On March 27, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act or (the ‘‘CARES Act’’ or the “Act”). The Act contains a wide range of provisions to provide relief from the effects of the new Coronavirus (“COVID-19”) pandemic. This alert focuses on certain tax provisions affecting businesses.
Eligible employers are allowed a credit against employment taxes for each calendar quarter equal to 50% of eligible wages (up to $10,000 in wages for all calendar quarters) for each employee. An eligible employer is an employer who (A) was carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended during a calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 or (B) incurs gross receipts in a calendar quarter during 2020 that are less than 50% of its gross receipts for the same quarter in 2019 (the employer will remain eligible until its gross receipts in a succeeding calendar quarter exceed 80% of its gross receipts for the same calendar quarter in 2019). For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit. Eligible wages do not include certain wages taken into account under the Families First Coronavirus Response Act (see Orrick’s Tax Alert titled “Employer Tax Credits in the Families First Coronavirus Response Act”). Qualified wages paid or incurred by an eligible employer with respect to an employee for any period may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period. An employer may elect not to have the credit apply.
The credit allowed with respect to any calendar quarter may not exceed the employment taxes (reduced by certain credits allowed under the Internal Revenue Code of 1986, as amended (the “Code”) and the recently passed Families First Coronavirus Response Act) on the wages paid with respect to the employment of all the employees of the eligible employer for such calendar quarter. If the amount of the credit exceeds this limitation for any calendar quarter, the excess may be refunded. Any wages taken into account in determining the credit allowed under this section shall not be taken into account for purposes of determining the credit allowed under section 45S. Any employer that receives certain loans under the Small Business Act (15 U.S.C. 636(a)) will not be eligible for the credit. The credit is only available for wages paid after March 12, 2020, and before January 1, 2021.
The Act allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax from the date of enactment through December 31, 2020, that they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. This provision requires that the deferred employment tax be paid in 2021 and 2022, with 50% of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. This provision does not apply to any employer that has had indebtedness forgiven under the Act with respect to certain loans made under the Small Business Act (15 U.S.C. 636(a)) or certain indebtedness forgiven under the Act.
The Act relaxes the limitations on a company's use of net operating losses (“NOLs”). Prior to the Act, NOLs from taxable years that ended on or after December 31, 2017, were subject to an 80% taxable-income limitation, and they could not be carried back to reduce income in a prior tax year (see Orrick’s Tax Alert titled “U.S. Tax Reform Has a Profound Impact on Inbound Investment”). The Act provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The Act also suspends the taxable income limitation for any taxable year beginning before January 1, 2021, to allow an NOL to fully offset income.
In the case of an NOL arising in a taxable year beginning before January 1, 2018, and ending after December 31, 2017, an application under the Code with respect to the carryback of such NOL will be treated as timely filed if it is filed not later than the date which is 120 days after March 27, 2020. Taxpayers may elect to not have this provision apply if such election is made not later than the date which is 120 days after March 27, 2020.
These NOL provisions may create less of a benefit for U.S. corporations with non-U.S. subsidiaries. Under the Tax Cuts and Jobs Act, these corporations may recognize global intangible low-taxed income (“GILTI”) annually with respect to such subsidiaries that are profitable, which is taxed at a lower U.S. federal income tax rate due to a deduction under section 250. If a corporation elects to carryback NOLs to earlier tax years, it may offset GILTI that otherwise would have been taxed at such lower effective tax rate. Even if a corporation does not elect to carryback such NOLs and uses the NOLs as a carryforward, it may not get the full benefit of such NOLs if it has GILTI because the GILTI deduction is limited by taxable income that otherwise would have resulted in a lower effective tax rate for GILTI.
The Act also provides that loans made to or guaranteed by U.S. Treasury should be treated as indebtedness and that the IRS shall provide guidance to the effect that a government investment in warrants, options or stock, common or preferred, or other equity or does not result in an ownership change for purposes of section 382.
Prior to the Act, section 461(l) disallowed excess business losses of pass-through businesses and sole proprietors in tax years beginning after December 31, 2017, and before January 1, 2026, if the amount of such losses exceed $250,000 ($500,000 for married taxpayers filing jointly) (see Orrick’s Tax Alert titled “Private Equity Fund Taxation Post-Tax Reform: What Really Changed?”). Act amends section 461(l) to remove the limitation of non-farm excess business losses in taxable years beginning before January 1, 2021.
The corporate alternative minimum tax (“AMT”) was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in 2021 (see Orrick’s Tax Alert titled “Private Equity Fund Taxation Post-Tax Reform: What Really Changed?”). The Act accelerates the ability of companies to recover those AMT credits, permitting companies to immediately claim a refund, which must be filed prior to December 31, 2020.
The Act temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30% limitation to 50% of taxable income (with adjustments) for 2019 and 2020 (for a discussion of pre-Act law, see Orrick’s Tax Alert titled “U.S. Tax Reform Has a Profound Impact on Inbound Investment”). Taxpayers can elect to use 2019 income in place of 2020 for the computation. In the case of a partnership, any such election must be made by the partnership. If such an election is made for a taxable year which is a short taxable year, the taxable income for the taxpayer’s short taxable year is adjusted for purposes of this provision by a ratio to reflect a full year of income.
The Act enables businesses, especially in the hospitality industry, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. This provision corrects an error in the Tax Cuts and Jobs Act regarding qualified improvement property under section 168 by making it 15-year property.
The Act provides loan forgiveness for certain COVID-19 related Small Business Administration (“SBA”) loans authorized by the Act. Specifically, the following items of indebtedness listed below are forgiven if they are made during covered periods: payroll costs, interest payments on certain mortgages, rent, and utility payments. However, the amount forgiven cannot exceed the principal amount of the loan. The amount forgiven will be reduced if the business has had employee layoffs or reductions to employee salaries and wages. For purposes of the Code, any amounts forgiven pursuant to this provision may be excluded from gross income.
 Unless otherwise specified, all “section” references are to the Code.