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On March 25, 2020, the U.S. Senate released final text of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (H.R. 748) to provide emergency economic assistance to those affected by the novel coronavirus (COVID-19). Upon passage in the Senate, it is expected that the U.S. House of Representatives will shortly follow suit, and that the bill will be signed into law by President Trump. Below is a summary of the major tax provisions in the bill, many of which will benefit businesses large and small:
Net Operating Loss (NOL) Rule Relaxation
(CARES Act Section 2303; Tax Code Section 172)
- Losses arising in 2018, 2019 and 2020 can be carried back to the five preceding years.
While companies in a loss position at the end of the tax year used to be allowed to carryback those losses to offset prior year income (resulting in a refund—and a cash infusion—to the company) for the prior two years, the Tax Cuts and Jobs Act (TCJA) from 2017 changed the law so that such losses could not be carried back at all. The last time that there was a recession (2008-2009), lawmakers decided to give most companies the ability to carryback and deduct their losses over the prior five years.
The CARES Act similarly allows any NOL arising in tax years 2018 through 2020 to be carried back to each of the five taxable years preceding the loss year. Companies with unused losses arising in 2018, 2019 or 2020 that paid tax in one or more of the five preceding tax years will be able to immediately file amended returns seeking a refund of taxes paid, which can help such companies make payroll and rent.
The legislation includes special NOL carryback rules for real estate investment trusts (REITs) and life insurance companies and rules regarding the interaction of the NOL carryback provision with the Section 965 deemed repatriation tax. A separate section (CARES Act Section 2304) relaxes the loss rules that applied to taxpayers other than corporations.
- Losses can fully offset taxable income—80 percent limitation temporarily removed.
- These two changes would effectively undo TCJA’s NOL changes for 2018 through 2020, resulting in an estimated benefit of about $25.5 billion to corporations (and $169.6 billion for other taxpayers).
Since 2018, companies have not been allowed to use NOLs to zero out their taxable income. Specifically, for any losses arising in 2018 or later, the NOL deduction could not exceed 80 percent of taxable income, increasing the chances that a corporation would have to pay taxes.
The CARES Act temporarily repeals this limitation for tax years 2018 through 2020, allowing taxpayers to claim the full NOL deduction (including the carryback described above), effectively undoing the TCJA change (and providing a potential cash infusion in cases where companies can amend prior year returns to claim the full deduction, giving rise to a refund). However, the 80 percent limit returns beginning in 2021.
Employer Payroll Tax Delay
(CARES Act Section 2302; Tax Code Sections 3111(a) and 1401(a))
- Employers can defer the 6.2 percent payroll tax due for rest of year until end of 2021, 2022.
- Congress thinks the net cost of this provision is about $12.3 billion, although estimates of the amount of extra cash this would provide businesses are much larger (depending on unemployment, about $732 billion over the next two years).
Employers ordinarily have to pay certain employment taxes—known as Federal Insurance Contributions Act (FICA) taxes—with respect to their employees. The employer is responsible for paying its share (6.2 percent) of social security taxes and its share (1.45 percent) of Medicare taxes for each employee’s covered wages (separate from withheld amounts covering the employee’s portion of each and separate from ordinary income tax withholding), generally depositing such amounts to the U.S. Treasury electronically either semi-weekly or monthly.
The CARES Act will allow employers (and self-employed individuals) to defer paying their portion of the social security payroll tax (6.2 percent) otherwise due. As soon as the CARES Act is signed into law, the deferral period will start. It goes through December 31, 2020. The amounts will ultimately have to be paid over to Treasury in two installments. Half of the deferred amount of payroll taxes from 2020 will be due December 31, 2021, with the remaining half due December 31, 2022. The Social Security Trust Fund will be held harmless by way of transfers from the general fund, as if the payroll tax payments were never deferred.
However, employers who received Small Business Act loans that were forgiven under the CARES Act (so that the Federal government effectively gave them cash—that they did not have to pay back—to fund as much as eight weeks of their payroll costs) are not eligible for this payroll tax deferral.
Employee Retention Payroll Tax Credit
(CARES Act Section 2301; Tax Code Section 3111)
- Certain employers may receive a payroll tax credit of as much as $5,000 per employee for wages (and health benefits) paid after March 12, 2020, and before January 1, 2021.
- If the credit amount exceeds the employer’s liability, the excess shall be refundable. It is estimated that the credit will provide an aggregate benefit of about $54.6 billion.
Any employer whose business was fully or partially suspended in 2020 due to government orders associated with COVID-19 or that experienced a significant decline in gross receipts (or that is a tax-exempt organization) may be eligible to receive this refundable employment tax credit. A significant decline in gross receipts is generally established when a business’s gross receipts in a calendar quarter in 2020 are less than 50 percent of the gross receipts of the same calendar quarter in 2019.
For purposes of the credit, qualified wages vary depending on whether the employer has more than 100 full-time employees or not. For those with more than 100 full-time employees, qualified wages are those paid to employees when they are not providing services due to the COVID-19 outbreak. For those with 100 or fewer full-time employees, essentially all wages qualify for the credit. The credit amount is equal to 50 percent of the qualified wages of an employee, but such wages cannot be more than $10,000 per employee.
Increase of Interest Expense Deduction Limitation
(CARES Act Section 2306; Tax Code Section 163(j))
- In 2019 and 2020, corporations can deduct more of their borrowing costs (up to
50 percent of their earnings, instead of only 30 percent of their earnings).
- Those hoping for a temporary suspension of the limit will be disappointed, although the provision is estimated to provide a benefit of about $13.4 billion.
Under current law, a corporation is only allowed to deduct the interest expense it pays on its loans to the extent the amount does not exceed 30 percent of the company’s “adjusted taxable income” (which is comparable to earnings before interest, taxes, depreciation and amortization (EBITDA)). This limit, which was imposed by TCJA, has been widely criticized by firms, especially those that are highly leveraged.
The CARES Act will increase the limit to 50 percent of the company’s adjusted taxable income just for 2019 and 2020. However, it will also allow corporations to elect to use their 2019 adjusted taxable income for 2020, ensuring that even though their earnings may be harmed by the COVID-19 outbreak, their otherwise increased business interest deduction will not be.
Modification of Refundable Minimum Tax Credit
(CARES Act Section 2305; Tax Code Section 53(e))
- Corporations with eligible minimum tax credits may accelerate their refunds.
Corporations are no longer subject to the alternative minimum tax (AMT), as it was repealed for such taxpayers by TCJA. Any AMT credits that a company generated pre-TCJA and otherwise had available to carry forward were refundable in 2018 through 2022, with the amount limited in each year to (essentially) 50 percent of the remainder. For instance, a $20 million AMT credit generated pre-TCJA might generate a $10 million refund in 2018, a $5 million refund in 2019, a $2.5 million refund in 2020, a $1.25 million refund in 2021 and a $1.25 million refund in 2022.
The CARES Act modifies the refundable credit so that corporations will take the entire amount in 2018 and 2019 (so, in the example above, a $10 million refund in 2018 and a $10 million refund in 2019). Further, corporations that prefer to can elect to take the entire amount in 2018.
The legislation specifies that, exclusively for purposes of the refundable AMT credit, a taxpayer may file an application for a tentative refund with the Internal Revenue Service (IRS), which then must review the application and, if appropriate, issue the related refund within 90 days. A tentative refund would likely be paid out before any necessary review by the Joint Committee on Taxation, as such reviews are required for large ($5 million or more) corporate refunds and can take weeks.
Technical Correction to Fix ‘Retail Glitch’
(CARES Act Section 2307; Tax Code Section 168)
- Businesses can fully deduct the cost of certain property improvements back to 2018.
When Congress enacted TCJA at the end of 2017, it wanted to expand the availability of expensing. Expensing (which, in this case, is really 100 percent bonus depreciation) generally allows a business to immediately write off (deduct) the cost of certain purchases. Congress wanted to make expensing available not only for investments in equipment and other capital assets, but also for improvements made to commercial property (so that retail establishments, including restaurants and others businesses in the hospitality industry, could benefit).
Unfortunately, due to a drafting error, improvements to the interior of a non-residential building (so-called qualified improvement property or QIP, which potentially includes certain structural components of the building) were not actually eligible for expensing because their recovery period was set at the 39-year ordinary life of a building instead of the intended 15 years (as only property with a recovery period of 20 years or less is eligible for bonus depreciation).
The CARES Act fixes this technical drafting glitch effective retroactively to property placed in service in 2018 and beyond. Lawmakers are not only hoping this change will increase companies’ cash flow by allowing them to amend a prior year return and receive a refund, but also hope it will incentivize firms to invest in improvements to help stimulate economic activity.
Additional Money for the Internal Revenue Service
(CARES Act Section 6428; Tax Code Section 7508A(a))
- The IRS is getting an additional $500 million to support taxpayers and beef up operations and enforcement during the extended filing season.
On March 20, the IRS issued Notice 2020-18, confirming that any person with a Federal income tax payment or return due April 15, 2020, will be provided an automatic postponement of such deadline to July 15, 2020. To assist with the extended filing season and implementation of the CARES Act, the following additional funds were allocated to the IRS for use through September 30, 2021:
- $293.5 million for taxpayer services.
- $170 million for operations support.
- $37.2 million for enforcement.