Businesses are facing challenges not seen previously due to COVID-19. Many industries have been significantly impacted, some have been decimated, and most have been impacted to some extent by the COVID-19 outbreak. To help businesses survive this turbulent time, the federal government put the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) into effect.
While the stimulus checks and increased unemployment benefits provided by the CARES Act are well-known, the act also includes additional tax provisions providing relief to businesses. These measures have been put into place to support the business community and preserve jobs, as we look to recover in the future. If you own a business, be sure to check in with your CPA to determine if any of the provisions would benefit your business.
Net Operating Loss Modification
One new tax provision, and seemingly the most talked about, is the modification to net operating loss provision. Net Operating Loss (NOL) is a business’ total net loss over a year, when the possible deductions exceed taxable income.
Prior to the CARES Act, a business with an NOL was restricted to carrying forward these losses to future years in order to reduce taxable income in those years. The thought was that some business’ earnings fluctuate from year to year, and this provision could enable them to take the loss in a future year. In any given year, businesses were limited to the amount of NOLs able to be deducted, which was 80 percent of taxable income.
With the CARES Act, businesses are now able to carry losses backward to prior years, in addition to carrying them forward to future years. This change permits businesses to carryback any NOLs between December 31, 2017 and January 1, 2021. Utilizing this provision can allow a business to offset past income and receive a refund now, rather than wait to apply losses to a future year. Furthermore, the 80 percent limit has been suspended, allowing businesses to now fully offset taxable income using deductions.
Non-Corporation Taxpayers Excess Business Loans
In addition to the NOL Modification, the CARES Act included the suspension of the Excess Loss Rules. Prior to the provision, noncorporate taxpayers who participate in business ventures could only deduct up to $500,000 for joint filers to offset income. Business losses over this amount were then carried over as an NOL. This had applied to all tax years from December 31, 2017 until December 31, 2026.
The CARES Act effectively suspended this limitation for 2018, 2019, and 2020. Deductions are now authorized to exceed the past amount, meaning businesses can deduct 100 percent of their losses. This can result in paying less taxes in 2019 and receiving refunds for past years.
Refundable Payroll Tax Credit
In order to encourage businesses to keep on employees, a Refundable Payroll Tax Credit was added to the CARES Act. This enables businesses a refundable tax credit that is equal to 50 percent of wages for each employee up to $10,000, including health benefits. Those businesses that made 50 percent less gross income this year than within the same quarter last year may qualify, as well as those who were forced to suspend their business, either fully or partially.
Businesses with fewer than 100 employees can apply this to all of their employees’ wages. Businesses with over 100 employees may only apply this provision to those who have been kept on their team but are not currently working, or are working fewer hours than is standard.
This is not an option for any business that received a PPP (Paycheck Protection Program) loan. Instead, it provides another way for businesses to stay afloat and to retain their staff.
Payroll Tax Payment Deferral
The Payroll Tax Payment Deferral allows businesses to defer the 6.2 percent of the Social Security tax without any penalty involved. Each business who utilizes this provision will owe 50 percent by December 31, 2021 and the other 50 percent by December 31, 2022. This essentially operates as an interest-free loan until it is due. With this provision, the government aims to improve cash flow for businesses.
Though initially available to those who had received the PPP loan, the provision has since been amended, disallowing PPP recipients from utilizing the Payroll Tax Payment Deferral provision. However, there is no requirement that the business must have been impacted by the COVID-19 pandemic to take advantage of this deferral.
For countless businesses, this has been a significantly challenging period. Many are left with uncertain futures, as they watch surrounding businesses and competitors close their doors. With the CARES Act, the hope is to improve financial conditions for every business that needs it in order to rebuild a thriving economy. Be sure to reach out to your CPA for help navigating the options your business has in order to reap the benefits, and make it out to the other side.