A number of tax implications evolve as a result of relief provided by the Coronavirus Aid, Relief and Economic Security (CARES) Act, and the Families First Coronavirus Response Act (FFCRA).
The CARES Act is the larges economic relief bill in US history, allocating $3 trillion to support individuals and businesses through the pandemic and economic downturn. A summary of tax implications of provisions of the CARES Act and FFCRA follows to help taxpayers plan.
Nondeductibility of PPP-related Expenses
The IRS released Notice 2020-32 advising that businesses receiving a loan through the PPP are not permitted to deduct expenses reimbursed by the PPP funds if forgiven. Despite the fact these business expenses would normally be deductible as business expenses, the guidance by IRS prevents a double benefit to small businesses by preventing a deduction for expenses paid by forgiven PPP proceeds, which represent income that is excluded from income taxes. The IRS cited Rev. Rul. 83-3 for the proposition that deductions must be decreased to the extent the associated expense is allocable to amounts excludable from gross income.
The AICPA has taken the position that IRS’s announcement is contrary to Congress’s intent – and I agree. Congress specifically excluded loan forgiveness from taxation, and the IRS’s position removes any meaning of the exclusion by Congress. The AICPA is requesting legislation clarification, which we will watch over time.
Stimulus Rebates – reconciled on 2020 tax returns
Stimulus rebates are refundable tax credits, meaning they decrease tax liability dollar for dollar, and can be refunded to taxpayers. The stimulus rebates are credits of up to $1200 per adult and $500 per qualifying child that will be applied to the 2020 tax returns, but are being advanced to taxpayers now based on their 2018 and 2019 tax returns. This means when filing 2020 tax returns, the credits will reduce the amount of credit available by the amount of the credit received. Taxpayers receiving a smaller rebate than they are eligible for based on 2020 income will receive the difference after filing a 2020 tax return, but there will be no requirement to repay over-payments of rebates due to higher income in 2020 than in 2018 or 2019. If income drops in 2020, taxpayers will be eligible for any remaining rebate credit not claimed using 2018 and 2019 tax returns.
Use this calculator to determine your rebate using your AGI, number of dependents, and filing status.
CARES Act Employee Retention Payroll Tax Credit & Paycheck Protection Program (PPP)
The CARES Act provides employers an opportunity to claim a 50% tax credit on wages paid to employees from March 13 to December 31, 2020. The credit is capped at $5,000 per employee (on $10,000 of employee wages).
In order to qualify for the payroll tax credit, businesses must have suspended operations due to government actions related to coronavirus, OR must experience a 50% decline in gross receipts during a quarter, when compared to the same calendar quarter in the prior year. Additionally, for businesses with more than 100 employees, the credit can only be taken for wages paid to employees unable to work due to business suspension or lack of work.
Warning: Double dipping is not allowed. Businesses accepting loans through the PPP are not eligible to take the payroll tax credit. Additionally, the employee retention credit cannot be claimed for COVID-19 related paid sick and family leave payments mandated by FFCRA, for which the FFCRA tax credits are claimed. The retention credit cannot be claimed for employee wages claimed through the pre-existing work opportunity tax credit, or tax credit for paid familiy and medical leave.
CARES Act Payroll Tax Deferral
Employers and self-employed individuals may defer payroll tax payments for the employer portion of Social Security taxes. The first 50% will be owed on 12/31/2021, and the balance of payments due on 12/31/2022, easing cash flow pressure.
Warning: The payroll tax deferral is unavailable to any recipient of forgiveness of SBA loans issued under the PPP.
CARES Act Net Operating Loss (NOL) – Retroactive Carry Back Permitted
Companies may now apply losses earned in 2018, 2019 and 2020 and carry back those losses five years. The prior NOL limit of 80% of taxable income is also suspended, so firms may use NOLs to fully offset taxable income. This allows companies to immediately amend prior year tax returns to offset income with NOLs, and generate refunds of previously paid taxes.
CARES Act Depreciation Rules for Qualified Improvement Property – Retroactive 100% First-year Bonus Depreciation
For Qualified Improvement Property (QIP) placed in service in 2018 – 2022, 100% first-year depreciation can be claimed. QIP is defined as an improvement to an interior portion of a nonresidential building that is placed in service after the date the building was first placed in service.
The retroactive correction permits amendment of 2018 or 2019 returns to claim the accelerated depreciation, which may result in an NOL, that can now be carried back to a prior tax year to recover taxes paid in that prior year.
CARES Act Interest Deduction Limitation Reduced
Businesses may now deduct interest on debt of up to 50% of earnings before interest, tax, depreciation and amortization (EBITA) for 2019 and 2020. Previously, interest deductions were limited to 30% of EBITDA. The change helps businesses increase liquidity if they have debt, or must take on debt, during the crisis.
FFCRA Payroll Tax Credits for Coronavirus Paid Sick and Family Leave
The FFCRA requires emergency paid sick leave, and in some cases family leave. The payment for sick leave is limited to $511 per day for up to 10 days per eligible employee in coronavirus quarntine or seeking a diagnosis. The paid family leave is limited to $200 per day for up to 10 days per eligible employee to care for a quarantined family member or a child whose school or child-care location has been closed due to the pandemic. The Act also provides employees the right to take up to 12 weeks of job protected family leave related to coronavirus quarantine, or school or childcare location closure.
The FFCRA payroll tax credit is different and unrelated to the 50% refundable tax credit available under the CARES act noted above. The FFCRA permits a small employer to collect a tax credit equal to 100% of qualified emergency sick-leave and family-leave payments made by the employer. The credit covers leave payments made through December 31, 2020, and is increased to cover a portion of an employers qualified health-plan expenses allocable to the emergency sick-leave and family-leave wages. The credit is first used to offset the Social Security tax component of the employers payroll tax bill, and any excess credit is refundable.
Sick-leave and family-leave payments mandaged by the FFCRA are exempt from the 6.2% Social Security tax component of the employer’s payroll tax bill. The 1.45% Medicare tax must be paid, however employers may claim a credit for the payments made.