Additional tax benefits under the CARES Act

In addition to the much heralded Paycheck Protection Program (PPP) and tax rebates to individuals, the CARES Act also includes many additional tax credits and benefits. The following are some of the benefits created under the CARES Act.

Employee Retention Credit

The Employee Retention Credit (ERC) is a fully refundable tax credit for employers equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before Jan. 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000. “Qualifying wages” are based on the average number of a business’ employees in 2019, depending on the size of the business. If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full-time and were paid for full-time work, the employer still receives the credit. If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

“Eligible employers” are employers that meet one of two alternative tests: (1) The employer’s business is fully or partially suspended by government order due to the COVID-19 pandemic during the calendar quarter; or (2) the employer’s gross receipts are below 50% of the comparable quarter in 2019.  Eligible employers can get immediate access to the credit by reporting their total qualified wages for each quarter on Form 941, beginning June 30, 2020. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS by filing Form 7200. Additionally, qualified employers that do not pay wages to laid off or furloughed employees but continue health coverage for those employees may treat the associated health plan expenses as qualified wages.

However, an eligible employer cannot claim the ERC if it also received a PPP loan. Additionally, any qualified wages for which an eligible employer claims the ERC may not be taken into account for purposes of determining a paid family and medical leave credit. Employees are not counted for the ERC if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for the employee.

Net operating losses

Net operating losses (NOLs) arising in tax years beginning after Dec. 31, 2017, and before January 1, 2021 (e.g., NOLs incurred in 2018, 2019 and 2020 by a calendar-year taxpayer), may be carried back to each of the five tax years preceding the tax year of such loss. Losses must be carried back to the earliest year available for the offset. As a result, taxpayers with eligible NOLs may now be able to claim a refund for tax returns from prior tax years. Additionally, as losses will be carried back to pre-2018 tax years, corporate taxpayers may benefit from a tax refund at favorable rates of up to 35%, rather than 21% as under the Tax Cuts and Jobs Act of 2017 (TCJA). The CARES Act also suspended the 80% limitation on the use of NOLs enacted by the TCJA with respect to NOLs carried to any taxable year beginning before Jan. 1, 2021.

Charitable deductions

Taxpayers may now claim a charitable deduction up to $300 made to a qualified charitable organization. This $300 deduction is specifically for taxpayers who don’t itemize their deductions and would typically not get any tax benefits for donations. Since it’s considered an above-the-line deduction, the IRS applies it when calculating a taxpayer’s adjusted gross income (AGI). In other words, if you donate up to $300 in cash to a qualified organization, your AGI will be reduced by up to $300 and you can still claim the standard deduction. 

Required minimum distributions

Under the CARES Act, all required minimum distributions (RMDs) have been waived for 2020. The waiver applies to most retirement plans including IRAs, inherited IRAs, 401(k) and 403(b) plans and means that most participants will not be required to take any distributions from their retirement plans this year. This waiver, however, doesn’t apply to defined benefit plans. For beneficiaries required to the take distributions under the five-year rule, 2020 will not be counted as part of the five-year period.  

Business interest expenses reduction

Business taxpayers with average annual gross receipts for the prior three tax years below $26 million may now deduct business interest expenses up to 50% of adjusted taxable income (ATI) for tax years 2019 and 2020 in lieu of a 30% limitation. For partnerships, the 50% ATI limit applies to 2020 only.

Client alert authored by Connor J. Valentyn (312 855 6413), Law Clerk.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.