With worker retention credits, tax payment deferrals, suspensions to net operating loss carryovers and industry-specific relief, the multi-trillion dollar CARES Act is more than just a record-breaking aid package.
Modifications to the U.S. tax code under the CARES Act, signed into law on March 27, are designed to help companies hold onto capital and retain employees until the COVID-19 pandemic subsides, federal officials and local accounting professionals say.
“I think the concept of not having to pay employer taxes is appealing for many businesses. They’re looking at that as basically a tax-free loan from the government,” said Eric Wenger, a managing partner with RKL’s Lancaster office. “For the average business owner, the ability to defer payments right now is key.”
The pace of new tax provisions in the past few weeks has been dizzying for many accountants and business consultants. Wenger, who leads RKL’s tax outsourcing practice and is currently working with business clients to navigate the CARES Act’s stimulus provisions, said he spends all day talking with clients about how to apply incoming guidelines.
A lot to digest
“It’s a bit a perfect storm on a lot of different fronts,” Wenger said. “As much as this legislation is designed to help and try to save these companies, it’s yet another burden to try to interpret ‘well what do I need to do.’ It’s not like there’s all the time in the world for regulations to come out and support this stuff. It’s just ‘here it is, do your best’ and companies are doing their best to decipher it.”
Some of the changes are straightforward. For instance, the IRS is extending the April 15 filing date to July 15, giving companies more time to file their tax returns given the limitations caused by the COVID-19 emergency.
But some of them come with a catch; take the payroll tax credits and tax deferrals provisions. Employers whose operations may have been closed or experienced a severe decline in revenue may be eligible to receive an Employer Retention Tax Credit of up to $5,000 per retained employee.
For firms with more than 100 employees, the credit can be claimed for employees who are retained but not currently working due to the pandemic, according to the bill. But for firms with 100 or fewer employees, the credit can be claimed for all employee wages.
Employers can also qualify for a deferral of their share of the Social Security tax on wages from March 27 through Dec. 31. Deferred amounts are payable in two installments — 50% on Dec. 31, and the other 50% due Dec. 31, 2022.
However, neither the employer retention credit nor the Social Security tax deferral are available to employers receiving a covered loan from the Small Business Administration’s Paycheck Protection Program. The PPP provides forgiven loans that can be used to cover payroll taxes.
Wenger said that puts small businesses in a tough dilemma: apply for PPP and hope for a payout, or take advantage of deferring the payment of employer payroll taxes.
“That’s a bit of a gotcha in the law,” he said. “Some companies are saying, ‘I’m going to put in my application and hope and pray that I get the money,’ but depending on whether or not they’re successful in that, and depending on whether or not congress puts more money into the program, they may or may not be able to defer the payment of employer taxes.”
Business owners can carry back net operating losses incurred in 2018, 2019 and 2020 for five years. Under the 2017 Tax Cuts and Jobs Act, these net operating losses could only be carried forward.
‘A big deal’
For taxable years before Jan. 1, 2021, taxpayers have no limits on how much taxable income they can offset with net operating loss carryovers and carrybacks. Under 2017’s tax reform, this limit was set at 80% of taxable income.
“It’s a big deal,” Wenger said. He said employers who experienced a loss in 2018 can carry that loss back, get a refund and potentially offset a higher-rate income that was in existence before the tax reduction from the 2017 Tax Cuts and Jobs Act. The CARES Act temporarily suspends pass-through excess business loss limitation rules, previously set to $250,000 for single filers, and $500,000 for joint filers, for 2018 to 2020.
“This frees up such losses to either offset other sources of income or to be potentially carried back to years when the taxpayer’s tax rate may have been higher,” wrote Robert Duquette, a professor of the College of Business at Lehigh University and retired partner with William G. Koch & Associate, in an April 3 blog post for the Pennsylvania Institute of Certified Public Accountants.
Those changes will primarily benefit institutions registered as C corporations, which had a 35% tax rate, brought down to 21% by the implementation of the tax reform bill, Wenger said.
“What it does is it gives them some cash flow,” he said. “What a business owner decides to do with that cash flow is entirely their prerogative.”
With so many businesses experiencing unprecedented losses and closures in 2020, Wenger predicted there will be many more employers who file carryback claims for 2020 losses for the first time.
It’s going to be at least until January of 2021 before they feel the benefits, Wenger said, with 2020 returns and carryback claims to be filed and the IRS to turn around the cash.
“This concept is not one that’s going to put cash in people’s pockets immediately,” Wenger said.
Another change expands businesses’ ability to deduct interest paid on tax returns to 50% of EBITDA (earnings before interest, tax, depreciation and amortization), up from 30%. As companies make less profit and therefore less EBITDA during the recession, this measure supports businesses borrowing more money than during standard operations.
“As companies may be forced to borrow more now than they typically would due to cash flow constraints, this change provides less limitation on interest,” Wenger said.