The CARES Act which was signed into law on March 27, 2020 provides income tax relief for businesses during this time of uncertainty due to the COVID-19 crisis. Provisions in The CARES Act also address business liquidity concerns by making some changes retroactive to earlier tax years.
Liquidity through tax relief. The CARES Act rolls back several tax deduction limitations which were part of the Tax Cuts and Jobs Act (TCJA). By removing some or all of the limitations for years 2018, 2019, and 2020, the roll back will result in liquidity through lower taxable income and/or tax refunds. Businesses may find income tax relief as a result of changes to net operating losses, net business losses, interest expense rules, and to depreciation of qualified improvement property.
Net operating loss (NOL) rules. The CARES Act temporarily suspends the 80% taxable income limitation to allow a NOL to offset 100% of taxable income for tax years beginning before January 1, 2021. In addition, the NOL carry back provision which was eliminated under TCJA has been restored and made more favorable. Losses from 2018, 2019, and 2020 will be permitted to be carried back for up to five years. As was previously the case, a taxpayer will be permitted to forgo the carryback and instead carry the loss forward. Form 1045 (for individuals, trusts and estates) or Form 1139 (for corporations) can be filed to request an expedited refund from the application of these rules. IRS has granted a six-month extension to file under these expedited rules for a NOL that arose in any taxable year beginning in 2018 and ending on or before June 30, 2019.
Excess business loss rules. For tax years beginning before January 1, 2021, The CARES Act temporarily removes the limitation on the amount of “net business loss” a noncorporate taxpayer is allowed to offset other sources of income. Unused “net business loss” in one year is treated as a NOL in the next tax year. The temporary removal of this limitation and the NOL limitation discussed above means eligible taxpayers can take advantage of the NOL five year carry back provision. A taxpayer who found a loss limited by the provision in 2018 or 2019 can file an amended return to claim a refund.
Business interest expense rules. While the rules are complex, The CARES Act generally increases the business interest expense limitation in the TCJA. This applies to tax years 2019 and 2020 and results in an increase in the amount of business interest that can be expensed. The taxpayer can make an election to opt out of the increased limitation.
Partnerships are subject to slightly different business interest expense rules. The increase in the business interest expense limitation only applies to 2020. Other rules address the application of the limitation rules to 2019.
The IRS issued additional guidance that allows businesses to change a previously made Excepted Business Election that allowed them to elect out of limitation on interest expense(s) by adopting Alternative Depreciation System for their real property.
Qualified improvement property correction to TCJA rules. The CARES Act includes a technical correction to restore qualified improvement property to 15-year property for depreciation purposes, making them eligible for a more accelerated write-off and 100% bonus depreciation. The correction is retroactive to property placed in service after December 31, 2017. IRS has published guidance which provides several ways for a taxpayer to benefit from this correction. This includes filing an amended return, an administrative adjustment request or a Form 3115, Application for Change in Accounting Method in the taxpayers’ 2018, 2019 or 2020 tax year. For a limited time, the IRS will also allow an applicable late election or revocation of an election as a change in method of accounting with a Sec. 481(a) adjustment.
Corporate minimum tax credit rules. There is a provision in The CARES Act which accelerates the refund of unused corporate minimum tax credits. Previously all credits were scheduled to be refunded in tax years beginning in 2021. Now 100% of the credits may be claimed for tax year 2019. Form 1139 can be used to expedite the refund request.
Forgiveness for certain SBA-guaranteed loans. In general, loan forgiveness results in taxable income recognition to the debtor unless certain exceptions apply. Under The CARES Act an exception was added for loan amounts forgiven under the Payroll Protection Program.
Charitable contributions. The limitation on corporate cash charitable contributions is increased under The CARES Act from 10% to 25% of the corporation’s taxable income, as computed with certain modifications. Qualified contributions in excess of the limitation are taken into account under a carryover rule. In the case of any charitable contribution of food during 2020, the taxable income limitation in the Internal Revenue Code is increased from 15% to 25%.
Federal extended due dates. Under revenue procedures issued by IRS, the due date on U.S. tax returns originally due on or after April 1, 2020 and before July 15, 2020 have been automatically extended to July 15, 2020. Individuals and corporations with estimated tax payments due within the same period can wait until July 15, 2020 to make those payments. No late-filing penalty, late-payment penalty, or interest will be due.
State income tax considerations. Many states are following the federal extended due dates. Some states conform to the income tax provisions in The CARES Act. However, other states conform to only some of the provisions and yet other states do not conform at all. It is best to check state provisions before filing any state returns.
Other relief provisions in The CARES Act.
There are many other relief provisions in The CARES Act and in other recently passed legislation for businesses. For example, there are SBA loans which are special under the Payroll Protection Program and the Economic Injury Disaster Loss program. There is an employee retention credit for employers, a provision to delay payment of employer payroll taxes, and advance refunding of credits for paid sick leave and paid family leave. Please let your Kerkering Barberio Team Member know if you have any questions about the income tax relief for businesses under The CARES Act or any other COVID-19 relief programs.
This article is a high-level overview of income tax relief for businesses in The CARES Act. The article is not intended to be comprehensive or to provide tax advice. Information is current as of April 29, 2020. Please check our website periodically for changes.