The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed by President Trump on March 27, contains numerous income tax provisions impacting businesses. Some of these provisions have an immediate impact on 2019 tax filings and could require amendments to 2018 tax filings. Others are effective for tax years beginning in 2020.
Below is a summary of the business tax provisions included in the CARES Act.
It’s Time for a Celebration! Fix Provided For Qualified Improvement Property
The Tax Cuts and Jobs Act (TCJA) of 2017 amended the bonus depreciation rules to allow for 100% expensing of certain qualified property. A drafting error in that law led to qualified improvement property (defined below) being ineligible for 100% bonus depreciation. The CARES Act corrects the drafting error and specifically designates qualified improvement property as 15-year property. This allows it to qualify for 100% expensing.
Qualified improvement property is defined as any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date the building was first placed in service. The definition excludes the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
This correction is effective for property placed in service after December 31, 2017.
Net Operating Losses Can Be Used More Quickly
Carrybacks of net operating losses (NOLs) generated by businesses were eliminated by the TCJA. The CARES Act reinstates carrybacks of NOLs arising in tax years ending after December 31, 2017 and before January 1, 2021, and allows losses to be carried back five years. Corporations that were subject to a 35% tax rate before the TCJA reduced the corporate rate to 21% as of January 1, 2018 may benefit from carrying back NOLs.
Additionally, the CARES Act removes the limitation that NOLs can offset only 80% of taxable income, freeing up losses to offset 100% of taxable income. This is effective for tax years 2018, 2019, and 2020.
Business Interest Limitations Reduced
The TCJA limited the deductibility of business interest for taxpayers with gross receipts exceeding $25 million (adjusted for inflation). For these taxpayers, business interest expense was limited to the sum of 1) business interest income, 2) 30% of adjusted taxable income, and 3) floorplan financing interest expense. The CARES Act has increased the 30% limitation to 50% for tax years beginning in 2019 and 2020. Impacted taxpayers may elect out of this increase. Special rules apply to partnerships.
Corporations Can Claim Minimum Tax Credits Faster
The CARES Act accelerated the ability of corporations to claim minimum tax credits. It allows corporations to claim 100% of the credit in either 2018 or 2019 instead of over 4 years under previous law.
Deduction for Certain Charitable Contributions Increased
The deduction limitation on cash contributions made by corporations to qualifying charitable organizations during calendar year 2020 is increased from 10% of taxable income to 25% of taxable income.
Contributions by businesses of food inventory to qualified charitable organizations also benefit from an increased deduction limitation to 25% of taxable income for 2020 only.
Not an Income Tax Item but Still Good to Know: Employer Payments of Student Loans
The CARES Act expanded the definition of qualifying educational payments that an employer can make on behalf of an employee to include eligible student loan repayments. Employers can pay up to $5,250 of eligible student loan repayments per employee and exclude the payments from the employee’s income. This benefit is available from March 27 through December 31, 2020. Although this provision does not affect the income of the business, it allows companies to provide their employees with a valuable tax-free benefit.
A Reminder: Filing and Payment Deadline Extensions
Before the passage of the CARES Act, Treasury extended the April 15 deadline for filing federal income tax returns and making payments to July 15, 2020. The extension applies to payments of federal income tax and federal estimated tax payments due April 15. Corporations with income tax filing and tax payment deadlines on April 15, 2020 qualify for this 90-day extension.
On April 9, 2020, the IRS expanded this relief to include most federal income tax filings and payment deadlines due on or after April 1 and before July 15, 2020. This includes corporate estimated tax payments due on June 15, 2020, and expands this relief to fiscal year filers with due dates falling within this timeframe.
Conclusion
Navigating these changes will be challenging for businesses, but the CARES Act is intended to provide relief and free up cash flow to taxpayers. The IRS is issuing guidance frequently to assist taxpayers in addressing the business income tax provisions of the CARES Act. Taxpayers should consider whether it is necessary to amend tax returns filed before the enactment of the CARES Act due to the retroactive benefits provided. Please reach out to your Dean Dorton advisor to discuss how these changes may impact your business.
For more information on how the Coronavirus is impacting businesses across multiple industries, visit our COVID-19 resource page: