Long before COVID-19 entered the picture, the IRS and Treasury were still issuing guidance for provisions in the Tax Cuts and Jobs Act (TCJA), the comprehensive tax reform which took full effect for the tax year 2018. Once the pandemic spread to the U.S., the IRS turned its focus to issuing rules on Congress' comprehensive legislation to address critically needed assistance to individuals and business owners. The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to the TCJA, many of which benefit taxpayers. The following summary highlights some of the significant provisions affecting business owners. As the IRS continues to issue guidance, it will be important for business owners to work closely with their tax advisors, who can help them strategically plan for 2021.
Payroll Tax Credits: Families First Coronavirus Response Act (FFCRA)
For businesses with fewer than 500 employees, Congress passed two payroll tax credits: the Emergency Paid Sick Leave and Emergency Family and Medical Leave. Families First Coronavirus Response Act (FFCRA) payments made to employees are funded through a refundable credit provided to the employer against payroll taxes; therefore, this benefit should have no cost to the employer.
However, there are several ways for employers to obtain the credit, and they could reduce the amount of federal payroll taxes and employee income tax withholding to be deposited in anticipation of receiving the credit. Should this reduction not cover the amount paid to covered employees, employers can request a refund for the balance on their quarterly payroll tax return. The IRS also created new Form 7200, which employers can use to request an advance payment of the credit.
The creation of the Paycheck Protection Program (PPP) loans is a core component of the CARES Act law. The government quickly implemented this program to incentivize small businesses to keep workers on the payroll. The Small Business Administration (SBA) will forgive loans if employee retention criteria are satisfied, and funds are utilized for certain purposes. However, there remains a great deal of confusion about loan forgiveness and the taxation of these loans. For example, what happens in the case of M&A activity—who gets the loan forgiveness? To assist business owners in navigating the interaction of a PPP loan with changes in ownership, the SBA issued a Procedural Notice in October, which states that the PPP borrower, as well as the successor entity in the event of a merger, will remain subject to all obligations of the PPP loan. Learn more.
Another gray area has been the taxation of the loans. When Congress passed the CARES Act, many representatives intended the PPP forgiveness to be a non-taxable event; however, the IRS has taken a different perspective, stating that the eligible expenses related to loan proceeds will be nondeductible in the year incurred if the taxpayer expects the loan to be forgiven. Expect to see additional legislative and regulatory action on this topic.
Small business owners received positive news in October when the SBA announced the creation of PPP Loan Forgiveness Application Form 3508S to assist recipients of loans of less than $50,000 to receive full forgiveness with less paperwork. Read related blog.
Many other questions remain about PPP loans. For example, when filing their 2020 return, businesses may not know what percentage of the PPP loan has been forgiven. Should the expected forgiveness be factored into 2020 taxes or taxable in the year the forgiveness is approved? GPP continues to provide updates on PPP loan forgiveness through our blogs and webinars.
Contact the GPP COVID-19 Business Advisory and Planning Services Team for assistance with your particular circumstances.
The TCJA repealed the rule allowing for a carryback of net operating losses (NOLs) created in 2018 and later. Before the CARES Act, NOLs were limited to 80% of the current year's taxable income, and these losses could not be carried back. Now, NOLs from 2018, 2019, and 2020 can be carried back five years for refunds against prior taxes. The losses can offset income at the higher tax rates that were in place before 2018, so you have the opportunity to receive a larger refund. The CARES Act also eliminates the excess business loss limitation that was applicable to pass-through business owners and sole proprietors, enabling them to take advantage of the modified NOL rules. Your tax professional can work with you to identify opportunities to accelerate deductions into a loss year.
Note: You must file tentative refund claims for 2019 by December 31, 2020, using Form 1145. However, if your NOLs will be for 2020, you can't claim an NOL carryback until you file your claim, so you will want to file in early January 2021.
The TCJA repealed the corporate alternative minimum tax (AMT) and permitted businesses to claim unused AMT credits in tax years 2018 through 2020. The CARES Act fast-tracked this timeline, allowing corporations to claim remaining credits in 2018 as fully refundable. Business owners have several options for a quick refund, but if you want the fastest path, you will need to file a tentative refund claim on Form 1139 by December 31, 2020.
Bonus depreciation enables businesses to deduct a percentage of the cost of their assets the first year they are placed in service. Changes in the tax law made bonus depreciation 100% through the tax year 2022, and used property is now eligible for bonus depreciation. The CARES Act added a five-year carryback option, and it fixed a technical glitch that applies faster depreciation plus bonus depreciation to qualified improvement property (QIP), which includes most improvements to the interior of a building that is owned or leased. The QIP fix is retroactive to 2018, so property owners can take advantage of the ability to fully deduct QIP dating to January 1, 2018.
Employee Retention Tax Credits
The CARES Act allows for fully refundable Employee Retention Credits equal to 50% of qualified wages paid in a calendar quarter with a maximum of up to $10,000 per employee (including qualified health plan expenses). The maximum credit is $5,000 ($10,000 qualified wages x 50%) per quarter per employee.
If you meet the requirements, your business is entitled to a credit for each quarter until your business has receipts in excess of 80% of what they were for the same quarter they were last year. Quarterly calculations for the employee retention tax credit are complicated, and the program is limited to wages paid after March 12, 2020, through December 31, 2020.
Unlike forgivable PPLs, which are limited to companies with 500 and fewer employees, employee retention credits are for all employers—but not to a business that has taken out a PPL.
An employer who receives a PPP loan is eligible for the employee retention credit. See related blog.
Corporate Charitable Contributions
Previously, charitable contributions were limited to 10% of a corporation's taxable income. The CARES Act increased that to 25% of taxable income for 2020.
Section 1031 Exchanges
Section 1031 like-kind exchanges allow real estate investors to swap out one piece of real estate for another without paying federal income tax. This tax break has benefited many property owners over the years. The TCJA permanently eliminated 1031 treatment for personal property exchange that occurred after December 31, 2017. However, properly structured like-kind exchanges of real property were left intact.
President-elect Joe Biden's proposed tax plan eliminates this tax-savings tool for investors with income greater than $400,000. GPP encourages property owners to act quickly to take advantage of the Section 1031 exchange break. You should complete your 1031 exchange now before the tax break is terminated.
Tax Credits and Deductions
This has been a challenging year for businesses across most industry sectors. That makes it all the more important to take advantage of tax incentives to help offset tax liabilities and improve cash flow. For example, the permanent research and development (R&D) tax credit program provides an avenue for businesses to receive a dollar-for-dollar tax credit for qualifying expenses. R&D activities include innovative products, processes, and software techniques.
If you own commercial or residential property and have made energy-efficient improvements, you may be able to earn tax credits or deductions. Both were retroactively extended to include tax years 2018 and 2019, and unused credits can be carried forward for up to 20 years.
The Opportunity Zones Tax Incentive was included as part of the TCJA to provide developers the opportunity to defer capital gains and help develop distressed communities through qualified opportunity zones (QOZs) for temporary tax deferral until 2026. Investors were able to gain the full tax benefit by making investments before the end of 2019, but there is still a very good opportunity to defer capital gains and take advantage of this powerful incentive. Given the negative impact the COVID-19 pandemic has had on business transactions, the IRS has provided significant QOZ investment relief. Additionally, the IRS issued guidance in June to extend specific deadlines and working capital suspensions due to pandemic-related interruptions.
The topics outlined above touch on some of the most significant business tax implications stemming from the TCJA and the CARES Act. There are many other considerations that you should discuss with your tax professionals. GPP will continue to provide updates as additional IRS and Treasury guidance is issued on many of the issues we've summarized, and more.
For specific questions about NOL changes or other tax-related issues, please contact Kevin Harris, CPA at 214-635-2473.
GPP's COVID-19 Business Advisory and Planning Services Group will continue to keep you posted. If your business needs tax guidance during this challenging time, our tax professionals are ready to assist. For immediate questions, email CARETEAM@GPPcpa.com.
Note: This content is accurate as of the date published above and is subject to change, as definitions change. Please seek professional advice before acting on any matter contained in this article.