By Jennifer Kobylarz, CPA, MST
Employee Retention Credits
Tax credits are available under the CARES Act against Old Age, Survivors, and Disability Insurance (OASDI) taxes for qualified employers that had to suspend operations or had a significant decrease in gross receipts in an applicable credit quarter.
The credit specifically applies to any employer who carried on a trade or business in 2020 that:
- Was suspended due to orders from an “appropriate government authority” which limited commerce, travel or group meetings due to Covid-19; or
- Who during the period:
- Beginning with the first quarter after 2019 in which the business experienced a 50% or greater reduction in gross receipts compared against the gross receipts of the same quarter in 2019; and
- Ending with the subsequent quarter in which it had gross receipts greater than 80% of the gross receipts as compared to the same quarter in 2019.
The credit is generally allowed for up to 50% of qualified wages for each qualified employee who is retained during the period. For employers who have more than 100 employees, the employee must not be working due to a suspension in operations or a substantial drop in gross receipts. Employers who have less than 100 employees will be eligible for the credit for wages paid to employees whether or not the business is operating during the quarter.
These credits are applied to offset employment taxes after other credits, such as credits for the employment of qualified veterans and the payroll tax credits for required paid sick leave for family leave under the Families First Coronavirus Relief Act (FFCRA). The amount which exceeds these limitations is refundable and is treated as an ‘other refund’.
There are limitations for the credit:
- Government employers are not eligible;
- An employer can elect out of the credit;
- Employees who are counted under the Work Opportunity Tax Credit must be excluded;
- Wages used to compute the paid family and medical leave credit under the Tax Cuts and Jobs Act must be excluded; and
- An employer is in not eligible if they are taking a small business interruption loan.
Delayed Payment of Employer Payroll Taxes
The CARES Act also allows employers and self-employed individuals to defer the matching portion of social security and Medicare taxes. These payments would be due in two installments, one on December 31, 2021 and the second on December 31, 2022.
Any business that has debt forgiven under the Act will not qualify for this payment deferral.
Technical Corrections for Qualified Improvement Property
As part of the Act, a welcomed technical correction for qualified improvement property was included. Under the Act, qualified improvement property will have a class life of 15 years which will allow taxpayers to utilize 100% bonus depreciation for these assets. Retroactive application of this is allowed under the Act.
Modification to Interest Expense Limitations
Under the Act, the interest expense limitation rules are modified to allow many taxpayers to deduct a higher amount of their interest expense in 2019. The general limitation is modified from 30% to 50% of Adjusted Taxable Income (ATI). For all taxpayers other than partnerships, this change applies to the 2019 tax year; however, for partnerships, this change does not apply until the 2020 tax year.
The Act allows partners of a partnership to treat 50% of their 2019 allocable share of the partnership’s excess business interest as interest this is not subject to any §163 limitation on their 2020 tax return.
The final change to these rules is the allowance of taxpayers to elect to use their 2019 ATI to calculate their interest expense deduction in 2020.
Modification of Net Operating Loss Provisions
Significant changes were made the Net Operating Loss (NOL) Rules under the Tax Cuts and Jobs Act (TCJA) of 2017. The CARES Act modifies many of these changes to benefit taxpayers.
Under the TCJA, NOLs were limited to 80% of a taxpayer’s pre-NOL deduction taxable income. The CARES Act suspends this limitation until 2022.
Additionally, the TCJA repealed a taxpayer’s ability to carryback NOLs generated in the current tax year. Under the CARES Act taxpayers with losses in 2018, 2019, and 2020 will be allowed to carryback those NOLs to each of the prior five taxable years. Taxpayers are allowed to elect out of the NOL carryback period and carry those NOLs forward to future tax years.
It appears that this carryback provision will apply to both corporate and individual taxpayers.