Tax savings opportunities from the CARES Act.

• Author: Werlhof, John
• Position: Coronavirus Aid, Relief, and Economic Security Act of 2020

On March 27, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, (1) the third phase of legislation aimed at fighting the COVID-19 pandemic and mitigating the related economic harm for families, workers, and businesses. It is the largest stimulus package in history with an estimated cost of $2.2 trillion. The CARES Act, among other things, provides "recovery rebates" to individuals, expands and enhances unemployment benefits, extends loans and loan guarantees to eligible businesses, offers funding for the health care and education systems, and provides tax relief for businesses and individuals. This article discusses business and individual tax provisions of the CARES Act.

Business Provisions Deferral of employer Social Security tax

The employer share of the 6.2% Social Security tax on wages paid from March 27,2020, through Dec. 31,2020, is deferred, with 50% due on Dec. 31,2021, and 50% due on Dec. 31,2022. (2) A similar rule applies to 50% of self-employment tax liability of partners and sole proprietors.

Originally, employers that take advantage of loan forgiveness under the Paycheck Protection Program (PPP) (a CARES Act program involving certain loans for payroll and specified other expenses that is administered by the U.S. Small Business Administration) were not eligible to defer the deposit and payment of the employer share of Social Security tax, but that prohibition was repealed in June. (3)

Employee retention credit

The CARES Act added a refundable payroll tax credit equal to 50% of qualified wages (wages, including qualified health plan expenses allocable to the wages) paid by eligible employers from March 13,2020, to Dec. 31,2020. (3) An eligible employer is one whose:

* Operations were fully or partially suspended due to a COVID-19related shutdown order; or

* Gross receipts declined by more than 50% when compared with the same quarter in the prior year (the employer remains an eligible employer in subsequent quarters until its gross receipts exceed 80% of gross receipts compared with the same quarter for the prior year).

If the employer has more than 100 employees, qualified wages include only wages paid to employees who are not working as a result of a COVlD-19-relatcd shutdown order or the significant decline in gross receipts. For employers with 100 or fewer employees, qualified wages paid during the period when the operations were fully or partially suspended or during a quarter in which gross receipts have significantly declined are eligible for the credit, even if paid to an employee who is still working.

The credit is limited to the first $10,000 of qualified wages paid to a particular worker. The credit is not available for wages taken into account in computing the sick leave or family medical leave credits under the Families First Coronavirus Response Act (FFCRA). (4) Similarly, the credit is not available to employers who receive a small business interruption loan under the PPP.

Example 1: E Inc. is an electrical contractor whose operations are partially suspended from March 20 through April 14 as a result of a COVID-19rclated shutdown order. A few of Es employees are able to work from home during the shutdown, but most are not. E continues to pay all its employees, regardless of whether they are able to work. Assume for purposes of this example that E is not eligible to claim the sick leave or family medical leave credits under the suspended from Mari-li 20 through April 14 as a result of a COVTD-19-rclated shutdown order. A tew of E's employees arc able to work from home during the shutdown, but most are not. E continues to pay all its employees, regardless of whether they are able to work. Assume for purposes of this example that E is not eligible to claim the sick leave or family medical leave credits under the FFCRA. E's second-quarter gross receipts decline by 25% relative to the same quarter in the previous year and then pick back up in the third quarter.

If E has more than 100 employees, it can claim the retention credit with respect to the portion of qualified wages paid from March 20 to April 14 to employees unable to work. The credit is not available for qualified wages paid to employees for work actually performed.

If E has 100 or fewer employees, it can claim the retention credit with respect to all qualified wages paid from March 20 to April 14--even wages paid to employees for time they are working.

Reinstatement of NOL carrybacks

Following the passage of the law known as the Tax Cuts and Jobs Act (TCJA), (6) net operating losses (NOLs) generated in tax years beginning in 2018 and later years cannot be carried back and can only offset up to 80% of taxable income in carryover years. (7) The CARES Act permits NOLs from the 2018,2019, and 2020 tax years to be carried back to the previous five tax years (beginning with the earliest year first) and suspends the 80%-of-taxable-income limitation through the 2020 tax year. (8)

Taxpayers can elect to waive the...