Government stimulus policy generally takes two forms: fiscal policy (direct payments to individuals, business subsidies, and tax incentives) and monetary policy (central bank intervention). This alert briefly summarizes some of the ways the government is using tax policy to stimulate the economy in response to the coronavirus (COVID-19) outbreak. These policy tools are contained in the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) and Families First Coronavirus Response Act (FFCRA). The below does not cover all tax topics but rather those most relevant to businesses. In addition, it does not cover the other fiscal stimulus strategies directed at business and individuals the government is using to bolster the U.S. economy. NP has written other alerts and educational pieces on those found here.
Employee Retention Credit—CARES Act Sec. 2301
The Employee Retention Credit (ERC) is available to employers whose businesses either were (a) fully or partially suspended, or (b) had significant reductions in gross receipts. The ERC can be up to $5,000 per employee for qualified wages paid during the period from March 12, 2020, through the end of 2020. The ERC is economically realized by reducing quarterly tax deposits, and to the extent this reduction is not sufficient, the employer can file a Form 7200 and request a tax refund. This credit is especially valuable for employers (or franchise locations) with 100 or fewer employees, due to restrictions added for larger employers. Those receiving a Paycheck Protection Program loan are ineligible for the ERC; however, if PPP proceeds are returned by May 14, 2020, those proceeds will not be considered “received” for these purposes.
Payroll Tax Deferral—CARES Act Secs. 2302
Employers may defer their portion of FICA taxes, equaling 6.2% of wages. Half of the deferred amount must be paid by December 31, 2021, and the other half a year later by December 31, 2022. Most employers will find that this deferral, while welcome during the pandemic, especially by employers with numerous employees sickened by COVID-19, represents a small amount relative to the amount of relief that can be obtained in other programs.
Net Operating Losses Carryback—CARES Act Sec. 2303
The Tax Cuts and Jobs Act (2017) (the TCJA) eliminated the ability of companies, starting in 2018, to carry back net operating losses (NOLs). The CARES Act provides that NOLs generated by businesses beginning after December 31, 2017, and before January 1, 2021, can be carried back to each of the previous five years. The TCJA imposed a rule that limits the amount of taxable income that may be offset by post-2017 NOLs to 80%. The CARES Act temporarily suspends this rule until 2021, so that NOLs can offset 100% of taxable income.
461(l)—CARES Act Sec. 2304
The CARES Act eliminates the limitation on the use of “excess” business losses by taxpayers other than corporations (IRC Sec. 461(l)) during the tax period after December 31, 2017, and before January 1, 2021. This was a loss deferral provision introduced by the TCJA that generally provided that business losses greater than $ 250,000 ($500,000 for married taxpayers) could not offset other income. It should be noted that taxpayers were often not able to avail themselves of these losses because of other loss limitations, e.g., passive activity loss rules or the at-risk rules. This provision has received significant media attention as a giveaway to the wealthy. The CARES Act also makes technical corrections to IRC Sec. 461(l) by clarifying that NOLs and qualified business deductions under IRC Sec. 199A are not included in calculating excess business losses and by clarifying the extent to which capital gains are considered in calculating excess business losses.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations—CARES Act Sec. 2305
The TCJA repealed the alternative minimum tax (AMT), including the corporate AMT, but forced taxpayers to delay the time in which they could recover AMT credits over a four-year period (2018 to 2021). The CARES Act allows the AMT credit to be utilized in 2018 and 2019, and provides a means to obtain tax refunds by filing a tentative refund claim, as long as action is taken by December 31, 2020.
Business Interest Deductions—CARES Act Sec. 2306
Under the TCJA, business interest expense for companies with gross revenues of over $25 million in 2018 and $26 million in 2019, is limited to 30% of EBITDA. The CARES Act increases this limit to 50% of EBITDA for 2019 and 2020. For the 2020 tax year, you are allowed to use 2019 EBITDA for purposes of calculating the limitation. Since it is expected that EBITDA in 2019 will be substantially more than 2020, this could mean significant relief to leveraged companies.
“Retail Glitch”—CARES Act Sec. 2307
The CARES act corrected the “retail glitch” created by the TCJA, by retroactively reclassifying certain property as “qualified improvement property,” which had been accidently left out under the TCJA. This change encompasses the three pre-TCJA categories of property within tenant space—“(i) qualified leasehold improvement property, (ii) qualified restaurant property, and (iii) qualified retail improvement property,” as well as immediate expensing of certain
improvements to common elements of commercial rental real estate. This fix is significant as companies can retroactively take 100% expensing on their 2018 or 2019 amended returns and if the result is an NOL, then, as mentioned above, that NOL can now be carried back by up to five years to offset taxable income that may have previously been subject to the old 35% corporate rate (now 21%) to generate significant refunds.
Paycheck Protection Program—CARES Act Secs. 1102 and 1106
The CARES Act expands the Small Business Administration’s loan program to offer qualifying businesses low-interest loans, the principal of which can be forgiven if the borrower meets certain conditions with respect to the use of the loan proceeds. The Treasury issued a notice (Notice 2020-32), which explains the IRS’s position that borrowers will, however, be denied a tax deduction if the funds are used to pay otherwise deductible expenses, even though loan forgiveness hinges on such use. A Senate bill has been drafted to change this result (S. 3612), although its future is uncertain at this point.
Payroll Tax Credits for Paid Sick, Family, and Medical Leave—FFCRA Secs. 7001, 7003
The “Leave Tax Credits” are available for employers paying Family and Medical Leave (FML) wages to employees who qualify. Until December 31, 2020, employers may simply reduce their quarterly tax deposits in the amount of the Paid Sick or FML wages paid to employees. For an eligible employee and employer, the only ceiling to the credits is the wage owed to the employee.