As we’ve outlined in our previous Newsletters, President Trump signed into law on March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act or the Act). In addition to the Paycheck Protection Program offered to businesses to further support employee retention and maintenance of the business (See March 30th, CARES Act and Paycheck Protection Program (PPP) Client Alert), as well as other appropriations for health care and education needs, the Act provides various forms of temporary and permanent tax relief in an effort to supply additional liquidity to such businesses. A list of those relevant tax relief provisions is outlined below:
Bonus Depreciation for Qualified (Leasehold) Improvements:
- The CARES Act provides for a technical correction to the 2017 tax law change relating to certain interior building improvements (Qualified Improvement Property) by classifying such improvements as 15-year MACRS property, thereby qualifying such property for 100% bonus depreciation.
- This change in the tax law is effective retroactively for tax periods beginning after 2017 and will provide some relief to the businesses that hold interests in real estate. Businesses may file amended tax returns to take immediate advantage of this availability of additional deductions for 2018 and where already filed, for 2019, as well as for tax years going forward.
Temporary Repeal of Net Operating Loss Limitations:
The Tax Cuts and Jobs Act of 2017 (TCJA) introduced two further limitations on the use of net operating losses (NOLs) by eliminating the ability to carry losses back and in limiting the use of an NOL to only 80% of the current year taxable income. The CARES Act temporarily suspends these limitations in the following manner:
- 5 Year Carryback of NOLs: For NOLs arising in tax years 2018, 2019, and 2020, taxpayers may carry the losses back to each of the 5 taxable years preceding the year of the NOL.
- Repeal of Taxable Income Limitation: For tax years before Jan 1, 2021, the 80% limitation on NOL usage for a given year is removed and the taxpayer may utilize 100% of NOL carryovers against current year taxable income.
- The combination of the repeal of the NOL limitation and the ability to carry back NOLs 5 years is intended to allow taxpayers with unused NOLs from 2018 to file amended tax returns with refund claims that will produce more immediate liquidity for such businesses, and those with NOLs in 2019 and 2020 will receive a more current benefit as their returns are filed.
Excess Business Losses Limitation:
- Excess business loss limitations, enacted as part of TCJA, which limited non-corporate taxpayers from deducting more than $500,000 (married filing jointly) is temporarily repealed for tax years 2018, 2019, and 2020.
- The removal of this limitation for the current and prior tax years could provide certain businesses in the real estate industry, for example, with opportunities to access additional and immediate liquidity from tax refunds or reductions in tax liabilities.
- Please note however that this temporary repeal of the limitation on excess business losses does not impact the application of the passive activity loss limitations.
Employee Retention Credit:
- Applicable to employers whose operations have been fully or partially suspended due to a government order OR employers who have experienced greater than 50% loss in quarterly receipts/revenues based on year over year quarterly basis.
- Eligible employers receive a refundable payroll credit against 6.2% FICA tax liabilities equal to 50% of wages paid from March 12, 2020, thru December 31, 2020, and limited to first $10,000 paid to each employee.
- The Retention Credit is not available if the employer receives a loan under the Paycheck Protection Program.
Other Business-Related Tax Relief Provisions:
- Employers may defer payment of their 2020 employer portion of employment taxes and pay 50% by December 31, 2021, and the other 50% by December 31, 2022. This relief is not available if the employer receives debt forgiveness under the PPP.
- Limitations on business interest expense (previously 30% under TCJA) have been increased to 50% of adjusted taxable income for tax years 2019 and 2020.
- Corporation’s charitable contribution limit, currently at 10% of modified taxable income, is increased to 25%.
Members of the DUGGAN BERTSCH team are available to assist employers in evaluating their obligations under these new rules as well as the availability of payroll tax credits arising from such sick and family leave payments to employees.