March 31 2020

COVID-19 pandemic: emergency tax measures – extensive business tax relief (CARES Act) enacted

Source: IBFD Tax Research Platform News

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) (H.R. 748) signed by President Trump on 27 March 2020 includes provisions that provide tax relief to businesses in response to the economic consequences of the COVID-19 pandemic.

Significant provisions are set out below.

Alternative minimum tax credits

Corporations are permitted to claim alternative minimum tax credits (MTCs) at an accelerated rate of 50% for 2018 and 100% for 2019. Corporations may also elect to claim the full refundable credit amount for 2018.

Net operating losses

Net operating losses (NOLs) arising in tax years 2018, 2019 and 2020 are permitted to be carried back for a 5-year period. This changes current law under which NOLs are not permitted to be carried back but may only be carried forward.

In addition, the limitation that currently allows NOLs to offset only 80% of taxable income is temporarily removed so that taxable income may be fully offset by NOLs.

Deduction of business interest

The limitation on the deduction of business interest is increased in taxable years beginning in 2019 and 2020 from 30% of adjusted taxable income (ATI) to 50% of ATI. The CARES Act also permits taxpayers to use their ATI as computed for 2019 as their ATI amount for 2020.

Charitable contributions

The deduction limitation for 2020 on cash contributions by corporations to qualified charitable organizations is increased from 10% of taxable income to 25% of taxable income. In addition, the deduction limitation for qualified contributions of food inventory is increased from 15% of taxable income to 25% of taxable income.

Qualified improvement property

Technical corrections are made to the rules for the depreciation of qualified improvement property (QIP) in order to permit enhanced deductions for improvements made to real property. The deduction generally applies to interior improvements made to non-residential real property. As a result of the technical amendments, bonus depreciation may be claimed at a 100% rate for eligible QIP placed in service after 2017.

Social security taxes

Employers and self-employed individuals are permitted to defer the payment of the employer's portion of social security taxes for 2020. This applies to the 6.2% payroll tax imposed on employee wages. The employer or self-employed individual is required to pay 50% of the deferred taxes on 31 December 2021 and 50% of the deferred taxes on 31 December 2022.

Refundable payroll tax credit

A refundable payroll tax credit is provided for 50% of qualified wages paid by employers who were carrying on business in 2020 and whose operations were adversely affected by the COVID-19 crisis.

The credit is available to employers: (1) whose operations were fully or partially suspended due to a COVID-19 shut down order, or (2) whose gross receipts declined by 50% or more compared to the same quarter of the prior year.

For employers who qualify for the credit under the 50% gross receipts test described above, the qualification will terminate at the end of the calendar quarter in which gross receipts exceed 80% of the gross receipts for the same quarter in the prior year.

For employers with greater than 100 full-time employees, qualified wages are wages paid to employees who are not providing services due to COVID-19 circumstances. For employers with 100 or fewer full-time employees, all wages paid to employees are qualified for the credit regardless of whether the employer is in operation or is subject to a shut-down order.

The credit is limited by reference to the first USD 10,000 of compensation paid to an eligible employee, including health benefits. The credit is available for wages paid or incurred from 13 March 2020 to 31 December 2020.