31 03 2020

US Senate Passes 'Phase Three' COVID-19 Aid Package

On March 25, 2020, the United States Senate overwhelmingly approved the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which represents the third package of financial aid measures to businesses and individuals affected by the coronavirus crisis and which includes numerous tax provisions to support businesses.

Notable business tax provisions in the CARES Act include employee retention tax credits, modifications to the rules surrounding the use of losses, and a temporary relaxation of the limitation on business interest expenses. These and other measures, detailed in a report produced by the Committee on Finance, are summarized below:

Employee retention credit for employers subject to closure due to COVID-19

The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first USD10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020, through December 31, 2020.

Delay of payment of employer payroll taxes

The provision allows employers and self-employed individuals to defer payment of the employer share of the social security tax they otherwise are responsible for paying to the federal Government with respect to their employees. Employers generally are responsible for paying a 6.2 percent social security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.

Modifications for net operating losses

The provision relaxes the limitations on a company's use of losses. Net operating losses (NOLs) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that NOLs arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow a NOL to fully offset income (currently, taxpayers can use NOLs to offset up to 80 percent of taxable income). These changes will allow companies to utilize losses and amend prior year returns.

Modification of limitation on losses for taxpayers other than corporations

The provision modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.

Modification of credit for prior year minimum tax liability of corporations

The corporate alternative minimum tax (AMT) was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The provision accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.

Modification of limitation on business interest

The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA) limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.

Technical amendment regarding qualified improvement property

The provision enables businesses, especially in the hospitality industry, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act, not only increases companies' access to cash flow by allowing them to amend a prior year return, but also incentivizes them to continue to invest in improvements as the country recovers from the COVID-19 emergency.

Temporary exception from excise tax for alcohol used to produce hand sanitizer

The provision waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration and is effective for calendar year 2020.

What happens next?

The CARES Act now proceeds to the House of Representatives, which is expected to approve the legislation in the coming days. It is likely to be signed into law by President Trump soon after the House vote.