Provisions Affecting Businesses
April 12, 2020
Business Losses (Net Operating Losses “NOLs”)
The CARES Act allows for the carryback of NOLs arising in taxable years ending in 2018, 2019 and 2020 to the five years preceding the loss year. Prior to this Act, NOLs were only able to be carried forward to offset future year taxable income. This provision will allow C-Corporations and individuals with business losses to recoup taxes paid within the immediate 5-year period prior to the loss year. To the extend the NOLs exceed the prior 5-year taxable income the remaining NOL will be carried forward indefinitely. In addition, the CARES Act removes the limitation that NOLs could only offset 80% of taxable income for losses incurred in tax years ending in 2018, 2019 and 2020.
|Year of Loss||Carryback Period*||Carryforward Period||Taxable Income Limitation|
|2018||2013 – 2017||Indefinite||None|
|2019||2014 – 2018||Indefinite||None|
|2020||2015 – 2019||Indefinite||None|
*Note for Taxpayers with IRC §965(a) Deemed Repatriation Income: The carryback of an NOL cannot offset §965(a) income.[GPW INSIGHT: Filing NOL carrybacks will provide immediate cash flow to taxpayers in the form of tax refunds from prior years.]
Business Loss Limitation Suspension
The Tax Cuts and Jobs Act (TCJA) of 2017 limited the ability for individual taxpayers to deduct net business losses in excess of $250,000 (single/married filing separate) or $500,000 (married filing joint) for tax years 2018 through 2025. The CARES Act suspends the $250,000/$500,000 limitation for tax years 2018, 2019 and 2020.
|Excess Business Loss Limitation||TCJA||CARES Act|
|Years Applicable||2018 – 2025||2021 – 2025|
Business Interest Limitations
The business interest limitation introduced in the Tax Cuts and Jobs Act (TCJA) of 2017, which impacted taxpayers with gross receipts exceeding $26 million and entities where more than 35% of losses are allocated to limited partners/entrepreneurs, has been modified to allow for additional business interest expense deduction. Under TCJA, interest expense was limited to 30% of “adjusted taxable income” (ATI) and has now been increased to 50% of ATI for tax years 2019 and 2020. In addition, considering most taxpayer’s income in 2020 will be less than 2019, the taxpayer can elect use their 2019 ATI in determining the deductible interest expense.
|Tax Years||TCIA (Old)||CARES (New)|
|ATI Limitation||2019 – 2020||30%||50%|
|ATI Limitation||2021 and forward||30%||30%|
Quick Refunds – Corporations
A Corporation that overpaid its estimated tax can obtain a refund of any excess estimate prior to filing its tax return. The refund is allowed to the extent it equals or exceeds 10% of the tax estimated by the corporation for the tax year. This provision only applies after the close of the corporate tax year and before the extension date, which is due the 15th day of the 4th month after the year end. As an example, a 2019 calendar year end corporation has until April 15, 2020 to request a tentative estimated tax refund.[GPW INSIGHT: This provision will only benefit corporations who are planning on extending their tax returns and are also anticipating refunds with those returns.]
Charitable Contribution Limitation – Corporations
The charitable contribution deduction limitation to 10% of corporate taxable income has been increased to 25% of taxable income for tax years ending after December 31, 2020.
Qualified Improvement Property (QIP) – Technical Correction
QIP is any property that is an improvement to the interior portion of commercial building, excluding the enlargement of the building, elevators, escalators, or structural framework. Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), QIP had a depreciable life of 15 years and could qualify for federal bonus depreciation. But due to a drafting error in the TCJA language, QIP depreciable life was inadvertently changed to 39 years, making it ineligible for bonus depreciation. The CARES Act retroactively corrects the language passed in the TCJA to allow for the 15-year life for QIP.[GPW INSIGHT: Considering this change is retroactive, taxpayers who placed into service QIP during 2018 may want to evaluate whether they should amend their returns or possibly file for a change in accounting method during the current year. We are uncertain as to whether there will be any relief for taxpayers who made an irrevocable election out of the §163(j) interest limitation rules at the consequence of no longer being able to claim bonus depreciation, who would not have made that election had the original law been written correctly. The IRS may issue further guidance to address issues related to the retroactive correction.]
Qualified Disaster Relief Payments Made by Employers
In the wake of the September 11 terror attacks Congress created IRC §139, which allows for the tax-free reimbursement of reasonable and necessary personal, family, living or funeral expenses for individuals as a result of a qualified disaster. The President’s invocation of the Robert T. Stafford Disaster Relief and Emergency Assistance Act designates the COVID-19 pandemic as a qualified disaster. A qualified disaster relief payment must be paid to, or for the benefit of, an individual, but only to the extent the reimbursement is not otherwise compensated by insurance or other reimbursement. Generally, any payments made to employees are considered compensation and must be included in the wages with the appropriate payroll taxes withheld. However, under this provision, employers would be able avoid designating qualified disaster relief payments as compensation, thus avoiding payroll taxes, and the employee would receive a tax-free benefit of any qualifying payments. Some reasonable expenses related to the COVID-19 pandemic could be:
- Medical expenses incurred by the employee (not compensated by insurance)
- The cost of over-the-counter medications and hand sanitizer
- Reasonable expenses for working employees working remotely
- The cost of childcare or tutoring for family members due to school closures
Paid Emergency Family & Medical Leave, Paid Sick Leave and Related Employer Tax Credits
Emergency Family & Medical Leave
The Families First Coronavirus Response Act added a new reason related to a ‘public health emergency’ that an employee might qualify for 12 weeks of leave for the period beginning April 1, 2020 and ending December 31, 2020.
Any employer with fewer than 500 employees, to include employees on leave, temporary employees, and day laborers supplied by a temp agency. Independent contractors are not counted as employees.
- Employers with fewer than 50 employees may be exempted if they can show that paying the leave will jeopardize the viability of their business as a going concern.
- Employers with more than 500 employees are exempt.
- Any employee who has been employed for at least 30 calendar days before leave is requested.
Qualifying need related to a ‘public health emergency’:
- An emergency with respect to COVID-19 declared by a Federal, state or local authority and
- An employee is unable to work (or telework) due to a need for leave to care for a child under the age of 18 due to the closure of the child’s school or childcare facility or unavailability of childcare provider.
Note an employee is not entitled to paid leave because their place of work is closed whether voluntarily or involuntarily. They will only qualify if they need to stay home to care for a child.
Paid Leave Outline:
- The first 2 out of the 12 weeks are unpaid (unless you also qualify for Paid Sick Leave).
- The employee can elect to use accrued vacation, sick leave or other PTO to receive payment during these 2 unpaid weeks.
- The remaining 10 out of the 12 weeks must be paid by the employer as follows:
- At a rate of 2/3 of the employee’s regular pay, and
- For the number of hours, the employee would normally be scheduled to work.
- The leave pay is not to exceed $200 per day, or $10,000 in aggregate to any single employee.
- Emergency Family & Medical Leave is not subject to the 6.2% employer Social Security Tax
Requirement to hold employee’s job:
- If an employer has fewer than 25 employees, the employee is not guaranteed their job back if:
- The position no longer exists due to the economic conditions caused by COVID-19, and
- The employer makes reasonable efforts to restore the employee to the position if the position becomes available in the next year.
Paid Sick Leave
- Any employee, regardless of how long they have been employed.
Eligibility Qualifying Reasons:
- An eligible employee is entitled to up to 80 hours of paid sick leave for any of the following reasons identified in the chart below.
Paid Leave Outline:
- For reasons 1, 2 and 3 in the chart below, the employer must pay the greater of:
- The employee’s regular rate of pay (limited to $511 per day); OR
- The federal/state minimum wage
- For reasons 4,5 and 6 in the chart below, the employer must pay the lesser of:
- 2/3 of the employee’s regular rate of pay; OR
- $200 per day
- Paid Sick Leave is not subject to the 6.2% employer Social Security Tax
|Sick Leave Situation||Daily Pay Limit||Max Days Per Employee|
|1. Federal, state, or local quarantine or isolation order has limited the employee’s ability to travel||$511||10|
|2. A health-care provider advised the employee to self-quarantine because of COVID-19 concerns||$511||10|
|3. The employee is experiencing symptoms of COVID-19 and is in the process of determining whether they have the virus||$511||10|
|4. The employee is caring for someone who is subject to a government quarantine or isolation order or whose health-care provider advised that person to self-quarantine||$200||10|
|5. The employee needs to care for a child due to the closure of the child’s school or child-care facility or unavailability of child-care provider||$200||10|
|6. The employee is experiencing a situation that was specified by the Department of Health and Human Services as substantially similar to any of the above situations||$200||10|
Combining Emergency Medical Leave & Paid Sick Leave:
An employee taking care of a child due to the closure of the child’s school or childcare facility, or unavailability of childcare provider can qualify for both. In this case both the first 2 weeks out of the 12 weeks would be paid under Paid Sick Leave (maximum $2,000) and the remaining 10 weeks would be paid as Emergency Medical Leave (maximum $10,000).
Employer Related Credits:
The employer is entitled to refundable credits to be taken against payroll taxes as follows. But note the amount of any credits taken is added to the gross income of the employer.
Emergency Family & Medical Leave
- 100% of ‘qualified Emergency Family & Medical Leave’ for each calendar quarter from April 1, 2020 through December 31, 2020
- The credit is increased by the employer’s 1.45% of Medicare tax that is imposed on qualified Emergency Family & Medical Leave
- The credits are increased by the employee’s share of allocable health care costs
Self-employed individuals are also eligible for a credit against self-employment taxes based upon a “qualified family leave equivalent,” not to exceed the lesser of $200 per day or 67% of the “average daily self-employment income.” The “average daily self-employment income” is determined by dividing the net earnings from self-employment for the taxable year by 260. The individual will then multiply the number of days they would have been entitled to receive Paid Family Leave if the individual were an employee, up to a maximum of 50 days.
Example 2: Joe is self-employed and was unable to work while he cared for his children due to the closure of their school. He missed 30 days of work due to COVID-19 of which 10 days are qualified sick leave and 20 days are qualified family leave. For tax year 2020, Joe’s net earnings from self-employment was $100,000. His “average daily self-employment income” was $385 ($100,000 divided by 260). Joe’s “qualified family leave equivalent” is $4,000 (20 days (maximum) X $200/day. Joe’s credit against self-employment tax for qualified family leave is $4,000.
Paid Sick Leave
- 100% of ‘qualified Paid Sick Leave’ for each calendar quarter from April 1, 2020 through December 31, 2020.
- The credit is increased by the employer’s 1.45% of Medicare tax that is imposed on qualified Paid Sick Leave.
- The credits are increased by the employee’s share of allocable health care costs
Self-employed individuals are also eligible for a credit against self-employment taxes based upon a “qualified Paid Sick Leave equivalent,” not to exceed the lesser of $200 per day or 67% (or 100% in the case of situation 1, 2 or 3 above) of the “average daily self-employment income.” The “average daily self-employment income” is determined by dividing the net earnings from self-employment for the taxable year by 260. The individual will then multiply the number of days unable to perform services due to the reasons in the chart above by the “average daily self-employment income.” The sick leave credit is limited to 10 days.
Example 1: Joe is self-employed and was unable to work while he cared for his children due to the closure of their school. He missed 30 days of work due to COVID-19. For tax year 2020, Joe’s net earnings from self-employment was $100,000. His “average daily self-employment income” was $385 ($100,000 divided by 260). Joe’s “qualified sick leave equivalent” is $2,000 (10 days (maximum) X $200/day (maximum due to Situation 5 above). Joe’s credit against self-employment tax for qualified sick leave is $2,000.
Paycheck Protection Program – Small Business Loan (‘PPP Loan’)
To help small businesses with cash flow needs and to encourage the retention of employees, the CARES Act has allocated nearly $350 billion to the creation of PPP Loans. These loans are made by financial institutions and guaranteed by the U.S. Small Business Administration, i.e. they do not require personal guarantees by business owners.
PPP Loans will have a term of 2 years and an interest rate of 1% with no prepayment penalties. The standard fees for establishing a loan are also waived. In addition, the CARES Act provides for deferment of repayment of both principal and interest for six months. A PPP borrower may also be eligible for loan forgiveness for a portion of the loan.
- Small businesses and nonprofits with 500 employees or less that were in operation as of 2/15/2020. Must make a good faith certification that the loan is necessary to support their ongoing operations and the funds must be used towards payroll, mortgage payments, lease payments and utility payments.
- Sole proprietors (with or without employees), independent contractors, and self-employed individuals are all eligible for this program provided they will file a Schedule C with their Form 1040 for 2019.
- Hospitality businesses (e.g. restaurants, bars, hotels, and RV parks) can treat each of their locations separately, and as a result, businesses with more than 500 employees could still qualify.
No Double Dipping:
- Small businesses taking out a PPP Loan are not permitted to have multiple or duplicative loans for the same purpose, or to receive proceeds from similar loans through December 30, 2020.
- Participation in the PPP Loan will also prevent the business from participating in the following alternative CARES Act provisions:
- Employee Retention Credit
- Delay of Payment of Employer Payroll Tax and Self-Employment Tax
- Small businesses that already have an Economic Injury Disaster Loan (EIDL) through the Small Business Administration for COVID-19, can refinance it into a PPP Loan, but cannot hold both loans for the same expenses.
- PPP Loan applications can commence as soon as banks start processing the loans.
- PPP Loans must be taken out before June 30, 2020.
- Special provisions for ‘Express Loans’ of up to $1 million can be approved within 36 hours.
- Calculated as a formula based on 2.5 times certain average monthly ‘payroll costs’ (based on the 1-year period before the loan date) up to a maximum of $10 million.
- The portion of the loan used to pay eligible expenses during an 8-week period after your loan’s origination date will be forgiven tax-free.
- Eligible expenses include:
- certain payroll costs, including wages, salaries up to $100,000 (annualized) per employee, health insurance premiums, commissions, cash tips, payments for vacation, parental, family, medical, or sick leave (unless a credit is allowed) and state and local payroll taxes, but not federal payroll taxes. (Does not include compensation of an employee who resides outside the United States).
- Interest payments on mortgages for real or personal property. Does not include principal payments, or pre-payments.
- Loan Forgiveness is reduced if:
- You reduce your full-time equivalents, including cutting hours, during the ‘covered period’.
- You reduce the compensation of employees making less than $100,000 (annualized) by more than 25% during the ‘covered period’.
- You can avoid the loan forgiveness reduction if:
- You make no further cuts by 30 days after the passage of the CARES Act.
- You rehire and raise wages to prior levels by June 30, 2020.
Payroll Costs Include:
- Salary, wages, commissions, or similar compensation paid to an employee
- Payments for cash tips or equivalent
- Payments for vacation, parental, family, medical or sick leave
- Allowance for dismissal or separation
- Payment for group health care benefits, including premiums
- Payment of any retirement benefits, and
- Payment of state or local tax assessed on the compensation of employees
Sole proprietors and independent contractors can include up to $100,000 of self-employment income as ‘wages’ for the purposes of calculating ‘payroll costs’ if applying for a PPP Loan.
Partnerships can include the self-employment income (capped at $100,000 annualized per partner) as part of its payroll costs for all ‘general active partners’. It is unclear at this time if this refers to all partners of a partnership. We are awaiting further guidance on the definition of ‘general active partner’.
Payroll Costs do NOT Include:
- The excess of compensation for any individual employee in excess of an annual salary of $100,000
- Federal payroll taxes
- Compensation for any employee whose principal place of residence is outside the U.S., or
- Qualified sick leave or family medical leave for which a credit is allowed.
See our loan program comparison chart for a side by side comparison of the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL), Main Street Business Lending Program and traditional SBA loan.[GPW INSIGHT: At this time the original $349 billion allocated to the Paycheck Protection Program has been spent. A bill to add an additional $310 billion to the Paycheck Protection Program, was passed in the Senate, and was sent to the House of Representatives, where it is still being negotiated.]
Economic Injury Disaster Loans (EIDL)
The CARES Act expands the availability of Economic Injury Disaster Loans to small businesses, cooperatives, tribal small businesses, and Employee Stock Ownership Plans with 500 or fewer employees during the period of January 31, 2020 through December 31, 2020.
These loans are made by financial institutions and are also guaranteed by the U.S. Small Business Administration, i.e. they do not require personal guarantees for loans up to $200,000. The SBA will approve loans based on the company’s actual economic injury, the applicant’s credit score and their determination of the ability to repay.
- Loans must be taken out before December 31, 2020.
- Eligible businesses that certify under penalty of perjury that they have suffered a substantial economic injury are permitted to request a $10,000 advance payable within 3 days of application. No repayment of the $10,000 is required, whether the loan is approved or not.
- The maximum loan amount is $2 million, but is based on the amount of economic injury.
- There is NO loan forgiveness under this program. The only amount forgiven is the $10,000 advance, which is not required to be paid back if the loan application is not approved.
Employee Retention Credit
Eligible Employers can take a tax credit against their Federal employment tax equal to 50% of qualified wages (up to $10,000) paid to each employee.
- An employer is eligible for this credit only if they were carrying on a trade or business in 2020 and either:
- the operation of that business is fully or partially suspended by the government due to COVID-19, or
- the business has seen a significant decline in gross revenue (50% less than for the same calendar quarter of the previous year).
- Businesses participating in the Paycheck Protection Program are not eligible for the Employee Retention Credit.
- For employers with 100 or fewer employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020 for compensation, including health benefits, paid to an eligible employee (up to $10,000).
- For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not working due to COVID-19 related circumstances.
- 50% of qualified wages (up to $10,000 per employee).
- Credit not to exceed the applicable employment taxes (reduced by any other credits allowed)
- Credit is applied against employment taxes and can generate a refund.
Delay of Employer Payroll Taxes
Employers are ordinarily responsible for paying 6.2% on employee wages, for Social Security tax. The CARES Act permits employers (both for-profit and non-profit) and self-employed individuals to defer payment of the employer portion of the Social Security tax to the Federal government that would be owed for the period: March 27, 2020 to December 31, 2020. The deferred taxes are payable over a two-year period as follows:
50% is required to be paid by December 31, 2021
50% is required to be paid by December 31, 2022
If the entity participates in the Paycheck Protection Program, the business is not eligible to defer payment of payroll taxes.