The Coronavirus Aid, Relief, and Economic Security Act is currently providing financial relief to individuals and businesses negatively impacted by the Coronavirus pandemic. Below is a glance at the $2 trillion stimulus program and its key tax provisions impacting small businesses.
There are 14 key tax provisions in the CARES Act affecting individuals and businesses. Individual provisions include for example, an increase in the adjusted gross income limitation for cash contributions to charities to 100% up from 60% ( corporate limitations increased to 25% of taxable income which is up from 10% ).
For retirement plans, in addition to the waiver of required min distributions for 2020, the act increases loans available from qualified retirement plans from $50k to $100k while the 2020 due date of outstanding loans is differed for a year.
- Employee Retention Credit – credit of 50% of the first $10k of an employee’s wage for the year. Operation of business has to have been fully or partially suspended during the quarter due to government orders or have had a 50% decline in revenue quarterly. Tax exempt organizations don’t have this 50% decline in revenue test, just reduced activity.
- Retention Credit breaks down into two classes of employers: those with under 100 full time employees vs. over 100 full time employees. For employers with more than 100, you only get the retention credit for the wages of the employees who are not able to work due to the government orders or decline in revenue. For smaller employers with less than 100 full time employees, all of the wages paid during the period of government ordered suspended operations qualify for this credit. You can get the credit even if employees have been able to work but you have to be under government mandated reduced operations or have to have a decline in revenue.
- Employers that qualify for the forgivable SBA loans do not qualify for the Employee Retention Credit.
- Payroll Tax Deferral – employer’s share of the 6.2% FICA tax can be deferred all of 2020. Of that total deferral, 50% is paid Dec 31, 2021, the other 50% is paid Dec 31, 2022.
- If you will have forgiveness on SBA loan you do not get payroll tax deferral.
- Self–employed people have the opportunity to defer a portion of self employment tax that is equivalent to 6.2% of employer FICA tax. Approx. 50% of the tax is deferred. Half of that is paid end of 2021, the other half is paid end of 2022.
- Net Operating Losses Reform. Since Tax Cuts and Jobs Act, there was an 80% limitation on taxable income on the use of post-2017 NOL. This has now been deferred until 2021. Losses carried over from 2017 years and later can offset up to 100% of the taxable income. For 2018 – 2020 NOL we can carry them back 5 years. Carrying that loss back to a higher tax % years is a great opportunity to get some money back from these earlier years.
- Excess business loss limitation change. Code has until now limited the net business loss that a person can deduct to $500k. Net losses greater than that were not fully deductible. The CARES Act delays this provision. Taxpayers will need to amend their 2018 taxes to remove this excess business loss limitation, recalculate 2018, and if 2018 is a loss then that can be carried back 5 years.
- Qualified improvement property provision. There was a glitch in the Tax Cuts and Jobs Act where they missed including qualified improvement property in the category of 15 year property in the internal rev code and the CARES Act fixes that. For internal improvements inside a building it would have been considered a 39 year property. If taxpayer has made qualified improvements in their building in 2018, there is opportunity to amend 2018 return and claim that bonus depreciation. If you had NOL, carry that loss back 5 years. The government now has the ability to generate quick refunds and get liquidity back in the system.
- 163(j) limit – interest expense. This was very unpopular because Tax Cuts and Jobs Act did not allow deduction of business interest expense if it exceeded the total of business interest income plus 30% of adjusted taxable income. The CARES Act raises the limit to 50% for 2019 and 2020.
- For partnerships, 2019 does not change. If the partnership reports to the individual, that they were limited in the deductibility of their interest expense, that individual partner can take 50% of disallowed interest and deduct that on the 2020 return, not on the 2019 return. This only applies to businesses that have greater than $26MM of average annual gross receipts. 2020 income will be lower
The CARES Act goes a long way to aid businesses during this trying time. The following weeks will illustrate its full impact on the business world and the overall economy. For more information visit
https://home.treasury.gov/policy-issues/top-priorities/cares-act or find the complete bill at