On March 27th 2020, President Trump signed into law the Coronavirus Aid Relief and Economic Security (“CARES”) Act which contains certain US tax relief, low interest and forgivable loans and other direct subsidies to US businesses and individuals to deal with COVID-19. These measures could provide relief for our US clients so we should make them aware of these measures.
Given the complexity of these measures and the fact that the programs are being updated regularly, it is strongly recommended clients regularly visit the relevant government websites to get up-to-date information on available programs.
This post is only intended to provide an overview of the measures available at time of publishing. Please see the links below for additional information.
Relaxing of net operating loss carryback provisions
- Under current US law, businesses cannot carry-back net operating losses (“NOLs”) to recover taxes previously paid but can only carry them forward indefinitely to reduce taxable income by up to 80%.
- The CARES Act suspends this 80% limitation and also allows businesses to carry back their NOLs for their 2018, 2019 and 2020 years for up to 5 years.
- Therefore, we should review our client base to determine whether such businesses have had losses in 2018, 2019 and 2020 and amend their prior-year returns to carry-back these losses to recover taxes previously paid.
Relaxing of interest deduction provision
- A company’s interest deduction is currently limited to 30% of its earnings before interest, tax, depreciation and amortization (“EBITDA”). The CARES Act retroactively increases that limitation to 50% of EBITDA for the 2019 and 2020 years.
- Therefore, any of our US clients that have had their interest deduction limited in 2019 or 2020 under the current rules should refile their US tax returns to increase their interest deductions to 50% of EBITDA.
Loan under the Payment Protection Program (“PPP”)
- This program provides loans to small and medium-sized businesses with fewer than 500 employees up to 2 1/2 times an eligible businesses average monthly payroll costs (subject to a $10 million cap).
- The loan is being provided through the small business administration (“SBA”) program approved lenders and is it a loan due in two years, barring interests at 1% per year and on which loan payments are deferred for 6 months and which do not require any collateral or personal guarantees.
- Allowable uses of these loans include the payment of payroll costs, employee salaries, mortgage rent and utility payments and interest on any debt obligations incurred before the covered period.
- A portion of the loan up to 8 weeks of payroll costs, mortgage and rent obligations and utility payments may be forgiven. The forgiven amount will be reduced if the loan funds are used for anything other than the above costs for the first 8 weeks after obtaining the loan, if the business decreases its full-time employee headcount or it decreases salaries and wages by more than 25%.
- If a business obtains a loan under the PPP program, then it will not be eligible for the Employee Retention Credit.
Low Interest Economic Injury Disaster (“EIDL”) Loans
- Small business owners that have fewer than 500 employees are also eligible to apply for the low interest EIDL up to $2 million to provide economic support to overcome the temporary loss of revenue due to COVID-19.
- Applicants may request an advance of $10,000 which must be used to provide sick leave to employees, maintain payroll to retain employees, to cover increased cost of materials due to interrupted supply chains, to make rent or mortgage payments or to repay other obligations that cannot be met due to COVID-19 losses.
- An applicant will not be required to repay this advance if it is used for these purposes, even if they are subsequently denied a loan under the EIDL program. Qualified businesses can apply on the SBA website.
- Businesses can apply for this program in addition to the loan under the PPP.
Employee Retention Credit
- The CARES Act also provides a credit equal to 50% of qualified wages paid to employees by eligible employers:
- any employer carrying on a trade or business in 2020 where the operation is fully or partially suspended during the quarter due to orders from a governmental agency limiting commerce, trade or meetings due to COVID-19, or
- where the trade or business experiences a 50% or more decline in gross receipts when compared to the comparable period last year.
- For small to medium-sized businesses with 100 or fewer employees, the credit is on all employee’s wages capped at $10,000 per employee for all quarters.
Individual Tax Deadlines
- The federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020.
- Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.
- Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the July 15 deadline, can request a filing extension by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Businesses who need additional time must file Form 7004.
- Filing and payment deadlines questions and answers: https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers
- As state filing and payment due dates may not be automatically extended to match the federal dates, state requirements should be reviewed on a state by state basis.
- Economic Impact Payments
- Individuals that filed a 2018 or 2019 tax return will automatically receive up to $1,200 and up to $500 per qualifying child.
- Amounts will be distributed automatically, with no action required for most people.
- Certain income threshold limitations apply. (see attached)
- If the IRS does not have direct deposit information, a portal will be setup to allow taxpayers to provide those details.
- Social Security beneficiaries who are not typically required to file tax returns will not need to file to receive a payment. Instead, recipients will receive these payments as a direct deposit or by paper check, just as they would normally receive their benefits
Please speak to your DMCL advisor about your circumstances and to understand the tax impact on you or your organization.