The quote “cash is king” has never been truer than in the first half of 2020. The COVID-19 pandemic has thrust cash flow and liquidity planning to the forefront of every business sector’s strategic planning. Recent legislation from the federal government has provided American taxpayers many short-term and long-term cash flow planning opportunities. From loans and tax credits, to filing postponements and carryback claims, following is a summary, highlighting many of the opportunities to help near-term cash flow.
As discussed in a previous Schneider Downs Our Thoughts On article, CARES Act - Delay of Payment of Employer Payroll Taxes, the CARES act allows for a deferral of the employer-paid portion of the Social Security tax on wages paid between March 27, 2020 and December 31, 2020. This deferral allows employers to pay 50% of the balance by December 31, 2021 and the remaining 50% by December 31, 2022. There are no employer size thresholds; all employers are eligible. This deferral of payroll taxes is the equivalent of a short-term interest-free loan.
An employer that receives a loan under the Paycheck Protection Program (PPP) may defer the employer portion of social security taxes as long as the loan has not been forgiven. Accordingly, once a PPP loan is forgiven, an employer is no longer eligible to defer the employer portion of social security taxes.
A taxpayer can deduct the employer portion of social security taxes or the employer portion of any self-employment taxes in the taxable year in which the taxes are paid. Therefore, if the taxpayer elects to defer the employer portion of social security taxes or the employer portion of any self-employment taxes, the taxpayer will generally not be entitled to a deduction with respect to such taxes in 2020.
The CARES Act provided for a new employer payroll tax credit is known as the Employee Retention Credit (ERC). The credit is designed to assist eligible employers who have kept employees on their payroll despite experiencing economic hardship resulting from the economic impacts of the COVID-19 virus. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Please see our previous Our Thoughts On article CARES Act - The Employee Retention Credit.
Eligible employers report qualified wages on their quarterly federal employment tax returns (Form 941) and reduce the employer’s share of social security tax otherwise required to be deposited. The credit may also be refundable to the extent that the credit exceeds the employer-portion of social security taxes required to be deposited.
This credit is not eligible for taxpayers who have received a PPP loan. However, this should provide short-term liquidity opportunities for larger employers or other businesses that did not qualify for PPP loans or those who have returned PPP loans.
Separately, reinstated is the alternative fuel tax credit. This is detached from the CARES Act. Taxpayers wishing to claim credits for the use of alternative fuels such as liquefied petroleum gas (propane) may file a single Form 8849 to claim the propane use for tax years 2018 and 2019. As a reminder, this refund claim must be filed by August 11, 2020.
Tax Planning Opportunities
The CARES Act potentially provides cash flow and liquidity opportunities resulting from changes in tax law. Following are some of the changes that may benefit businesses and their owners:
The CARES Act temporarily provides for a carryback of losses originating in tax years 2018, 2019 and 2020. Taxable losses realized in these years may be carried back five years to recover taxes previously paid. Keep in mind that tax rates were generally higher in tax years prior to 2018 (pre-Tax Cuts and Jobs Act). See the following article for more information https://www.schneiderdowns.com/our-thoughts-on/cares-act-net-operating-losses
Individuals who reported pass-through business losses in 2018 or 2019 may have been subject to limitations in utilization pursuant to IRC Section 461(l). The CARES Act temporarily suspends this limitation and allows full utilization of business losses incurred in 2018, 2019 and 2020. In addition to allowing full use of these losses against other categories of income reported in these tax years, any excess may be eligible to be carried back to a previous tax year, potentially at higher tax rates. For more information, see https://www.schneiderdowns.com/our-thoughts-on/cares-act-business-loss-limitation
The CARES act amends IRC Section 53(e) to remove the gradual refunding of taxpayers’ AMT credits over four tax years (2018-2021) and to provide for a full refundable credit for the taxpayer’s tax year beginning in 2019. Alternatively, taxpayers may make an election to take the entire refundable credit in 2018. This will accelerate the refund of accumulated AMT credits that would otherwise be refundable over the next three tax years. For more on the potential AMT tax refund opportunity, please see Our Thoughts On article CARES Act - Modification of Credit for Prior Year Minimum Tax Liability of Corporations
Qualified Improvement Property was updated to be eligible for 100 percent bonus depreciation by making it 15-year property. Prior to the CARES Act, this property was depreciated over 39 years, and not eligible for bonus depreciation. For taxpayers not revoking an ADS method elected in tax year 2018, taxpayers can make late elections utilizing an accounting method change to take the cumulative adjustment on the 2019 tax return. Otherwise, taxpayers may amend 2018 returns if it proves more beneficial.
Paycheck Protection Program
We have many articles regarding the PPP. According to the Small Business Administration, as of Thursday, May 7, 2020, about 40% of the money (in excess of $100 million) remained available from the second tranche of loans.
Please contact your Schneider Downs tax advisor if you have any questions or would like to discuss the provisions of the CARES Act.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.