The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27, 2020, provides a number of tax changes that offer relief during the Coronavirus crisis. Three significant changes include:
1. Rollback of restrictions on using tax losses to recover taxes paid in profitable years,
2. Cash payments to individuals and families, and
3. Payroll tax credits and deferred payments.
Rollback of Restrictions on Tax Losses
Tax deductions in excess of income generate a tax loss. Prior to the CARES Act, you could not use the loss incurred in 2018, 2019, or 2020 to reduce a prior year’s taxable income. Also, the amount of the loss you could use against a future year’s taxable income was limited to 80%. If you have a tax loss in 2018, 2019, or 2020, you can now use the loss to recover taxes paid five years before your tax loss year with no percentage limitation. For instance, you can use a 2018 tax loss to recover taxes paid on your 2013 tax return. If you do not use up the loss in the 5th year back, you can use it for the 4th year back, 3rd year back, and so on until fully utilized. This rule change applies to both personal and business tax returns.
ABC Company reports a $500,000 tax loss on its 2018 federal corporate income tax return. The company reported taxable income of $1 million on its 2013 tax return and paid $340,000 in federal income taxes. The company can use its 2018 tax loss to get a $170,000 refund of the tax it paid on its 2013 federal income tax return.
Check out the IRS page here for more information.
Your company may not pay federal income taxes if it is a pass-through entity. In that case, you, as an owner, can report and pay federal income taxes on your share of the company’s taxable income. Prior to the CARES Act, you could not use a tax loss from your company’s activity to reduce your other income, such as salaries, interest or dividend income, and capital gains, among other items of income. If the company you own reports a tax loss to you in 2018, 2019, or 2020, you can reduce your other sources of income by the amount of the loss. If you already filed your 2018 or 2019 personal tax returns, you can amend the returns to claim the tax loss that was not available at that time. You may claim a refund for the decrease in your income tax after claiming the loss.
Recovery Rebate Credits for Individuals
You may be eligible for a refundable income tax credit for 2020. If you qualify, the IRS will advance pay the credit during 2020 for each individual who was eligible for 2019. These payments are $1,200 per person plus $500 for each dependent child. You qualify for the payment unless you are a nonresident alien or claimed as a dependent on another person’s tax return. There would be a reduction of the payment amount if you reported more than $150,000 of income for a joint tax return with your spouse, $112,500 if you filed as head of household, and $75,000 for everyone else. The payment is reduced to zero if you reported more $198,000 of income for a joint tax return with no dependent children, $146,500 if you filed as head of household with one child, and $99,000 if you file as a single person. The reduction in payment amount is 5% per thousand dollars above the threshold amount.
You and your spouse file a joint tax return with three dependent children under the age of 17 reporting adjusted gross income of $175,000. Your rebate payment is $2,650 ($1,200 + 1,200 + 500 + 500 + 500 = 3,900 – 1,250 = 2,650). The reduction of the payment is 5% per dollar above $150,000 for a joint tax return or $175,000 – 150,000 = 25,000 x 5% = 1,250.
You can calculate your payment here.
Payroll Tax Credits and Deferral
The CARES Act provides a refundable payroll tax credit for 50% of wages paid to employees during the COVID-19 crisis. The credit applies to wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of wages eligible for the credit is $10,000, with the maximum credit for any employee equal to $5,000. Your company might claim the credit if it experienced an impact related to a government order limiting commerce, travel, or group meetings. You may also claim the credit if your company had a greater than 50% reduction in quarterly sales compared to the same period in the prior year. When your company’s sales exceed 80% of sales in the same quarter in 2019, you no longer qualify for the credit at the end of that quarter. The credit is not available if your company receives a Payroll Protection Program (PPP) loan or if you are self-employed with no employees. Your company may claim the credit immediately by reducing the amount of payroll taxes that you deposit (total tax deposit minus credit amount equals actual deposit). You apply the credit against the employer portion of social security taxes.
A government order affected your company and it has not recovered at least 80% of your sales as compared to the prior year. Your company paid 50 employees a total of $100,000 in wages during the current quarter, with no employee paid more than $10,000. You credit is $50,000 ($100,000 x 50%).
Check out the IRS Frequently Asked Questions here.
In addition to the Employee Retention Credit, the CARES Act allows your company to defer the deposit and payment of its share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes. The deferral applies to deposits and payments during the period beginning on March 27, 2020, and ending December 31, 2020. The IRS will revise Form 941, Employer’s QUARTERLY Federal Tax Return, for the second calendar quarter of 2020 (April – June 2020). The company must deposit 50% of the deferred amount on December 31, 2021, and the remaining amount on December 31, 2022. Employers that received a Paycheck Protection Program (PPP) loan may not defer the deposit and payment of the employer’s share of Social Security tax that is due after the employer receives a decision from the lender that the loan was forgiven.
Your company paid employees $250,000 in wages for the period March 27, 2020, through December 31, 2020, and the company’s share of Social Security taxes is $15,500 ($250,000 x 6.2% tax rate). Your company may defer depositing $7,750 until December 31, 2021, and defer depositing the remaining $7,750 until December 31, 2022.
Check out the IRS Frequently Asked Questions here.
The tax relief items above are immediately available to assist you with increased cash flow during the COVID-19 crisis. For help in understanding how the COVID-19 relief provisions apply to your business, please contact a CRI advisor.