July 15, 2020
As reported cases of COVID-19 continue to reach new highs in Georgia, with an average of 3,394 per day, there is an increasing concern in the business community that restrictions and forced closures will again be implemented. The potential reversal could spell trouble for Atlanta businesses that recently reopened and resumed normal business activities. While it is impossible to predict what will happen next with COVID-19 and the government’s reaction, there are several new tax credits, deductions, and other opportunities created by the CARES Act, which can result in significant savings. Examples include the Employee Retention Credit, deferred payroll tax deposits, Net Operating Loss (NOL) carrybacks, expanded business interest deductions, and an increased charitable gift deduction. In addition, the Main Street Lending Program has recently been expanded to permit greater access to those in need. To help clients, prospects, and others, Wilson Lewis has provided a summary of these opportunities below.
On top of the Paycheck Protection Program (PPP) another incentive to maintain staff is the Employee Retention Credit (ERC). It is a refundable tax credit worth 50 percent of qualified wages up to $10,000 paid to eligible employees between March 12, 2020, and January 1, 2021. ERC is available in any quarter that the business is eligible. To be considered eligible a company must satisfy one of the following criteria:
The ERC applies in any quarter the business experienced either of these two scenarios. Businesses with more than 100 employees can use the credit only to pay inactive employees, while smaller businesses can use the credit even if the employee is actively working. It is important to note that businesses cannot claim ERC if they have received a PPP loan.
Like ERC, deferring 2020 payroll tax deposits is another way to free up cash flow. Businesses have the option to delay the employer’s share of payroll taxes between March 27, 2020, and December 31, 2020, and spread the payments out over two years. There is no special election to make; simply allocate 50 percent of 2020 payroll to December 31, 2021, and the other half to December 31, 2022. This option can be used even if the business is under the PPP funding covered period; a change enacted in the PPP Flexibility Act. In the original CARES Act legislation, a business was not permitted to defer payroll tax deposits if it was using PPP funds during that quarter.
When the amount of tax deductions exceeds business income for the year, the business is said to have incurred a Net Operating Loss (NOL). NOLs used to be a mechanism to offset taxable gains in other years, but the Tax Cuts and Jobs Act of 2017 (TCJA) limited lookback periods. The CARES Act substantially relaxed NOL carryback rules.
Now, businesses that experienced NOL in 2018, 2019, or 2020 are permitted to look back up to five years, and unused NOLs may be carried forward indefinitely. And in 2020, NOLs can be used to offset up to 100 percent of taxable income, compared to the typical 80 percent. The additional lookback period combined with 100 percent offset in gains will be especially helpful for businesses that paid a higher corporate income tax before TCJA was enacted. A business does not have to be affected by coronavirus to use NOL carrybacks, and this tax strategy can be used with any other type of funding, like PPP or EIDL.
Deducting active losses against other forms of income has been a valuable tax strategy for high-income and/or pass-through entity taxpayers, but the benefit is usually limited to individuals making $250,000 annually ($500,000 married filing jointly). The TCJA also restricted the deductible amount of interest on business debt to 30 percent of EBITDA.
The CARES Act removed income restrictions for businesses with gross receipts of $25 million or less and increased the deductible amount of debt interest to 50 percent of EBITDA. Additionally, the benefit was made retroactive to 2018 and carryforwards are permitted. Businesses can use 2019 numbers to calculate the 2020 interest deduction. Partnerships, LLCs, sole proprietorships, and other pass-through entities should reexamine the previous two years to see if it makes sense to amend a prior year return.
Non-profits have also been seriously affected by COVID-19, and to increase donations, the CARES Act is allowing individuals and businesses a higher charitable donation deduction. In 2020, businesses can deduct up to 25 percent of taxable income when they donate cash to eligible 501(c)3 organizations. This is compared to the previous limit of a 10 percent deduction. Deductions for corporate donations of food inventory are also temporarily increased to 25 percent, from 15 percent. It is important to note that contributions to private foundations are ineligible.
Part of the CARES Act allocated up to $600 billion in loans to the Main Street Lending Program, a set of loans for small and mid-size businesses that were in good financial standing before coronavirus hit. Main Street loans are not forgivable and were designed to help companies that either did not receive PPP funding or that still need additional money.
Main Street loans have five-year terms and adjustable interest rates. Interest payments are deferred for one year and principal payments are deferred for two years, with amortization throughout the rest of the loan term. New Main Street loans must be at least $250,000 with a cap of either $35 million or four times 2019 EBITDA. Main Street priority loans are capped at $50 million or six times 2019 EBITDA. Main Street expanded loans have a minimum loan size of $10 million and are capped at $300 million.
To qualify, businesses must have fewer than 15,000 employees or less than $5 billion in 2019 revenue and been operational before March 13, 2020. Businesses are ineligible for PPP loans if they have received money through Subtitle A of Title IV of the CARES Act – the section that provided loans to large businesses – or if they would be otherwise ineligible for PPP funds, except for the limitation on number of employees. Businesses must also commit to maintaining payroll, retaining workers, and agree to other restrictions apply related to compensation, stock repurchases, and dividends.
Should Businesses Amend Prior Year Returns?
Given all these ways to use tax strategy to maximize cash flow, many small and mid-size businesses may be wondering if it makes sense to amend prior year returns. After all, there are current-year tax savings to plan for, on top of managing a business in a global pandemic. The answer: it depends on individual circumstances. Some businesses may be able to recoup substantial taxes that would make amending prior year returns a valuable exercise.
Contact Us
There are plenty of opportunities available to Atlanta businesses to bolster cash flow and receive access to loans and other funding. To capture these opportunities, it is essential to consult with a qualified advisor who can assess your situation and determine the best way forward. If you have questions about the information outlined above or need assistance with a tax planning or optimization issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.