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Tax and Business Implications with COVID and the CARES Act, HR 748

Author: Jamison Walters, Edited by Jason Klein and Blaire Farine

Economic Impacts of COVID-19 and Solutions

The U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act), H.R. 748 on March 25, 2019. This is a $2 trillion aid package intended to help the economy as it progresses through the effects of the coronavirus pandemic. The bill is over 800 pages and has a sister document from the U.S. Senate Appropriations Committee that is over 200 pages. This brief article is intended to pull out some of the more relevant measures that pertain to business, generally. Naturally, in such major acts of Congress, the details will matter for each individual case as to how these measures may apply. Those who need help are highly encouraged to contact the attorneys here at Kearney, McWilliams, and Davis to help.

Paycheck Protection Program

The Paycheck Protection Program under Section 1102 of the CARES Act incentivizes small and medium-sized businesses to continue paying workers and providing benefits (including health, sick leave, family leave, etc.) through a partially forgivable loan arrangement that covers salaries, insurance, rent, among other items.

A small business concern under this Act, generally, is one that is independently owned and operated and not dominant in its field of operation. However, the definition for “small business concern” runs dozens of pages and if you are unsure if you qualify, we can help make that determination.

Regardless of the typical small business definition, the CARES act expands the eligible businesses to include any business, non-profit organization, veterans organization, or Tribal business concern if said organization employs less than 500 individuals or the specific “size standard” established by the appropriate Administration that covers the specific organization. This is again an individual determination that Kearney, McWilliams and Davis can help our clients navigate.

The time to complete a loan application runs from February 15, 2020 until June 30, 2020. Keep in mind that many of the tax related programs are excluded for businesses that utilize the Paycheck Protection Program. It is important to determine which of these will be most beneficial in the end.

Payroll Tax Credit Refunds

For companies fully or partially prohibited from operation during crisis, Section 2302 delays payment of employer payroll taxes. This bill allows for advance refunding of the payroll tax credits enacted in the prior Families First Coronavirus Response Act (P.L. 116-127). Required paid sick leave and credit for required paid family leave can be refunded in advance using IRS provided forms. The IRS will also waive any penalties for failure to deposit payroll taxes per Sec. 3111(a) or 3221(a) so long as the failure was due to an anticipated payroll tax credit. The payroll tax deferral period starts with the passing of the CARES Act and ends by January 1, 2021. This Section does not apply to those who have debt forgiven under the Paycheck Protection Program.

Payroll Tax Delay

Section 2302 also allows a delay in payments of payroll taxes. This delays payment of 50% of 2020 employer payroll taxes until December 31, 2021. The remaining 50% will become due December 31, 2022. An employer will be treated as having “timely made all deposits” for all taxes during the deferral period as long as the payments are made by these adjusted due dates. Self-employed individuals who pay self-employment taxes should be covered under this same provision. Note that this is a delay not a holiday—taxes will still ultimately be owed. Again, this Section does not apply to those who have debt forgiven under the Paycheck Protection Program.

Carryback Losses Allowed

Section 2303 modifies rules for net operating losses for 2018, 2019, and 2020 by allowing carryback losses for up to five years. Net operating losses will not be subject to the taxable income limit and companies may fully offset income.

Employee Retention Credit

For businesses forced to close during the pandemic, eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages, up to $10,000 for each employee. This is covered under Section 2301. Eligible employers are employers who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 emergency. Additionally, eligible employers are also those that have a “significant decline” in gross receipts which are less than 50% of their gross receipts for the same calendar quarter in the prior year are also eligible, and remain qualified until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year.

For employers with more than 100 employees, eligible wages for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts (being paid for not working to “retain” the employee on payroll). For employers with 100 or fewer employees, all wages paid qualify for the credit whether services continue or not.