CARES Act - Business Provisions Summary
The Coronavirus Aid Relief and Economic Security Act (CARES Act) was unanimously passed on March 27th to provide taxpayers relief resulting from the COVID-19 outbreak. This $2.2 trillion dollar bill contains numerous tax provisions benefiting both individuals and businesses. The following is a summary of the business tax changes implemented by the CARES Act.
NOL's Under the 2020 CARES Act
The Tax Cuts and Jobs Act (TCJA) of 2017 provided a complete overhaul of several areas of the law governing Net Operating Losses. The TCJA eliminated the carryback period for any NOL arising after December 31st, 2017. The carryforward period however is now indefinite. There is no longer a twenty-year cap on the NOL carryforward period for NOLs generated in the year 2018 and later. Additionally, the TCJA implemented a NOL deductibility threshold of 80% of taxable income. These changes, have without a doubt, had an adverse effect on many taxpayers. In these uncertain times, the Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020 will temporarily relieve the burden brought on by some of these provisions of the TCJA. These changes could potentially entitle taxpayers to significant refunds. Below is a summary of carryback/carryforward periods, due dates, and changes to limitations as a result of the 2020 CARES Act.
A. NOL prior to 2018
- Carryback 2 years
- Carryforward 20 years
B. NOL arising in 2018, 2019, or 2020 - Pre-CARES Act
- No Carryback
- Carryforward indefinitely
C. NOL arising in 2018, 2019, or 2020 - Post CARES Act
- Carryback 5 years (must elect out if wish to forego carryback)
- Carryforward indefinitely
Taxpayers may not choose to carryback NOLs to only particular years within the carryback period. Unless an election is made to forego the entire carryback, an NOL arising in a taxable year beginning in 2018, 2019 or 2020 must first be carried back to the earliest year within the carryback period in which there is taxable income, then to the next earliest year, and so on. The only exception to this rule is if one or more years in the carryback period reflects section 965 foreign income. Only then can the taxpayer elect to exclude any section 965 year(s) from the carryback period. Additionally, Real Estate Investments Trusts (REIT) will not be able to carry back losses and losses may not be carried back to any REIT year.
It is important to note that if a 2018 tax return has been filed with a NOL that has been carried forward, the taxpayer must make the Sec.172(b)(3) election to relinquish the five-year carryback period for 2018. At this time, this can only be done with an amended return.
NOL Deduction Limitations:
A. NOL prior to 2018
- No limitation - offset up to 100% of taxable income
B. NOL arising in 2018, 2019, or 2020 - TCJA Act
- NOL deduction limited to 80% of taxable income
C. NOL arising in 2018, 2019, or 2020 - CARES Act
- No limitation
The CARES act has temporarily removed the limitation on the deductibility of an NOL for the 2018, 2019, and 2020 tax periods. NOLs arising in tax years beginning after December 31, 2020 will be subject to the 80% taxable income limitation put in place by the TCJA. There was, however, a technical correction added by the CARES Act that accomplishes what congress originally intended in calculating the taxable income amount that is subject to the 80% limitation. Prior to the CARES Act, the TCJA did not allow taxpayers to reduce taxable income by NOLs that arose prior to 2018 as a means of calculating the 80% limitation. This meant that any NOL carryforward amount was limited to 80% of taxable income even if it originated in a tax period prior to 2018. The new law reduces taxable income in the carryforward year by any unused net operating losses that arose in tax years that began before January 1, 2018. Additionally, the CARES Act reduces taxable income, for the means of this calculation, by qualified business income deductions under Code Sec. 199A and the deduction for foreign-derived intangible income ("FDII") as well as global intangible low-taxed income ("GILTI") under Code Sec. 250.
See below for some important due dates related to these NOLs.
A.Code Sec.172(b)(3) election - Election to Forego the Carryback Period
- 2017/2018 Fiscal - 7/25/2020
- 2018 - 10/15/2020
- 2019 - 10/15/2020
- 2020 - 10/15/2021
B. Tentative Refund Application (Calendar Year
- 2017/2018 Fiscal - 7/25/2020
- 2018 - 12/31/2019 (must file amended return)
- 2019 - 12/31/2020
- 2020 - 12/31/2021
As an included revision, the CARES act clarified that the repeal of NOL carrybacks applies only to taxable years beginning after December 31, 2017. Additionally, the CARES Act provides that for a period of 120 days from March 27, 2020, taxpayers may request a tentative refund under section 6411 for an NOL carryback from a straddle year to a prior year, pursuant to the pre-TCJA two-year carryback rule, even though the normal deadline for making that request would have been during 2019. In the case of a net operating loss that arose in a tax year beginning before 2018 and ending after 2017, an application for a tentative refund is considered timely if filed by July 25, 2020.
Since the due date for filing a tentative refund application is statutorily required to be filed within 12 months after the close of the NOL year, the IRS is not able grant administrative relief. Consequently, taxpayers for whom the deadline has passed will need to file amended returns in order to claim refunds. There is hope that the IRS will provide guidance for relief for those with 2018 NOLs, however at this time, the only relief is for 2017/2018 fiscal year taxpayers. Taxpayers may file Form 1045 (individual) or Form 1139 (corporation) in lieu of an amended return so long as the due date has not passed. This method generally produces a much quicker refund for the taxpayer.
It is important for taxpayers to think about the effects of carrying back these losses to certain tax periods in which there are deductions that may have been based on taxable income. For example, if a taxpayer had a Domestic Production Activities Deduction under the prior Section 199, reducing the taxable income could be drastically reduce this deduction thus diminishing the value of the NOL being carryback.
Excess Business Losses Under the 2020 CARES Act
The Tax Cuts and Jobs Act (TCJA) of 2017 disallowed the deduction of any excess business loss arising after December 31, 2017 for any non-corporate taxpayer. Excess business loss is defined as any amount over the taxpayer's aggregate deductions for the tax year from the taxpayer's trades or businesses. In short, it is any amount over the sum of:
- the taxpayer's aggregate gross income or gain for the tax year from such trades or businesses; plus
- $250,000(single)/$500,000(joint), adjusted annually for inflation ($255,000/$510,000 in 2019, $259,000/$518,000 in 2020)
The taxpayer must apply the at-risk and passive activity rules prior to the application of these rules. Any excess amount is carried forward to be used in a future tax period.
Keep in mind that these limitations apply at the individual level for all non-corporate taxpayers.
The Coronavirus Aid, Relief, and Economic Security Act (CARES) temporarily postpones this limitation placed in affect by the TCJA until tax years beginning in 2021. Along with this postponement came a list of technical corrections to the excess business limitation that many taxpayers had been waiting for.
- Clarification that the disallowed loss will be treated as a NOL carryover under Code Sec. 172(b)
- Aggregate deductions in determining the loss are computed without regard to any service performed as an employee nor any deduction allowable under Code Sec. 172 for net operating losses (NOLs), Code Sec. 199A for qualified business income (QBI), or any deductions for losses from sales or exchanges of capital assets.
- The amount of gains from sales or exchanges of capital assets taken into account in determining aggregate gross income or gain may not exceed the lesser of (1) the capital gain net income determined by taking into account only gains and losses attributable to a trade or business, or (2) the capital gain net income.
If a taxpayer was
subject to these limitations in 2018, the taxpayer may file an amended 2018
return to reflect these changes made by the CARES Act.
Corporate Alternative Minimum Tax
Credit is Accelerated under CARES Act
The corporate Alternative Minimum Tax (AMT) was repealed by the Tax Cuts and Jobs Act for years beginning after December 31, 2017 and corporate AMT credits were made available as refundable credits over several years ending in 2021.Business that were due to receive corporate Alternative Minimum Tax (AMT) credits at the end of 2021 can instead claim a refund now in order to improve cash flow.The CARES Act changes the tax years to claim outstanding Alternative Minimum Tax Credits from 2018, 2019, 2020 or 2021 to 2018 or 2019 and changes the amount of the refundable credit from 50% (for years prior to 2020) to 100% for years beginning in 2019. This means that corporations are now able to claim 100% of AMT credits in 2019.The CARES Act also provides for an election to take the entire refundable credit amount in 2018. This means that corporations with unused AMT credits in tax years beginning in 2018 and 2019 can benefit from this change under the CARES Act.
When to File
- File an application for a tentative refund (Form 1139)
- Tentative refund may be filed for refundable credit amounts for tax years beginning in 2018
- The application must be filed prior to December 31, 2020
Excise Tax Exception for Alcohol Used to Produce Hand
Under the CARES Act, taxpayers will receive a temporary exception from excise tax for alcohol that was used to produce hand sanitizer in 2020 in accordance with the Food and Drug Administration (FDA) requirements. Taxpayers subject to the excise tax on distilled spirits will be excepted for distilled spirits removed in 2020 and used in or contained in hand sanitizer produced and distributed in response to the SARS-CoV2or COVID-19.
Corporate Charitable Contribution Limitations
Charitable contributions of corporate taxpayers are typically limited to 10% of the corporation's taxable income.The CARES Act will allow corporate taxpayers to deduct more of their charitable contributions during 2020 by increasing the taxable income limitation from 10% to 25%. In addition, the deduction for food inventory also is increased to 25%.
The percentage limitation on charitable contributions deductions for corporations is temporarily increased from 15 percent to 25 percent for qualified charitable contributions. The 25-percent contribution base limit applies to qualifying contributions made in any tax year beginning after December 31, 2019, and before January 1, 2021. A corporation may carry forward for five years any qualifying contribution that exceeds the 25-percent ceiling for the tax year of the contribution.
In addition, the deduction limitation for contributions of food inventory is temporarily increased from 15 percent to 25 percent for donations of food inventories. The 25-percent contribution base limit applies to qualifying contributions made in any tax year beginning after December 31, 2019, and before January 1, 2021.
Employer Student Loan Payments
The CARES Act will allow employers to provide employees with a tax-free student loan repayment benefit of up to $5,250 per year for student loan debt expenses. This Act now allows employers to assist employees with existing student loan debt in addition to new debt.
Under this Act, payments made by an employer on a qualified student loan of an employee before January 1, 2021, are excluded from the employee's gross income.The payments may be made either directly to an employee or to a lender.The payments can be of principal or interest on any qualified education loan that is incurred by the employee for the employee's education.However, employees may not receive both a loan payment and a deduction on the interest paid on the debt.
Educational assistance means the employer's payment of expenses incurred by or on behalf of an employee for education or the employer's direct provision of education to an employee. Assistance includes, but is not limited to, tuition, fees, and similar payments, books, supplies and equipment. Educational assistance does not include the employer's payment for, or provision, of: tools or supplies (other than textbooks) that the employee may retain after completing a course of instruction; meals, lodging, or transportation; education, involving sports, games, or hobbies, unless the education involves the employer's business, has a reasonable relationship to an activity maintained by the employer for profit or is required as part of a degree program.
Employers must maintain a written plan.
With the enormous amount of existing student debt that employees carry, this provision is a valuable way that employers can assist their employees.
Qualified Disaster Relief Payments to Employees
Although not part of the CARES Act, employers may make non-taxable qualified disaster relief payments to employees for reasonable and necessary expenses resulting from the coronavirus pandemic under Tax Code Section 139. Typically, payments made by an employer to, or for the benefit of, an employee must be included in the employee's gross income. However, because President Donald Trump declared a national emergency due to the spread of the coronavirus, employers may now provide tax-favored financial assistance to employees who are affected by the coronavirus.
Disaster relief payments to employees under Section 139 are not subjected to discrimination testing and there are no dollar limits imposed. In addition, employees are not required to substantiate actual expenses in order to qualify for the exclusion and qualified disaster relief payments are excluded from gross income and wages for payroll tax purposes. In addition, such payments are not subject to information reporting on Forms W-2 or 1099-MISC.
Employers may reimburse employees for expenses associated with the coronavirus, as long as the expense is reasonable and necessary. Reimbursable expenses may include any of the following: unreimbursed medical expenses including co-pays, deducible, vitamins, and supplements; increased expenses associated with being quarantined at home (such as increased utilities and home office expenses); expenses associated with setting up or maintaining a home office (such as enhanced internet connections, computer monitors, laptops, printers, office supplies, etc.); housing for additional family members (transportation and living expenses for college students returning home); nonperishable food purchases/reserves; increased childcare expenses; expenses to enhance mental health and physical well-being from social distancing such as meditation apps and home health fitness; and alternative commuting.
If the employee incurs an expense that is not reasonable or necessary, it can not be reimbursed. Similarly, payments that constitute income replacement, such as payments for lost wages, lost business income or unemployment benefits, are not reimbursable. In addition, employers may not reimburse employees for payments that are reimbursed or reimbursable by insurance.
A written plan document is not required or recommended. However, employers may wish to consider implementing a system to validate that payments meet the Section 139 requirements. The system may include an application form and an affirmative statement from the employee that the requested funds are necessary for expenses associated with the coronavirus, as well as a confirmation that such expenses are not reimbursable by insurance.
Because of the ease of implementation and nonexistent substantiation requirements, qualified disaster relief payments to employees are a benefit worth examining for clients who are considering ways to assist their employees with the financial impact of the coronavirus.