CARES Act: Important Tax Provisions

In this alert we summarize some of the more significant changes relating to businesses:

• • Delay of filing dates

Postponing the filing and payment dates of both corporate and individual tax returns that are normally due on April 15, 2020 to July 15, 2020. Note that this change does not apply to partnership returns and the due date for such remained March 16, 2020.

• • Changes relating to Net Operating Losses (NOLs)

The CARES Act relaxes certain current limitations on the use of NOLs:

• • • • 5 year carry back: NOLs generated in tax years beginning after December 31, 2017, and before January 1, 2020 (for example, NOLs incurred in 2018, 2019, or 2021 by a calendar-year taxpayer) may be carried back to each of the five tax years preceding the tax year of such loss. Special rules apply to REITs as described below.
      • Suspension of the 80% limitation: Temporary removal of the 80% taxable income limitation on the use of NOLs. This would apply to tax years beginning after December 31, 2017 and before January 1, 2021.
      • REITs: NOLs of a taxpayer may not be carried back to any tax year in which the taxpayer was a REIT and NOLs of REITs may not be carried back to any tax year (regardless of whether the taxpayer was a REIT in that year).
      • Noncorporate taxpayers: Noncorporate taxpayers are temporarily allowed to deduct excess business losses arising in 2018, 2019, and 2020.

• • Corporate Alternative Minimum Tax (AMT) Relief

The CARES Act provides corporations with the ability to accelerate their remaining minimum tax credits.

• • Relaxation of business interest deduction limit

The 2017 tax reform included a limitation on business interest deduction to 30% of adjusted taxable income (ATI). The CARES Act temporarily increases this limitation to 50% of ATI. This temporary increase applies to for tax years beginning in 2019 and 2020. In addition, taxpayers can use their 2019 ATI in calculating their 2020 limitation (this assumed that in most cases due to the COVID pandemic 2019 ATI would be higher than 2020).

For partnerships, the 30% of ATI limit remains in place for 2019 but is increased to 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.

• • Qualified Improvement Property (QIP)

The CARES Act provides for a much-anticipated technical correction to the 2017 Tax Law that retroactively treats “qualified improvement property” as a 15-year property for depreciation purposes. This change makes such property eligible for bonus depreciation (which means a 100% write-off). In addition, if a taxpayer is required to treat such property under the alternative depreciation system property, such property is eligible for a 20-year depreciation.

• • Delay of payment of employer payroll taxes

Employers (and self-employed individuals) can defer payment of the employer share of social security tax (6.2%) they are otherwise responsible for paying in 2020, effective for payments due after March 27 (the date of enactment) through December 31, 2020. The deferred employment tax is payable 50% on December 31, 2021 and 50% on December 21, 2022. Note that this deferral is not available to employers receiving Small Business Interruption Loans under the CARES Act.

• • Employee retention credit for employers

The CARES Act provides for a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to employers (including non-profit employers), 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. Note that this credit is not available to employers receiving Small Business Interruption Loans under the CARES Act.

• • Certain SBA loan debt forgiveness isn’t taxable

Amounts of Small Business Administration guaranteed loans that are forgiven under the CARES Act are not taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans must be made during the period beginning on February 15, 2020 and ending on June 30, 2020.

In the coming days we will issue additional alerts describing some of the above changes in more details including our observations.

The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.