Now that some of the dust has settled around the pandemic, it’s time to revisit the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that apply to businesses. Even if you have already filed your tax returns, these provisions can help you save additional money to support your business through the unpredictable challenges that lie ahead.
As an incentive to keep employees on the payroll, the Treasury Department and the IRS launched the Employee Retention Credit program, which is open to all businesses except state and local government and small businesses that take out small business loans. Therefore, any company that took out a PPP loan is ineligible.
The Employee Retention Credit is based on the number of employees you had in 2019 and applies to wages paid (including a portion of healthcare costs) between March 21, 2020, through January 1, 2021. As such, you will receive 50% of all qualifying wages paid up to $10,000 per employee per quarter. If you had less than 100 employees in 2019, the credit amount is based on wages paid to all employees regardless of employment status. If you had more than 100 employees in 2019, the credit is only allowed for salaries paid to employees who did not work during that period of time. Qualifications are calculated quarterly.
Businesses are permitted to defer their 6.2% employer share of social security tax due between March 27, 2020, and January 1, 2021, for up to two years. Half will have to be paid by December 31, 2021, and the remainder is due by the end of 2022. You can also defer your social security share before utilizing the employee retention, and Families First Coronavirus Response Act (FFCRA) credits against employment taxes. You can report the deferral using IRS Form 941.
In addition to a six-month filing extension, now businesses and partnerships have relief with respect to their net operating losses. The CARES Act now allows for a five-year carryback of NOLs arising in 2018, 2019, or 2020. The CARES Act also disregards specific amounts of foreign income subject to transition tax that would typically be included as income and has revised procedures for waiving, reducing or revoking an election to waive a carryback period. Regarding partnerships, eligible companies can file amended partnership returns. For more detailed information, visit the IRS website.
The CARES Act increased the limitation on business interest deductions from 30% to 50% of the taxpayer’s adjusted taxable income for 2019 and 2020. As a result, businesses can amend their 2019 tax return and base their 2020 on their 2019 year to earn a more significant deduction if they anticipate a lower taxable income in 2020. It’s important to note that the 50% deduction does not apply to partnerships operating in 2019; it only applies to 2020.
The CARES Act corrects the Tax Cuts and Jobs Act (TCJA) error, also known as the “Retail Glitch” by defining qualified improvement property (QIP) as 15-year property, which allows businesses to apply 100% bonus depreciation to QIP. The TCJA passed in 2017 eliminated qualified leasehold improvement property, retail improvement property, and restaurant property and replaced it with a broader definition known as QIP. This change inadvertently made these three real property categories ineligible for bonus depreciation. With this correction in the CARES Act, any non-residential property improvements are eligible with certain limitations. The bonus depreciation may impact NOLs, so check with your accountant. If you already filed your 2019 or 2020 tax returns, you can amend your return or file IRS Form 3115 with your next tax return.
The CARES Act ordered a temporary waiver that no longer requires plan participants who are 70 ½ years or older to take their minimum distributions for 2020. Additionally, participants who have been diagnosed with COVID-19 or have “adverse financial circumstances” can withdraw up to $100,000 from their 401(k) without the usual 10% penalty and without being taxed if the disbursement is paid back within three years. The CARES Act did not extend the filing deading for Form 5500, which was due July 31. However, you have until October 15 to complete and file your annual 401(k) audit without IRS penalty. Here are the requirements for the 401(k) audit.
If you need assistance with your 401(k) audit or understanding the provisions of the CARES Act, PriceKubecka has a 20-year tenure in helping businesses manage complex financial transactions.