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.
Employee retention credit for employers
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.
Delay of payment of employer payroll taxes
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 purposes of the above rules, the term ”applicable employment taxes” means: 1. The taxes imposed under Code Sec. 3111(a) (social security taxes), 2. So much of the taxes imposed under Code Sec. 3211(a) as are attributable to the rate in effect under Code Sec. 3111(a), and 3. So much of the taxes imposed under Code Sec. 3221(a) as are attributable to the rate in effect under Code Sec. 3111(a) (RRTA taxes).
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: 1. Dec. 31, 2021, with respect to 50% of the amounts to which employment taxes self‐employment taxes, as the case may be, apply, and 2. Dec. 31, 2022, with respect to the remaining 50% of those amounts.
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% ofself‐employment taxesfor 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 astaxesto which the estimated tax payment requirements apply.
Effective date. The provisions apply to the period beginning on the date of enactment of the Act.
Temporary repeal of taxable income limitation for net operating losses (NOLs)
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 removesthe 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 after Dec. 31, 2017 are carried.
Modification of rules relating to net operating loss (NOL) carrybacks
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.
Modification of limitation on losses for noncorporate taxpayers
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.
Corporate minimum tax credit (MTC) is accelerated
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 before 2021, 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 excess MTC 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.
The CARES Act also provides for an election to take the entire refundable credit amount in 2018.