Business Tax Incentives and Relief Resulting from COVID-19 Response
- Several legislative and regulatory tax measures have been undertaken to mitigate the effects on businesses as a result of the COVID-19 outbreak.
- Businesses may have additional time to pay and file their taxes.
- Businesses who are employers may be eligible for credits related to workforce.
- Businesses will have opportunities to reduce their 2019 and 2020 income tax liability, and possibly claim refunds for prior tax years.
Please note: This alert will be updated periodically with new developments. This was last updated on November 23, 2020. For your convenience, any new information added to our report is highlighted.
As a result of the coronavirus (COVID-19) pandemic, several legislative and regulatory measures have been promulgated in an effort to assist businesses during the economic downturn. Below is a summary of the most important tax-related measures that are available to businesses.
Income Tax Return and Payment Date Extension
On March 20, 2020, the Internal Revenue Service (IRS) issued Notice 2020-18, granting relief to certain taxpayers with respect to their federal income tax returns and payments otherwise due on April 15, 2020. The notice provides "affected taxpayers" an automatic postponement until July 15, 2020, for 2019 income tax payments and 2020 estimated income tax payments.
For these purposes, any person with a federal income tax return or federal income tax payment due April 15, 2020, is considered an affected taxpayer. A person includes an individual, trust, estate, partnership, association, company or corporation. There is no dollar limitation on the amounts that may be postponed.
The IRS has issued a series of FAQs with respect to Notice 2020-18. In addition, the IRS significantly broadened the earlier relief by extending the filing and payment postponement period to numerous additional federal tax filings. (See Holland & Knight's previous alert, "IRS COVID-19 Extensions of Time Provide Relief to Taxpayers," April 28, 2020.)
Families First Coronavirus Response Act
The Families First Coronavirus Response Act (FFCRA) (P.L. 116-127), enacted on March 18, 2020, includes the Emergency Family and Medical Leave Expansion Act (EFMLA) and the Emergency Paid Sick Leave Act (EPSLA), both under which employers are allowed to claim tax credits to offset payments made to employees, subject to certain caps.
In general, the EFMLA provides certain employees of employers with less than 500 workers up to 12 weeks of leave "because of a qualifying need related to a public health emergency." Such a qualifying need arises when an employee is unable to work as a result of having to care for certain family members because of the COVID-19 emergency and during this time employees are required to be paid at two-thirds rate of regular pay. Similarly, the EPSLA provides paid sick leave for certain employees that are absent from work under certain scenarios as a result of the COVID-19 emergency. (See Holland & Knight's previous alert, "New Law Requires Employers at Certain Firms Provide Leave, Gives Employer Tax Credits," March 19, 2020.)
Under the law, employers can claim refundable payroll tax credits that will fully reimburse, dollar for dollar, the cost of providing qualified family leave wages under the EFMLA and qualified sick leave wages under the EPSLA paid.
Equivalent credits are available to self-employed individuals based on similar circumstances.
Credit Limitations and Special Rules
For purposes of the EFMLA Credit, the amount of wages taken into account with respect to an individual shall not exceed, (i) $200 for any day for which an individual is paid such wages or (ii) $10,000 in the aggregate with respect to all calendar quarters.
For purposes of the EPSLA Credit, the amount of wages taken into account with respect to an individual shall not exceed $200 or $511 per day, for up to 10 days, depending upon the specific reason, as provided in the EPSLA, under which the worker is absent from work.
These two credits, however, are generally limited to the employment taxes imposed on the wages paid with respect to the employment of all employees of the employer. If the credits exceed the foregoing limitation, any excess will be treated as a refundable overpayment. In addition to wages, these credits will generally be available for qualified health plan expenses. The credit is reported on the employer's corresponding employment tax return. These credits were further amended by the CARES Act to allow employers to request an advancement of the credits, which can be requested by using Form 7200, Advance Payment of Employer Credits Due to COVID-19 (Form 7200), which has been made available by the IRS in draft form, along with instructions.
As detailed in IRS Notice 2020-21, the above provisions will apply only to wages paid from April 1, 2020, to Dec. 31, 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted into law. The CARES Act provides a series of tax incentives for businesses, the most important provisions of which are summarized below.
Employee Retention Credit
The CARES Act introduces an employee retention credit (ERC). Under this new provision an eligible employer can claim a credit against the employer's share of social security taxes for each calendar quarter for an amount equal to 50 percent of qualified wages per employee, up to a maximum of $10,000 wages per employee for all calendar quarters. The ERC is generally limited to the employer’s share of social security taxes imposed on the wages paid with respect to the employment of all employees. This credit also will be reported in the employer's corresponding employment tax return, and any excess will be treated as a refundable overpayment. In anticipation of receiving the ERC, the employer can fund qualified wages by: 1) utilizing federal employment taxes that would otherwise be required to be deposited with the IRS and 2) requesting an advance of the credit from the IRS by filing Form 7200.
For these purposes, an eligible employer is generally defined as an employer that:
- was carrying on a trade or business during calendar year 2020, and
- with respect to any calendar quarter,
- such trade or business was fully or partially suspended due to a governmental order as a result of the COVID-19 emergency, or
- during which there has been a significant decline in gross receipts
The statute further provides rules regarding whether these criteria have been met.
Although this credit is available to all employers, there are additional limitations for those with more than 100 employees during 2019. For these midsize employers, wages can only be taken into consideration for purposes of determining the credit for time that such employee is not providing services due to its operations being fully or partially suspended as a result of the COVID-19 emergency or during a quarter within a period during which there has been a "significant decline in gross receipts," as defined above. For all employers, wages shall generally also include certain employer's qualified health plan expenses to the extent properly allocable to the employee's qualified wages. Aggregation rules apply to determine when related entities are treated as a single employer for purposes of the ERC.
The credit will be available for wages paid after March 12, 2020, and before Jan. 1, 2021.
Similar to the FFCRA Credits provisions discussed in the prior section, employers may opt out of these provisions for any calendar quarter. An employer that receives a loan under the Paycheck Protection Program (PPP) under the CARES Act, regardless of the date of the loan, cannot claim the ERC. The IRS has recently provided additional guidance offering some relief to this general prohibition in the context of mergers and acquisitions.
The IRS has issued a series of FAQs addressing common questions on the ERC.
Two-Year Delay of Payment of Employer Payroll Taxes
The CARES Act also allows employers (regardless of size) and self-employed individuals to delay the deposit of the employer-portion of the social security tax (the 6.2 percent tax on wages) and 50 percent of the tax imposed on the self-employment income, respectively. The delayed payment must be deposited next year — 50 percent on or before Dec. 31, 2021, and the remaining 50 percent on or before Dec. 31, 2022. The deferral applies to deposits that are due to be made from March 27, 2020 through December 31, 2020.
Under the CARES Act, employers that received an SBA PPP loan could benefit from such deferral only through the date the lender issues a decision to forgive the loan in accordance with the CARES Act. However, the Paycheck Protection Program Flexibly Act of 2020, signed into law June 5, 2020, eliminated this restriction.
Relaxation of Net Operating Losses (NOLs)
The CARES Act modifies certain limitations on the use of NOLs that were enacted as part of the Tax Cuts and Jobs Act (TCJA). The TCJA eliminated the NOL carryback and limited the use of NOL carryforwards to offset 80 percent of a company's taxable income in a later year. The CARES Act modifies IRC § 172 by allowing NOLs that arise in 2018, 2019 and 2020 to be carried back for five years (different rules apply for real estate investment trusts (REITs), insurance companies and the year of an IRC § 965 inclusion). NOLs from taxable years that started prior to Jan. 1, 2018, are no longer subject to the 80 percent limitation. NOLs earned in tax years after Jan. 1, 2018, remain subject to the limitation with certain taxpayer favorable adjustments.
These changes should allow for businesses that will experience losses in 2020 to claim those losses against their prior year income and secure refunds for taxes paid in those prior years. While these NOLs will only arise at the end of the year, the additional changes described in the following sections may be relevant in reducing tax liabilities in 2018 and 2019 retroactively, which should be able to provide for more immediate tax refunds.
This change may also necessitate review of transactions entered into in 2018 and 2019 to consider whether the buyer or seller in those transactions would be entitled to benefit from any prior year tax refunds.
Prior to applying any NOL carryback, U.S. taxpayers with international operations should confirm that the carryback leads to no adverse results under the global intangible low-taxed income (GILTI) or the foreign derived intangible income (FDII) regimes.
The excess business loss limitation applicable to non-corporate taxpayers was eliminated retroactively for tax years beginning in 2018, 2019 and 2020. This will increase the likelihood that non-corporate taxpayers (such as individual partners of tax partnerships and shareholders of S corporations) will be able take advantage of the tax relief provided to businesses in the CARES Act.
Acceleration of AMT Credits
The TCJA repealed the corporate alternative minimum tax (AMT) but allowed refundable AMT credits for taxable years beginning in 2018, 2019, 2020 and 2021. The CARES Act amends such rule to allow corporations to accelerate the recovery of such AMT credits, including by requesting a tentative refund of such amounts on or before Dec. 31, 2020.
IRC § 163(j) Interest Expense Limitation
For taxpayers with more than $25 million in annual gross receipts, the TCJA modified the limitation on interest expense deductions under IRC § 163(j) by limiting interest deductions to the sum of the taxpayer's business interest income, 30 percent of the taxpayer's adjusted taxable income and the taxpayer's floor plan financing for the year. Taxpayers engaged in a real property trade or business are eligible to elect out of this limitation at the cost of slower depreciation schedules for their depreciable property.
The CARES Act modifies this limitation for tax years beginning in 2019 and 2020 tax years by substituting 50 percent for 30 percent. Special rules apply for partnerships, and taxpayers also may elect out of the CARES Act change. Taxpayers also will be able to elect to apply to their 2019 adjusted taxable income amount to tax years beginning in 2020, which may result in a more favorable limitation amount.
Expensing of Costs Associated with Qualified Improvement Property (QIP)
A technical error in the TCJA did not include QIP as depreciable property with a 15-year depreciable life. QIP is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. QIP excludes any improvement for which the expenditure is attributable to 1) enlargement of the building, 2) any elevator or escalator, or 3) the internal structural framework of the building.
Because of this technical error, QIP placed in service after Dec. 31, 2017, had a depreciable life in excess of 20 years, and was therefore not "qualified property" eligible for immediate expensing under IRC § 168(k). Through a retroactive amendment to IRC § 168(e)(3), QIP placed in service after Dec. 31, 2017, was added to the category of 15-year property. This allows for such QIP to be immediately expensed under IRC § 168(k) through tax years beginning in 2022.
For more information or any questions, please contact the authors or another member of Holland & Knight's Taxation Team.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact the author or your responsible Holland & Knight lawyer for timely advice.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.