may, within 120 days after March 27, 2020:

File an NOL carryback claim for such straddle year NOL
Elect to forgo any carryback of such straddle year NOL
Elect to reduce any period to which such straddle year NOL may be carried back, or
Revoke any election made to forgo any carryback of such straddle year NOL

4. Modification of credit for prior year minimum tax liability of corporations

The 2017 Tax Cuts and Jobs Act repealed the corporate Alternative Minimum Tax for tax years beginning after December 31, 2017. For corporations that had existing minimum tax credits, the excess credit over the regular tax liability was eligible to be refunded at a rate of 50 percent for any tax year beginning after 2017 and 100 percent for tax years beginning in 2021, thus ensuring a full refund of minimum tax credits prior to 2022.

The Act now allows corporations to claim a refund of their remaining AMT credits in tax year 2019.

Corporations may also elect to take the entire refundable credit amount in the first tax year beginning in 2018 by filing an application for a tentative refund. Such application must be filed prior to December 31, 2020. The Secretary of the Treasury has 90 days from the application filing date to review the application, determine the amount of the overpayment and apply, credit or refund such overpayment to the taxpayer.

5. Modification of limitation on business interest

The 2017 Tax Cuts and Jobs Act imposed a sweeping limitation on business interest to 30 percent of adjusted taxable income.

For tax years beginning in 2019 and 2020, the Act now permits a deduction for business interest equal to 50 percent of adjusted taxable income for most taxpayers. A taxpayer may make an irrevocable election not to apply the increased business interest deduction limitation.

Additionally, for tax years beginning in 2020, taxpayers may elect to use their 2019 adjusted taxable income (or the prorated 2019 adjusted taxable income amount for short taxable years) as the basis for the limitation computation.

Special rules applicable to partnerships and partners

The increased 50 percent limitation does not apply to partnerships for tax years beginning in 2019. However, unless a partner elects out, half of the excess business interest of the partnership for any taxable year beginning in 2019 which is allocated to the partner will be treated as paid or accrued by the partner and fully deductible in 2020, while the remaining half will be subject to the increased 50 percent limitation in 2020.

A partner may make an irrevocable election not to apply this treatment in 2019 or 2020, whereas a partnership may only elect not to apply this treatment for tax years beginning in 2020.

Regarding the election to use 2019 adjusted taxable income as the basis for the limitation computation, such election must be made at the partnership level.

6. Technical amendment regarding qualified improvement property

The Act corrects an error in the 2017 Tax Cuts and Jobs Act which inadvertently required businesses to depreciate qualified improvement property over 39 years. Qualified improvement property is generally any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date on which the building was first placed in service. Qualified improvement property does not include expenditures for enlargement of the building, elevators or escalators, or internal structural framework.

Taxpayers may now immediately write off the cost of qualified improvement property. The Act makes this change retroactive to property placed in service after December 31, 2017.

7. Temporary exception from excise tax for alcohol used to produce hand sanitizer

The federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration related to the outbreak of the virus SARS-CoV-2 or COVID-19 has been waived for calendar year 2020.

There are many other provisions in the CARES Act related to employment and labor laws, educational institutions, health care providers, life sciences and biotech companies, and Native American tribes. Please continue to check our website for updates or contact your Rödl & Partner representative for more information.

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