The Tax Benefits Inside the CARES Act

Stimulus money, small business loans and grants for the airlines are only pieces in the massive relief package that is the CARES Act. Among other things, the package includes tax benefits to aid in business recovery from the economic disruption caused by the coronavirus pandemic. The cornerstone of the tax benefits, businesses are allowed to offset 100% of the prior year’s net operating loss. The carryback period has also been extended from three years to five years.

The relief package also includes a temporary payroll tax credit tax credit. “The temporary tax credit encourages employers to pay wages if their business is forced to fully or partially suspend operations due to a government order, or the business experiences more than a 50% decline in gross receipts as compared to the same calendar quarter in 2019,” Phil Jelsma, a partner at Crosbie Gliner Schiffman Southard & Swanson, tells GlobeSt.com. “The credit is on employment or payroll taxes equal to 50% of each employee’s qualified wages for the calendar quarter capped at $10,000 per employee for all calendar quarters taken together. If the employer has a 100 or fewer employees, all employee wages are considered qualified wages. For employers with more than 100 employees, qualified wages are limited only to those wages paid to employees who are not providing any services due to the operations being suspended by a governmental order.”

Finally, the benefits allow employees to defer employer-owed payroll taxes for taxes due from the end of March through the end of the year. “One-half or 50% of the deferred portion would be due on December 31, 2021 and the remainder on December 31, 2022,” explains Jelsma. “However, if the business has a Paycheck Protection Plan loan forgiven it is not eligible for the payroll tax deferral.

The CARES Act changes the limitation on the deductibility of business interest expense, which had previously been limited to 30% of a taxpayer’s adjusted taxable income which approximates earnings before interest, taxes depreciation and amortization—increasing it to 50%. ”All businesses are able to qualify for these benefits, if the business has been impacted by the pandemic. “These benefits are available to all businesses. The Act’s loan provisions do target specific industries but the tax provisions generally apply to all industries,” says Jelsma.

However, the benefits aren’t available until businesses file their 2020 tax return, which could be too late for some businesses. “Unfortunately, many of these benefits—principally the one involving net operating losses—can’t be realized until the business files a 2020 tax return,” says Jelsma. “By then, many businesses will have already folded and the ability to get previously paid taxes may not be significant enough to save them.”