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Business Tax Credits

Business strategy meeting

1. Employee Retention Tax Credit

To help employers (including tax-exempt organizations) affected by the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748) provides for an employer federal tax credit against the Social Security portion of payroll tax that the employer pays. The act applies to wages paid from March 13, 2020, through December 31, 2020, and is available to qualified employers, which are employers who carried on a trade or business during 2020 and 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% compared to the same quarter in the prior year.

The amount of the tax credit is equal to 50% of the first $10,000 in qualified wages (including health benefits) paid to each employee, up to a maximum tax credit of $5,000 per employee. For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit. Qualified wages do not include sick leave wages or family leave wages paid pursuant to the Families First Coronavirus Response Act (H.R. 6201).

If the employer pays employee benefits that are greater than the amount the employer pays in the Social Security portion of payroll tax, the IRS will send the employer a check for the excess. The intent is for the employer to ultimately not pay out of pocket for any benefits owed to employees under the act. However, the payroll tax credit is available to employers quarterly, so the employer will have to front the benefits to employees and then be reimbursed. Employers also can elect not to apply the new provision.

This is not available to anyone who claims the Paychex Relief Program.

 

2. Delayed Payroll Tax Payments

Companies will be able to delay paying their portion of payroll taxes to the IRS.

They will still be collecting workers’ share through paycheck withholding.

Qualifying companies will be able delay their share of Social Security payroll taxes to the IRS. They would be delayed until Jan. 1, 2021, with 50% owed by the end of 2021 and the other half due Dec. 31, 2022. Companies’ share of the Medicare payroll tax will still be due as usual.

 

3. Carryback of NOLs from 2018, 2019 and 2020 to the past five years

The CARES Act defers the effective date of Section 461(l) for three years, but also makes important technical corrections that will become effective when the limitation on excess business losses once again becomes applicable. Accordingly, net business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code. Beginning in 2021, the application of this limitation is clarified with respect to the treatment of wages and related deductions from employment, coordination with deductions under Section 172 (for net operating losses) or Section 199A (relating to qualified business income), and the treatment of business capital gains and losses.

 

4. Increase in amount of business interest expense

The CARES Act increases the amount of deductible business interest expenses by easing the limitation from 30 percent to 50 percent of EBITDA for tax years beginning in 2019 and 2020, and by permitting businesses to elect to use their 2019 EBITDA to determine their 2020 business interest deduction. For partnerships, the 50 percent limitation will apply to income earned in 2020 (but not 2019), and for 2019, 50 percent of the excess business interest allocated from the partnership to the partner will be treated as business interest paid in 2020 (and not subject to the business interest deduction limitation) and the remaining 50 percent will continue to be subject to the 30 percent limitation but can be carried forward.

 

5. Immediate ability to deduct real property improvements

Quality Improvement Property – defined as any improvement made to the interior portion of a nonresidential building any time after the building was placed in service. The CARES Act provides a reduction from 39 years to a 15 year life.  The changes can be made retroactive to January 1, 2018. Taxpayers should be entitled to file amended returns to reap the benefits of accelerated depreciation in 2018 and 2019. Any net operating loss generated by the additional depreciation may be carried back for up to five years to recover taxes previously paid.