Tax Relief For Employers/Businesses Under The CARES Act
Updated April 21, 2020
Phase III of the Coronavirus stimulus relief included the Coronavirus Aid, Relief and Economic Security Act (CARES Act). This bill addressed economic impacts of, and otherwise responds to, the COVID-19 (coronavirus) outbreak in several ways, such as the individual stimulus payments, loans to small businesses, and student loan payment suspension. This act became effective on April 1, 2020.
Business Tax Relief Provisions: With respect to taxes, the bill establishes special rules for certain tax-favored withdrawals from retirement plans; delays due dates for employer payroll taxes and estimated tax payments for corporations; and revises other provisions, including those related to losses, charitable deductions, and business interest.
1. Employee Retention Tax Credit = up to $5,000 per employee
This is an alternative tool for businesses not utilizing the Paycheck Protection Program to cover the same employee wages.
The Employee Retention Credit is a fully refundable tax credit for employers equal to 50% of qualified wages (including allocable qualified health plan expenses) paid to their employees.
The Employee Retention Credit is available to employers whose businesses were disrupted due to virus shutdowns and those that had a decrease in gross receipts of 50% or more when compared to the same quarter last year. The credit can be claimed for employees who are retained – but not currently working – due to the crisis for businesses with more than 100 employees, and for all employee wages (working and not working) for businesses with 100 or fewer employees.
The Employee Retention Credit is NOT available to:
- government employees,
- self-employed individuals, or
- any business that received funds under the Paycheck Protection Program – if using PPP funds for the same employee wages as the retention credit.
Timing: This Employee Retention Credit applies to qualified wages paid on or after March 13, 2020, and before January 1, 2021.
Amount: The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.
Paid Leave Excluded: If an employer meets the requirements for the employee retention credit, it may receive both tax credits for qualified leave wages under the FFCRA and the Employee Retention Credit under the CARES Act, but not for the same wage payments. All employers MUST EXCLUDE from their calculations of qualified wages for this retention credit any wages used in the calculation of qualified wages to determine tax credits due for the sick and/or family leave under the Families First Coronavirus Response Act (FFCRA).
The total retention tax credit cannot exceed the applicable employment taxes, reduced by the following:
(1) any credits allowed for the employment of veterans;
(2) any credits allowed for research expenses;
(3) any payroll credit given for required paid sick leave under FFCRA; and
(4) any payroll credit given for required paid EFMLEA leave under FFCRA.
Obtaining the Credit:
A business can obtain the benefit of the credits as follows:
(1) by withholding or withdrawing the amount of federal employment taxes set aside for or on deposit with the IRS for other wage payments made during the same quarter as the applicable qualified wages;
(2) by filing a Form 7200- Advance Payment of Employer Credits Due to COVID-19 to request an advance of the amount of the credit; or
(3) a combination of the steps in (1) and (2) when the federal payroll taxes are insufficient to provide the full amount of credit allowed under this provision.
2. Employer-Side Social Security payroll tax payments may be delayed until January 1, 2021, with 50% owed on December 31, 2021 and the other half owed on December 31, 2022. The Social Security Trust Fund will be backfilled by general revenue in the interim period.
3. Modifications for Net Operating Losses (NOLs): Businesses may take NOLs earned in 2018, 2019, or 2020 and carry back those losses five years. The NOL limit of 80% of taxable income is also suspended, therefore businesses may use NOLs they have to fully offset their taxable income.
4. Businesses with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than they otherwise could.
5. The net interest deduction limitation, which currently limits businesses’ ability to deduct interest paid on their tax returns to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA), has been expanded to 50% of EBITDA for 2019 and 2020.
6. Excise tax applied on alcohol used to produce hand sanitizer is temporarily suspended for tax year 2020.
7. Qualified Improvement Property. Businesses may immediately deduct amounts spent to improve property rather than having to depreciate such amounts over the life of the building.
8. Charitable Contribution Limitations. Charitable contribution deduction limitations are increased from 10% to 25% of taxable income for corporations.
9. Employee Student Loans. The CARES Act allows employers to contribute up to $5,250 annually to the repayment of an employee’s student loans on a tax-free basis. The $5,250 annual cap applies in the aggregate to a new student loan repayment benefit and to other education assistance. The loan repayment may be made to the employee or to the lender on any qualified education loan (as defined under Section 221(d)(1) of the Code) and applies to student loan payments made by an employer after the date of enactment of the CARES Act and before January 1, 2021.
The information above is intended to act as a general resource and therefore does not address all considerations and jurisdiction-specific analyses that may need to be undertaken prior to taking action. Thus, employers should seek specific counsel.