As the coronavirus pandemic is increasing in intensity across the country, it is important for businesses to not lose sight of the options available to them to help manage operations in this rapidly changing environment. The most notable changes were delivered within the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress this spring. While some items within the CARES Act have closed, it is important to review the options that are available and to consult with your accounting team to make sure that everything is in place so that you can benefit. This post reviews the most relevant items, but you can see all the details at the official IRS site.
Employee retention tax credits
For businesses that did not participate in the Payroll Protection Program, the federal government put an employee retention credit in place to help encourage businesses to keep employees on the payroll during a downturn in business. Businesses must demonstrate that they have been adversely affected by the COVID-19 pandemic in one of two ways.
- Business operations must be fully or partially suspended as a result of government orders related to the coronavirus
- Businesses must be able to show a 50% or greater reduction in income for a calendar quarter when compared to the preceding year
If either of these cases apply and businesses retain employees on payroll, the business is eligible for a payroll tax credit equal to 50% of the wages paid to each employee, up to $10,000. This means that an employer can receive a tax credit up to $5,000 per employee for wages paid from March 12, 2020-December 31, 2020.
Contact us to see if we can help you to benefit from this program.
Option to carry back net operating losses
The CARES Act made some temporary alterations to the way in which businesses can use Net Operating Losses (NOL) to offset taxable income in other years. The CARES Act changes allow businesses to use 100% of losses sustained in 2018, 2019, and 2020 to reduce their tax burden on earnings up to five years in the past. This is referred to as a five-year carryback. NOLs are also still allowed to be applied in a carryforward fashion for an indefinite period of time.
In practical terms, this means that businesses that may suffer losses in 2020 due to the pandemic will be able to use those losses to offset tax burdens from prior years, up to five years ago. It is also important to note that the ability to claim 100% of NOL is an adjustment from the standard 80% limit, which will apply to any earning beginning in 2021 and moving forward.
Expanded write-offs for improving property for retailers, restaurants, and hotels
The CARES Act effectively corrected language from the 2017 Tax Cuts and Jobs Act and has made tax credits related to property improvements available to more businesses. This correction is retroactive, meaning that businesses will be able to file amended returns for 2018 and 2019 and may be able to realize immediate tax savings or refunds based on property improvements made int the past. This benefit is not permanent and will gradually phase out after the next three years. However, it does offer these businesses some benefits during these difficult times.
Payroll tax credits for expanded Family and Medical Leave Act benefits
If your business has had employees who were unable to work due to the coronavirus, there is help for both you and them. The Federal Government expanded the Family and Medical Leave Act benefits to cover employees who are unable to work due to contracting COVID-19 or being quarantined due to exposure to the virus. Individuals that fall into this category can receive up to two weeks (80 hours) of paid leave at 100% of their salary. The employer receives a payroll tax credit for that leave, up to $511 per day for up to 10 days.
Employees who have to take time off of work to care for someone else can also receive up to two weeks of paid leave under this program. Employers must pay employees two-thirds of the person’s regular salary. Employers will then receive a payroll tax credit for two-thirds of the employees salary up to $200 per day for a maximum of 10 days.
Employees that have worked for their employer for at least 30 days who find themselves unable to work due to childcare difficulties, for example a school or day care closure, can also receive an additional 10 weeks of leave.
This program applies to all businesses and nonprofits with fewer than 500 employees. There are exceptions for businesses with fewer than 50 employees where the leave requirements would put the business in jeopardy. This payroll tax credit can be claimed quarterly.