Employee retention credit for employers (Act Sec. 2301(a))
The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
It is important to note that if an employer takes out a payroll protection loan under Section 7(a), no employee retention credit will be available.
Delay of payment of employer payroll taxes (Act Sec. 2302(a)(1))
The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
For self-employed individuals, the same deferral extends to 50% of the Social Security taxes imposed under the Self-Employed Contributions Act.
Also note, this deferral is not available to any business that takes out a payroll protection loan that is forgiven.
Temporary repeal of taxable income limitation for net operating losses (NOLs) (Code Sec. 172(a), as amended by Act Sec. 2303(a)(1))
NOLs are currently subject to a taxable income limitation. They can only offset 80% of your taxable income. This was a change put in place by the 2017 Tax Cuts and Jobs Act (TCJA)
The CARES Act temporarily removes the taxable income limitation to allow an NOL to fully offset income. Losses carried to 2019 and 2020 will be permitted to offset 100% of taxable income as opposed to the 80% previously mentioned.
Modification of rules relating to net operating loss (NOL) carrybacks. (Code Sec. 172(b)(1) as amended by Act Sec. 2303(b)(1))
Currently, the law does not allow NOLs to be carried back to preceding tax years.
The CARES Act modifies the law to allow NOLs from 2018, 2019 and 2020, to be permitted to be carried back for up to five years. As was previously the case, a taxpayer will be permitted to forgo the carryback, and instead carry the loss forward.
Modification of limitation on losses for noncorporate taxpayers. (Code Sec. 461(l)(1), as amended by Act Sec. 2304(a))
The TCJA created code section 461(l) which provides that the amount of “net business loss” an individual may use in a year to offset other sources of income is capped at $250,000 (if single; $500,000 if married filing jointly). Any excess loss is converted into a net operating loss.
The CARES Act, however, suspends Section 461(l); not only for 2020, but retroactive to January 1, 2018. As a result, a taxpayer who had a loss limited by the provision in 2018 or 2019 can file an amended return to claim a refund.
These new rules can be complicated and at times hard to understand. We encourage you to seek out advice before making a decision. The GMP staff are up to date on the new rules and are available to help guide you through the complicated details that could benefit you and your business. Click here to set up a time to talk with a member of the GMP staff.
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