CARES Act – Tax Savings and Business Opportunities

Summary of Keypoints

• Employer payroll tax deferral: The CARES Act allows businesses to defer the employer portion of Social Security payroll taxes (6.2%) on wages paid from March 27–December 31, 2020, with repayment split between December 31, 2021 and December 31, 2022; the deferral is unavailable if PPP loan forgiveness is taken.
• Employee retention credit: Eligible employers may claim a refundable payroll tax credit equal to 50% of qualified wages (up to $10,000 per employee) if operations were suspended by COVID-19 orders or gross receipts declined by more than 50% compared to the prior year, subject to employee-count and PPP/FFCRA coordination rules.
• Expanded NOL carrybacks: Net operating losses generated in 2018, 2019, and 2020 may be carried back up to five years, and the prior 80% taxable income limitation is suspended through 2020, allowing potential refunds from prior-year taxes.
• Excess business loss relief: The CARES Act temporarily repeals limits on using business losses to offset non-business income for years before January 1, 2021, enabling some taxpayers to amend 2018 or 2019 returns for refunds.
• Qualified improvement property fix: The Act retroactively corrects depreciation rules for qualified improvement property (QIP) placed in service after January 1, 2018, restoring eligibility for 100% bonus depreciation and creating opportunities to amend prior returns and recover taxes.

Small Businesses may be able to take advantage of a number of tax savings and cost deferral opportunities presented by the CARES Act. Read on to learn about a few of the provisions and potential savings.

Deferral of employer Social Security tax

You can generally defer the employer share of the 6.2% Social Security tax on wages paid from March 27, 2020, through December 31, 2020, with 50% due on December 31, 2021, and 50% due on December 31, 2022. A similar rule applies to 50% of the self-employment tax liability of partners and sole proprietors.

Note: The deferral is not available if you take advantage of loan forgiveness under the paycheck protection program (PPP) provisions of the CARES Act (see our link HERE to learn more about the PPP).

Employee retention credit

The CARES Act added a refundable payroll tax credit equal to 50% of certain compensation paid from March 13, 2020, to December 31, 2020. To qualify, your business must either have had its:

• Operations fully or partially suspended due to a COVID-19-related shutdown order, or
• Gross receipts decline by more than 50% when compared to the same quarter the prior year.

If your business has more than 100 employees, the credit is available only for compensation paid to employees who are not working as a result of one of the two situations listed above.If your business has 100 or fewer employees, any compensation paid during the period when the operations were impacted by one of the two scenarios is eligible for the credit, even if it’s paid to an employee who is still working.

The credit is limited to the first $10,000 of compensation paid to a particular worker, and there are restrictions for employers taking credits under the Families First Coronavirus Response Act (FFCRA) and participating in the Paycheck Protection Program (PPP).

Reinstatement of NOL carrybacks

Following tax reform, net operating losses (NOLs) generated in tax years beginning in 2018 and later years cannot be carried back and can only offset up to 80% of taxable income in carryover years. The CARES Act permits NOLs from the 2018, 2019, and 2020 tax years to be carried back to the previous five tax years (beginning with the earliest year first) and suspends the 80% of taxable income limitation through the 2020 tax year. The NOL carryback can result in an immediate refund of taxes paid in prior years.

Temporary suspension of excess business loss rules

Tax reform limited individuals from using more than $250,000 ($500,000 married filing joint) of business losses to offset non-business income. The CARES Act repeals the limitation for years beginning before January 1, 2021. If you had a business loss that was limited in 2018 or 2019 under the excess business loss rules, then you may be able to obtain a refund by filing an amended tax return.

Bonus depreciation for qualified improvement property

Under 2018 tax reform, qualified improvement property (QIP) was intended to have a 15-year cost recovery period and be eligible for 100% bonus depreciation. An error in execution caused QIP to have a 39-year cost recovery period, and be ineligible for bonus depreciation. QIP includes most improvements to commercial or industrial buildings after the building was first placed in service, such as most tenant improvements. The CARES Act retroactively corrects the drafting error for QIP acquired and placed in service on or after January 1, 2018.

Businesses may consider an opportunity to accelerate depreciation and generate refunds for prior years.