For Your Business

Employee Retention Credit
The Employee Retention Credit is a refundable payroll tax credit available to employers paying wages to employees who have suffered economic hardship related to COVID-19. The CARES Act allowed for a credit equal to 50% of up to $10,000 in qualified wages per quarter paid to an employee between March 13, 2020, and Dec. 31, 2020. The credit is not available for federal, state, and local governments and their agencies or any business that received a Small Business Interruption Loan under the Paycheck Protection Program. In Dec. 2020, Congress passed the Coronavirus Relief Bill, which increased the credit to 70% of up to $10,000 in qualified wages in any quarter, extended the credit through July 1, 2021, and clarified that the credit is available to businesses who participated in the Paycheck Protection Program.

A qualified employer is one whose business was fully or partially suspended by government order due to COVID-19 or one whose business had a decline in gross receipts of greater than 50% during the affected quarter as compared to the same quarter in 2019.

If a business has greater than 100 full-time employees, qualified wages include only those paid to employees during the time in which the business was suspended, and the employees were not working. If a business has less than 100 full-time employees, qualified wages include wages paid to employees during the period when the business was suspended or had a significant decline in gross receipts, as discussed above, even if the employee was still working.

Payroll Tax Deferrals
A business is eligible to defer the employer portion of an employee’s Social Security tax, equal to 6.2% of wages, paid between March 27, 2020, and Dec. 31, 2020 (extended to March 31, 2021, by the Coronavirus Relief Bill). If deferred, 50% would be due on Dec. 31, 2021, and the other 50% would be due on Dec. 31, 2022. This deferral is available to all employers. There is a similar rule for 50% of self-employment tax for partnerships and sole proprietorships.

Treatment of Net Operating Losses
Before the passing of the Tax Cuts and Jobs Act in 2017, businesses could offset 100% of taxable income with net operating losses, and in the year the loss occurred could carry that loss back two years and forward 20 years. With the passing of the TCJA, NOLs generated in the 2018 tax year and after were only able to offset up to 80% of income in a given year and could only be carried forward.

The CARES Act provides that, for most businesses, NOLs arising in tax years 2018 through 2020 can once again offset up to 100% of taxable income. Additionally, these NOLs can be carried back five years, beginning with the earliest available year.

Business Interest Limitation
Another provision of the TCJA subsequently adjusted by the CARES Act is the limitation on the deduction of business interest for businesses with average gross receipts of $25,000,000 or more. For these businesses, the TCJA limited the deduction of business interest expense to 30% of adjusted taxable income beginning in tax year 2018. The CARES Act increases this limitation to 50% of taxable income for tax years 2019 and 2020.

For Partnerships only, there is a special rule allowing for an increase in the limitation from 30% to 50% of adjusted taxable income, with half of the excess business interest allocated to the partner to be treated as a business interest of the partner, not subject to the business interest limit at the partner level, and the other half subject to the normal limitations at the entity level.

For the Individual

Recovery Rebates
The CARES Act provided a $1,200 refundable tax credit for individuals, $2,400 for those filing joint returns, and $500 for each qualifying child, paid in advance as a “recovery rebate.” The credit began phasing out at $75,000 for single individuals, $112,500 for Head-of-Household filers, and $150,000 for joint filers, reducing the credit by $5 for every $100 in income over the threshold amount.

The recovery rebate is a 2020 tax credit but was originally calculated based on 2018 income (or 2019 if the filing was completed before issuance of the credit). If an individual qualifies for a credit based on 2020 income but did not receive the rebate, they will get the credit on their 2020 tax return. If they qualified for the rebate calculated on the prior year’s income but do not qualify based on 2020 income, they will not be required to repay the credit.

Charitable Contributions
Typically, a taxpayer must itemize deductions to receive a deduction for charitable contributions. The CARES Act allows for a $300 deduction for charitable contributions “above the line,” even if the taxpayer takes the standard deduction. If an individual does itemize, they can deduct charitable contributions up to 100% of their adjusted gross income. On Dec. 20, 2020, Congress passed the Coronavirus Relief Bill extending the above line deduction through 2021 and allowing a $600 deduction for joint filers.

Retirement Withdrawals
The CARES Act allows for penalty-free early access to retirement funds for taxpayers facing virus-related challenges. For those affected, up to $100,000 can be withdrawn early without the 10% penalty. While the withdrawn amounts will be taxable income, the amounts will be taxably rateable over three years beginning in 2020. Additionally, the funds can be re-contributed within three years to avoid taxation on the withdrawal. To qualify, the taxpayer must be diagnosed with COVID-19, have a spouse diagnosed with COVID-19, or experience adverse financial hardship due to COVID-19, including being unable to work.