In addition to the health implications, the coronavirus (COVID-19) pandemic has dealt a severe blow to the economy, and every business needs to use all the tools at their disposal as they attempt to recoup losses and rebuild financial health. Tax breaks are one set of tools that can help, including many provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The CARES Act creates a new refundable credit against payroll tax. It’s generally available to employers whose operations have been fully or partially suspended due to a COVID-19-related governmental shutdown order. It also is available to employers whose gross receipts have dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter).

Employers with more than 100 employees can receive the credit for employees who’ve been furloughed or who’ve had their hours reduced due to one of the reasons above. Those with 100 or fewer employees can receive the credit for employees regardless of whether they’ve been furloughed or had their hours reduced.

The credit equals 50% of up to $10,000 in compensation — including health care benefits — paid to an eligible employee from March 13, 2020, through December 31, 2020. Additional rules and limits apply.

Before the Tax Cuts and Jobs Act (TCJA), taxpayers could carry back net operating losses (NOLs) two years, and carry forward the losses 20 years, to offset taxable income. The TCJA limited the NOL deduction to 80% of taxable income for the year, eliminated the carryback of NOLs and removed the time limit on carryforwards.

The CARES Act loosens the TCJA restrictions. It allows NOLs arising in 2018, 2019 or 2020 to be carried back five years and temporarily removes the taxable income limitation for years beginning before 2021, so that NOLs can fully offset income. 

The CARES Act also amends the TCJA to temporarily eliminate the limitation on excess business losses for pass-through entities and sole proprietors. These taxpayers can now deduct excess business losses arising in 2018, 2019 and 2020. 

Taxpayers may need to file amended tax returns to obtain the full benefits of these changes.

For tax years beginning after 2017, the TCJA amended the Internal Revenue Code to limit the deduction for business interest incurred by both corporate and noncorporate taxpayers. It generally limited the deduction to 30% of the taxpayer’s adjusted taxable income (ATI) for the year. 

The CARES Act allows businesses to deduct up to 50% of their ATI for the 2019 and 2020 tax years. (Special partnership rules apply for 2019.) It also permits businesses to elect to use 2019 ATI, rather than ATI in 2020, for the calculation, which will increase the amount of the deduction for many businesses.

Prior to the TCJA, qualified retail improvement property, restaurant property and leasehold improvement property were depreciated over 15 years under the modified accelerated cost recovery system (MACRS). The TCJA classified all of these property types as qualified improvement property (QIP). 

Under the TCJA, Congress intended QIP placed in service after 2017 to have a 15-year MACRS recovery period and, in turn, qualify for 100% bonus depreciation through 2023, when the allowable deduction will begin to phase out. But, in what’s been called “the retail glitch,” the statutory language didn’t define QIP as 15-year property. So QIP defaulted to a 39-year recovery period, making it ineligible for bonus depreciation.

The CARES Act includes a technical correction to fix this drafting error. Hotels, restaurants and retailers that have made qualified improvements during the past two years can claim an immediate tax refund for the bonus depreciation they missed. They also can claim bonus depreciation going forward, according to the phaseout schedule.

Are you on top of these changes?

You need to make sure you claim all the tax breaks you deserve as you set a course to help your business survive and, ultimately, thrive. The CARES Act is one source for significant assistance. We can help you stay on track to take full advantage of these provisions.