How Will Your Business Clients Benefit From the New CARES Act?by
The new law includes a bevy of tax breaks designed to help both individual taxpayers and businesses, here's what your business clients should know.
The new stimulus package passed by Congress in response to the COVID-19 pandemic—the Coronavirus Aid, Relief, and Economic Security (CARES) Act—does much more than provide enhanced unemployment benefits and other forms of financial support. In second of this two-part article, we will briefly explain some of the key tax provisions affecting businesses.
The CARES Act provides a wide range of tax benefits for businesses ranging from credits for retaining workers to payroll tax delays to enhanced rules for claiming business losses. Here are some of the highlights that you and your business clients should be aware of.
Employer retention credits: Similar to the credit for family and medical leaves authorized by the Tax Cuts and Jobs Act (TCJA), the CARES Act provides a credit against payroll taxes for wages paid to employees in 2020. The credit is available to businesses that are forced to shut down or suspend operations due to the COVID-19 outbreak. A business with reduced gross receipts below 50 percent of a comparable quarter also qualifies.
This refundable credit is equal to 50 percent of the first $10,000 of qualified wages paid to an employee during the year. It applies through the last quarter of this year ending on December 31, 2020. Note: An employer can’t claim both the employee retention credit and the family and medical leave credit for the same wages.
Payroll tax delay: The CARES Act also allows businesses affected by the COVID-19 outbreak to defer payroll taxes that would normally be due in 2020. This applies to the employer’s share of the 6.2 percent Social Security tax component. Specifically, a business may choose to pay 50 percent of the required amount by December 31, 2021 and the remaining 50 percent by December 31, 2022.
A similar deferral break applies to self-employed individuals. They can defer 50 percent of the self-employment tax that is due by paying 25 percent by December 31, 2021 and 25 percent by December 31, 2022.
Qualified improvement property: Interestingly, the new law resolves a technical glitch in the TCJA. Congress had intended for qualified improvement property placed in service after 2017 to qualify for a 15-year depreciation recovery period. This would have made the property eligible for favorable “bonus depreciation.” But the statutory language of the law didn’t include this tax break.
Now the TCJA extends bonus depreciation to qualified improvement property as the lawmakers originally intended. The tax break is retroactive to January 1, 2018, so some businesses may want to file an amended 2018 return.
Net operating losses: Prior to the TCJA, net operating losses (NOLs) could be carried back for two years and then carried forward for 20 years. The TCJA generally repealed the carryback rule, but allowed NOLs to be carried forward indefinitely based on a limit of 80 percent of taxable income.
Under the CARES Act, the rules for NOLs revert to pre-TCJA law. In other words, losses may be carried back two years and offset 100 percent of current income going forward.
Excess business losses: The TCJA limited business losses claimed by non-corporate taxpayers to $250,000 for single filers and $500,000 for joint filers for 2018 through 2025. Any excess was treated as a NOL that had to be carried forward. These rules applied to sole proprietors and certain owners of pass-through entities.
The CARES Act eliminates the limits for 2020. Currently, the TCJA rules still apply to tax years beginning after 2020 and before 2026.
Business interest: Under the TCJA, the deduction for annual net business interest generally can’t exceed 30 percent of adjusted taxable income (ATI). There is, however, an exception for a qualified small business. Now a provision in the CARES Act increases the limit to 50 percent of ATI.*
*Note: The above change is only effective for the 2019 and 2020 tax years.
Charitable contributions: Normally, deductions for charitable contributions by corporations are limited to 10 percent of AGI. To encourage gift-giving in the corporate sector, the CARES Act increases the threshold to 25 percent of AGI for 2020. Furthermore, gifts of food inventory by corporations are currently limited to 15 percent of AGI. The new law raises this limit to 25 percent of AGI for 2020.
Of course, the CARES Act includes various other forms of financial assistance for the business sector, including the Paycheck Protection Program, Small Business Administration (SBA) debt relief, express SBA bridge loans and expanded unemployment benefits—just to name a few of the key items. Help your clients adversely affected by the COVID-19 virus maximize the tax and financial benefits available to them in this time of need.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...