Our commercial and technology partner Mark Blunden, shares a high level summary from US law firm Carter Ledyard & Millburn LLP on US tax benefits available to businesses impacted by the pandemic.
On 27 March 2020, President Trump signed into law $2 trillion Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 (CARES Act), which includes various tax benefits extended to businesses impacted by Covid-19. These benefits could provide extra liquidity as they can lead to refunds for taxes paid in the past or to deferments for taxes payable now.
Net Operating Losses
Trump’s 2017 tax reform act prohibited corporations from claiming refunds of taxes paid in previous fiscal years on account of Net Operating Losses (“NOL’s”) incurred in current years. The Cares Act amendment to the Tax Code relaxes these limitations by allowing corporations to use losses incurred in 2018, 2019 and 2020 to reduce income reported for five prior years and claim refunds of taxes paid during that prior five-year period. This NOL relaxation, which applies to corporations, unincorporated businesses and sole traders, allows the business to carry back NOL’s to offset income that was taxed at 35% (instead of the current 21%) before the tax reform. Taxpayers will have to amend their prior tax returns in order to benefit from this NOL carryback.
Deduction of Interest
Donald Trump’s 2017 tax reform act also reduced the amount of interest that a company can deduct as an expense from its profits to 30% of its adjustable taxable income, down from the previous 50%. For this purpose, adjustable taxable income means EBITDA for tax years through 2021 and EBIT beginning in 2022, i.e. without adding back depreciation or amortization deduction. The combined effect of a lower (30%) limit and a lower base (EBIT as opposed to EBITDA) significantly limited the availability of interest deductions for many businesses. The Cares Act amendment to the Tax Code restores the amount of interest expense eligible for deduction to 50% of adjustable tax income for 2019 and 2020.
Other Tax Refunds
While small businesses that continue to operate during the Covid-19 period are eligible for the Payroll Protection Loans and the Economic Injury Disaster loans, those businesses which have been forced by the government to fully or partially shut down or which have experienced a loss of at least half gross receipts during the first quarter of 2020 compared to the same quarter in 2019, may be entitled to a refundable tax credit for the employer’s share of the 6.2% social security tax. This tax credit is for 50% of the first $10,000 in wages (including health care expenses) paid to each employee commencing on 13 March 2020. This credit is available until the time when gross receipts exceed 80% compared to the same quarter in the prior year or 31 December 2020. Businesses are only eligible for this tax credit if they have not applied for Payroll Protection Loans.
Deferral of Employer Payroll Taxes
In addition to the above credit, businesses can defer the payment of the employer’s share of the 6.2% social security tax owed on wages paid between 27 March 2020 and 31 December 2020. The deferred amounts are payable in two equal installments with 50% due on 31 December 2021 and the remainder due on 31 December 2022. If, however, the businesses debt is cancelled under the Cares Act there is no such deferment.
The Cares Act prohibits creditors who have granted forbearance to businesses affected by Covid-19 or agreed to defer or modify their payments from reporting a default to credit agencies and adversely affecting their credit scores.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.