News / April 7, 2020 Tax Provisions in the CARES Act & IRS Guidance to Allow Immediate or Relatively Near Term Cash

By Ryan Gardner
Tuesday, April 07, 2020

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This message is part of a series of educational emails relating to issues likely to be considered, or faced, by many businesses and business owners this year as a result of the COVID-19 pandemic and the collapse of energy prices. As previously noted, topics to be discussed as part of this series include: (a) strengthening cash positions; (b) business recapitalizations in connection with new capital infusions (i.e., third party bail outs); (c) debt capital restructurings; (d) structuring business exit/sales; and (e) estate planning opportunities. 

As noted last Monday, March 30, 2020, H.R. 748, the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” was recently passed by the federal government in an attempt to stimulate the economy and provide financial support to employers and employees. Last week, our discussion relating to the CARES Act was primarily centered around the Payroll Protection Program, and the related government backed, non-secured, forgivable loan. Given that this payroll loan will essentially amount to free money (with no repayment obligation) in most cases, if you are a small business and have not already begun applying for this loan, it’s not too late, but you should begin taking the required steps immediately as the amount of money allocated or earmarked to this program is limited. This week, we are going to highlight certain other key tax provisions or rules: (a) arising from the CARES Act; and/or (b) issued by the U.S. Treasury; that could help free up cash for your business in the near term.

The most simple and obvious items that you need to be aware of, and that may allow you to defer the payment of taxes, and/or to obtain immediate cash without being subject to immediate taxation with respect to same include:

• Deferring payments of certain 2019 taxes due on April 15, 2020 to July 15, 2020 pursuant to IRS Notice 2020-18 and IRS Notice 2020-20. This relief is available for: (a) Federal income tax payments (including payments of tax on self-employment income) due on April 15, 2020; (b) Federal estimated (i.e., 2020) income tax payments (including payments of tax on self-employment income) due on April 15, 2020; and (c) Federal gift and generation-skipping transfer tax payments due April 15, 2020;

• Deferring the payment of the employer portion of the Social Security tax (and ½ of self-employment taxes relating to old-age, survivors and disability insurance (i.e., Code Section 1401(a)), which is the counterpart to Social Security Tax for self-employed individuals) from payroll beginning on or after March 27, 2020 and ending before January 1, 2021, until December 31, 2020 and December 31, 2021 (with 50% of such deferred taxes due on each such date) as provided in Section 2302 of the CARES Act. Limitations apply including a taxpayer may not use this provision if any of its loan is forgiven under the Payroll Protection Program; and

• Under certain circumstances, withdrawing or borrowing up to $100,000 from eligible retirement plans (see Code Section 402(c)(8)(B) for eligible retirement plans) during 2020 as provided in Section 2202 of the CARES Act. 

The CARES Act contains a number of other more complicated provisions/rules that may provide you or your business with the opportunity to defer or minimize other tax payment obligations and/or obtain tax refunds, thereby improving near-term cash positions. The following list is a summary of certain of those rules and opportunities:

• Code Section 172 generally provides that a net operating loss (NOL) for any tax year: (a) must be carried forward to each tax year following the tax year of the loss but shall not be carried back to any tax year preceding the tax year of the loss; and (b) is limited to 80% of taxable income, computed without regard to the NOL deduction for such taxable year. Section 2303 of the CARES Act, allows a NOL arising in a tax year beginning in 2018, 2019 or 2020 to be carried back five years, as well as carried forward. Section 2303 of the CARES Act also temporarily removes the taxable income limitation (i.e., the 80% of taxable income) for tax years beginning in 2018, 2019 or 2020 to allow a NOL to fully offset income, and for years prior to 2018, such years were not subject to this income limitation;

• Code Section 461(l)(1) generally disallows the deduction of excess business losses by noncorporate taxpayers for tax years beginning after December 31, 2017 and ending before January 1, 2026. An excess business loss is the excess of: (a) the taxpayer’s aggregate trade or business deduction for the tax year; LESS (b) the sum of the taxpayer’s: (i) aggregate trade or business gross income; PLUS (ii) $250,000 ($500,000 in case of taxpayer filing a joint return). Disallowed excess business losses generally are treated as a carryover NOL and are part of the following year’s NOLs. Section 2304 of the CARES Act temporarily modifies the above limitation so that noncorporate taxpayers can deduct excess business losses arising in a tax year beginning in 2018, 2019 and 2020;

• Code Section 163(j) generally limits (except in case of certain smaller businesses) the amount of business interest allowed as a deduction to an amount equal to the sum of the taxpayer’s business interest income plus 30% of the taxpayer’s adjusted taxable income. Section 2306 of the CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Section 163(j) from 30% to 50% for tax years beginning in 2019 and 2020. Special rules and further limitations apply to partnerships applying Section 2306 of the CARES Act, and special rules apply to S corporations under the general Code Section 163(j)(4)(D);

• The Tax Cuts and Jobs Act of 2017 amended Code Section 168 to allow 100% additional first-year depreciation (otherwise known as “100% bonus depreciation” under Code Section 168(k)) deductions for certain qualified property. The Tax Cuts and Jobs Act created the concept of “qualified improvement property” (generally defined in Code Section 168(e)(6)(A) and modified by the CARES Act to mean “any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in served after the date such building was first placed in service”). Qualified improvement property was intended to be 15-year property under Code Section 168(e)(3), but the Tax Cuts and Jobs Act failed to so provide. Therefore, such qualified improvement property became depreciable over 39 years and was ineligible for 100% bonus depreciation. Section 2307 of the CARES Act provides a correction to the Tax Cuts and Jobs Act, and specifically designates qualified improvement property as 15-year property for depreciation purposes, making it eligible for 100% bonus depreciation. Section 2307 of the CARES Act shall take effect as if included in the Tax Cuts and Jobs Act of 2017; and

• Finally, Code Section 53(e) generally provides that corporation’s alternative minimum tax credits are refundable for any tax year beginning in 2018, 2019, 2020 or 2021, in an amount equal to 50% (100% for tax years beginning in 2021) of the excess minimum tax credit for the tax year, over the amount of the credit allowable for the year against regular tax liability. Under Section 2305 of the CARES Act, the “2018, 2019, 2020 or 2021” reference noted above is changed to “2018 or 2019”, and the “(100% for tax years beginning in 2021)” reference noted above is changed to “(100% for tax years beginning in 2019”). Therefore, the CARES Act allows corporations to claim 100% of AMT credits in 2019. The CARES Act also provides for an election to take the entire refundable credit amount in 2018.

As a practical matter, the cumulative effect of the changes noted above could be extremely significant for many businesses and business owners. Specifically, 2020 is potentially shaping up to a be a “loss year” for many businesses. Given the relaxed limitations on loss deductibility (i.e., NOLs and excess business loss) and the more liberal rules relating to interest deductibility and 100% bonus depreciation for qualified improvement property, many businesses or owners thereof should be able to obtain a refund with respect to taxable years relating back as far as 5 years ago. For corporate taxpayers, the relaxed NOL carryback rules have the ability to create a significant tax rate benefit if sufficient income existed with respect to the corporate taxpayer’s 2015-2017 taxable years (as a result of change in corporate tax rates from 35% to 21% for taxable years beginning in 2018). Moreover, by timely filing certain IRS tax forms, certain corporate taxpayers may also be able to use the likelihood of 2020 losses and the relaxed NOL carryback rules to further delay 2019 tax obligation payments to IRS. 

The authors hope you find the foregoing insights helpful. Until next time, stay safe! 

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Next: March 30, 2020 Coronavirus and Cash Flow - Government Backed Forgivable Loan