The Coronavirus Aid, Relief, and Economic Security (CARES) Act will provide roughly $2.2 trillion in financial relief to individuals, businesses, not-for-profit organizations, and state and local governments in response to the coronavirus (COVID-19) pandemic.
Summarized below are certain key business income tax provisions of the CARES Act, including those which temporarily scale back provisions enacted in the 2017 Tax Cuts and Jobs Act (“TCJA”).
Modifications to Net Operating Losses (“NOLs”)
The CARES Act provides that NOLs arising in a tax year beginning after December 31, 2017, and before January 1, 2021, can be carried back to the five previous tax years. Previously, NOLs arising in these tax years were prohibited from any carryback as a result of the TCJA. The NOL carryback provision applies to both C corporations and individuals. As a result, there may be opportunities to file NOL carryback claims and request refunds for the 2018 and 2019 tax years, which were previously precluded.
In addition, the CARES Act suspends the 80 percent taxable income limitation for years beginning before January 1, 2021, and allows a full offset against taxable income. The TCJA had imposed a limitation of 80 percent of pre-NOL taxable income. For tax years after 2020, the 80 percent limitation is reinstated with favorable modifications that increase taxable income by the taxpayer’s qualified business income deduction and Global Intangible Low-Taxed Income (GILTI) deduction.
Business Tax Losses Sustained by Individuals
The CARES Act suspends the “excess business loss” limitation previously imposed on taxpayers beginning in 2018. The TCJA prevented taxpayers with losses in excess of certain thresholds from claiming them and instead they were carried forward as a NOL. The limitation was $500,000 for joint filers and $250,000 for others. The CARES Act eliminates this limitation for taxpayers who generated an excess business loss in 2018. These individuals can now either (1) claim the previously limited loss on the 2019 return or (2) file amended 2018 return and claim the loss.
Accelerated Refunds of Corporate Alternative Minimum Tax (“AMT”)
The TCJA repealed the corporate AMT. As a result, certain taxpayers had minimum tax credit carryforwards from prior year returns to the extent that the tentative minimum tax exceeded regular tax. The law allowed the minimum tax credit to be claimed on returns for tax years beginning after 2017 and before 2022 using a prescribed formula.
The CARES Act allows corporations with minimum tax credit carryforwards to claim a refund for the entire amount of the minimum tax credit beginning in either 2019 or 2018 (by election) instead of recovering the credit through refunds over a period of years.
Interest Limitation Easing
The CARES Act makes several changes to the business interest limitations imposed by the TCJA which will allow taxpayers the ability to deduct more interest expense.
The business interest expense is subject to a 50 percent limitation of adjusted taxable income, which has been increased from a 30 percent limitation. The tax year that this provision is effective depends upon the taxpayer type. For partnerships, the 50 percent limitation is effective for tax years beginning in 2020. For all other taxpayers, the change applies to tax years beginning in 2019.
Further, the CARES Act provides a partner the ability to treat 50 percent of the 2019 allocable share of the excess business interest as NOT subject to the limitation on the 2020 return. The remaining 50 percent of the 2019 allocable share will be subject to the limitation.
Finally, for taxable years beginning in 2020, taxpayers may elect to use their 2019 adjusted taxable income amount for purposes of the calculation. This provision is intended to benefit taxpayers whose 2020 income is less than 2019.
Qualified Improvement Property
The CARES Act fixes a TCJA drafting error for real estate qualified improvement property (“QIP”). Specifically, although Congress intended to permanently install a 15-year recovery period in the 2017 TCJA, a drafting error resulted in QIP not being added. As a result, QIP was left subject to a 39-year recovery period and not eligible for first-year bonus depreciation. The CARES Act retroactively corrects this drafting error and allows first-year 100 percent bonus depreciation to QIP. As a result, there may be opportunities to file amended returns to claim higher deductions for the 2018 and 2019 tax years which were previously precluded from QIP.
QIP is defined as an improvement to an interior portion of a non-residential building that is placed in service after the date the building is first placed in service. It doesn’t include any improvement for which the expenditure is attributable to the enlargement of the building; an elevator or escalator; or the internal structural framework of the building.
Charitable Deductions for Corporations
In general, a C corporation’s charitable deduction cannot exceed 10 percent of taxable income, adjusted for certain modifications. Under the CARES Act, a C corporation is now entitled to deduct qualified charitable contributions of up to 25 percent of taxable income for tax years beginning after December 31, 2019. The anticipated reduction in corporate taxable profits caused by the COVID-19 pandemic allows more deductions.
An exception to the C corporation charitable deduction limitation of 10 percent is food inventory, which is generally subject to a limitation of 15 percent of taxable income. The taxable income limitation has been expanded to 25 percent for charitable contributions of food during 2020.
Income Tax Deadline Deferrals
On March 21, the Treasury Department and Internal Revenue Service issued Notice 2020-18 which allows taxpayers with income tax returns and payments due on April 15, 2020, to postpone the deadline until July 15, 2020. The postponement includes the first quarter estimated tax payment due on April 15, 2020.
On March 28, 2020, the Tax Commissioner of New York State issued Notice N-20-2 that delays the April 15, 2020, filing deadline until July 15, 2020, for New York State personal income tax and corporation tax returns. Specifically, the extension applies to individuals, fiduciaries (estates and trusts), and corporations taxable under Tax Law Articles 9, 9-A, and 33. In addition, the related tax payments are also postponed to July 15, 2020, without penalties and interest, regardless of the amount owed.
As a result of this deferral, taxpayers that have qualified retirement plan contributions for which the due date for filing federal income tax returns would have been April 15, but has been postponed until July 15, 2020, are allowed additional time to fund contributions to qualified retirement plans.