On March 28, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (H.R. 748) was signed into law with the goal of providing emergency economic assistance to businesses affected by the novel coronavirus (COVID-19).
The following document summarizes the tax provisions affecting businesses. Please note this does not include the payroll tax credits for compensation paid to employees who are not working (family leave, sick pay, and shut down pay). For more information on these payroll provisions, please download our Employee
Benefits and Payroll Taxes alert.
Net Operating Loss Carryback
Under Act Section 2303, the CARES Act partially restores the net operating loss (“NOL”) rules that were put in effect by the Tax Cuts and Jobs Act (TCJA) in 2017.
Any NOL 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 an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency. Without the CARES Act relief, tax losses would not have been carried back and any NOL carryforwards would offset only a portion of the businesses’ tax liability.
AMT Tax Credits
Also under TCJA, the 2017 Tax Act repealed the Alternative Minimum Tax (AMT) for corporations and allowed corporations to receive a future credit for AMT credits. The CARES Acts accelerates the AMT credit recovery period.
Business Interest Expense
The existing limit on the tax deductibility of interest, under Code Section 163(j), is increased from 30 percent of taxable income to 50 percent of taxable income. This change is effective for tax years beginning in 2019 and 2020. This provision will allow businesses to increase liquidity with a reduced cost of capital, meaning they are able to continue operations and keep employees on payroll.
Qualified Improvement Property
The CARES Act makes a technical correction to the 2017 Tax Act to correct an error in the statute. As a result of the CARES Act, most improvements to a building’s interior, when made to a non-residential real property, will qualify for the Code Section 179 expense election. This means instead of having to depreciate such improvements over 39 years, tenants making leasehold improvements to commercial structures and others in the hospitality industry will be able to claim an immediate write-off.
Strassburger McKenna Gutnick & Gefsky attorneys have thoroughly reviewed the CARES Act legislation and provisions outlined in this summary. We are available to advise clients on the impact it may have on their businesses.