Tax credits, extensions and deferrals will help businesses cope with COVID-19 burden

In the midst of the coronavirus (COVID-19) pandemic, businesses of all sizes are concerned with either how to keep operations going or how to start them back up. To ease the financial burden, business owners are looking toward government aid, especially tax relief. In the third webinar from Baker Tilly’s four-part business resiliency series, tax professionals discuss the many tax-related opportunities created in the wake of COVID-19.

The Families First Coronavirus Response Act (FFCRA) along with the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted a number of significant relief measures and taxpayer-friendly provisions, including several new tax credits, payroll tax deferrals and helpful extensions and deductions.

Tax credits

The employee retention credit is a refundable tax credit that encourages employers to keep employees on their payroll for the balance of 2020. To be eligible, employers that carried on their trade or business during the 2020 calendar year must either fully or partially suspend operations because a governmental authority: 1) limited commerce, travel or group meetings due to the coronavirus; or 2) experienced a substantial decline in gross receipts. The amount of the credit that is refundable is 50% of the first $10,000 of qualified wages (i.e., the maximum credit is $5,000 per employee). It applies to wages paid from March 13 to Dec. 31, 2020. Additionally, qualified wages are determined by the size of the company.

Employers should know, if they take a small business loan under the Paycheck Protection Program (PPP) or claim the Work Opportunity Tax Credit (WOTC), they cannot also take an employee retention credit. And they may not use the same wage expenses used to qualify for the employer credit for paid family and medical leave under section 45S.

Furthermore, employers cannot use those same wage expenses toward the two medical leave credits enacted as part of the FFCRA – one is designated for emergency paid sick leave, and one for emergency paid family and medical leave. These medical leave credits apply to employers with fewer than 500 employees. They are refundable payroll taxes and effective for wages paid between April 1 and Dec. 31, 2020. Employers can only claim one of these credits and may not use the same wage for other credits, for example, the employee retention credit.

The sick leave credit is capped at $5,110 for an employee who is sick and/or quarantined due to the coronavirus, or $2,000 for an employee caring for either a sick and/or quarantined individual or a minor child whose school has been closed or whose child care provider is unavailable, due to the coronavirus. The family and medical leave credit is capped at $10,000 for an employee who is caring for a minor child whose school has been closed, or whose child care provider is unavailable, due to the coronavirus.

For more information about these tax credits, download our coronavirus benefit coordination matrix.

Payroll tax deferral

The CARES Act payroll tax deferral is perhaps the fastest cash relief for companies, as it allows employers to defer the deposit and payment of the employer’s share of Social Security taxes on wages normally due from March 27 through Dec. 31, 2020. Similarly, self-employed individuals can defer paying half of the Social Security tax due on their net self-employment income earned during the same period. Note: To be considered timely and to avoid penalties, employers and self-employed individuals must pay half of these deferred taxes by Dec. 31, 2021, and the remainder by Dec. 31, 2022.

Employers who have had a PPP loan forgiven cannot participate in a deferral; however, IRS guidance clarified PPP loan recipients can use the deferral up until the time they are notified their loan has been forgiven.

CARES Act changes to the Tax Cuts and Jobs Act

With the CARES Act, Congress made some major changes to parts of the Tax Cuts and Jobs Act (TCJA), including fixing the “retail glitch” and modifying or delaying several “revenue-raisers.”

The so-called retail glitch was a drafting error in the original TCJA that omitted the 15-year recovery period for qualified improvement property (QIP). The CARES Act added new language that defined QIP as 15-year property and made it retroactive to 2018. This correction is especially valuable for retail and restaurant owners. (For more on bonus depreciation, read our recent tax alert.)

The TCJA created a number of provisions intended to raise revenue to help pay for a lower corporate tax rate, and the CARES Act altered or delayed many of those. Specifically, the CARES Act:

• Increased the business interest expense deduction limitation to 50% of adjusted taxable income (ATI)
• Allowed net operating losses (NOLs) to offset 100% of taxable income for 2018, 2019 and 2020
• Allowed NOLs arising in 2018, 2019 and 2020 to be carried back five years
• Delayed the section 461(l) business loss limitation rule that restricted business losses for noncorporate taxpayers in 2021

These are positive changes for taxpayers, but, since many are retroactive to 2018, taxpayers will need to amend returns, revoke elections, make accounting method changes and take other actions in order to receive their refunds. Given the complexity, careful consideration and modeling should be performed prior to action.

Claiming benefits

The IRS released guidance addressing the administrative difficulties businesses will face when filing amended returns in order to claim tax benefits from the CARES Act. The IRS has released separate guidance for partnerships and C corporations.

If the business is a partnership and subject to the centralized partnership audit regime (CPAR), the IRS issued Rev. Proc. 2020-23 to help those partnerships take advantage of CARES Act relief and other adjustments more quickly.  Under the CPAR rules, partnerships cannot amend to correct prior years; however, under this new guidance, CPAR partnerships are permitted, for a limited time, to amend 2018 and 2019 returns. Amended returns must be filed before Sept. 30, 2020. Alternatively, CPAR partnerships can file an administrative adjustment request (AAR); the deadline to file an AAR is Oct. 15, 2021. Be careful with AARs, though – the benefit of adjustments passed through to partners may be lost if the partners are already in a loss position, or do not have income from other sources to full absorb the additional loss.

Most amended tax returns for businesses organized as C corporations have to be filed by mail. As of April 22, the IRS is not opening mail and all service centers are closed; therefore, the IRS is allowing C corporations to file Form 1139, a quick claim for refund, via fax. Because hundreds of pages will need to be faxed and data needs to be input into the IRS’ system before a return is processed, there is some doubt about how quickly refunds will be issued. If a C corporation needs a refund soon, we recommend soliciting assistance from the IRS Taxpayer Advocate Service and documenting why the refund is needed. 

State and local considerations

Almost all states provided an extension to file and/or pay 2019 returns in line with the federal extension of July 15, 2020. Typically, interest will start to accrue July 16, 2020. If a taxpayer needs additional time to pay a tax bill, most states will consider a short-term payment plan, but we recommend reaching out to the state’s revenue department as soon as that need is known, as most government offices are closed and it may take some time to receive a response from appropriate revenue personnel.

Unfortunately, many states have been less generous with 2020 relief on paying quarterly estimated taxes. For the most part, if a state granted a delay to pay, it has been for first-quarter payments only, with few exceptions. The second-quarter due date is June 15 for most states, and if a taxpayer’s state hasn’t announced an extension yet, it can be assumed the state is not going to, especially as the majority of states are predicting significant tax revenue shortfalls.

Taxpayers should remember the states in which they do business may not automatically adopt, or “conform” to Internal Revenue Code (IRC) amendments, such as the CARES Act’s provisions. In fact, even states that typically conform to federal tax changes can “decouple” or decide not to adopt specific aspects of the code or, in this case, the CARES Act.

In many cases, states will need to enact legislation to adopt certain aspects of the CARES Act, including the changes to bonus depreciation, the business interest deduction limitation and the NOL carryback, and it may take months before that happens.

Overall, states are recognizing the difficulties companies are experiencing to remain operational during this crisis and are making concessions where they can. For instance, the majority of states have frozen debt collection and/or understand delay in responding to audit inquiries and activities. Some have issued guidance stating employees working remotely during the pandemic are not creating nexus in the state. A few states, like California, are allowing additional time to file a refund claim or an appeal.

For more on states’ reactions to the coronavirus, view the matrices Baker Tilly’s state and local tax team created to track the ongoing changes states are making to business, sales and use, and individual taxes. You may find the most up-to-date matrices on our state and local tax coronavirus resources page.

Information contained here is current as of April 22, 2020. Please consult with your tax advisor for the most current information.

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

Baker Tilly COVID-19 support

Baker Tilly is ready to help you with practical advice on informing and supporting your employees as well as keeping your business running.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.