The federal Coronavirus Aid, Relief and Economic Security Act has, by many accounts, left something to be desired. Former President Donald Trump signed the initial measure in March of last year to help keep businesses afloat as they faced an onslaught of restrictions and closures.
Many business owners and executives complained about confusing or contradictory rules or the inability to get even a penny of help to keep their operations afloat during the worst of the pandemic. And for months as the second wave worsened, many were left without federal aid of any kind.
Now, with Democrats controlling both the White House and Congress, the federal government could adopt different and broader set of priorities in a new relief package. Still, the original CARES Act is packed with tax benefits – perks around the edges meant to help businesses recover from the financial hit they absorbed.
On Dec. 27, Trump signed the Consolidated Appropriations Act, the final extension of the CARES Act under his presidency. The bill included an employee retention credit, tax breaks to cover the costs of paid sick and family leave, more freedom on how Paycheck Protection Program loans should be reported on tax returns and more flexible rules governing net-operating losses.
The Families First Coronavirus Response Act, signed alongside the $2.2 trillion CARES Act last March, required two weeks of paid sick leave for an employee who contracted COVID-19 or was advised to self-quarantine because of potential exposure. And it includes 12 weeks of partially paid family and medical leave to provide childcare because a school or daycare facility was closed due to COVID-19. Anyone employed by a business for at least 30 days is eligible for this time off. Federal tax credits initially covered the costs of wages between April 1 and Dec. 31, 2020. Although those are credits were extended to March 31, the requirement to provide paid time off lapsed at the end of 2020.
Alisha Jernack, a partner at Mazars, said that some of her clients have opted out of providing the time off in exchange for the tax credit. They complained of finding labor to cover for employees taking off from work, she said, and staff were given a greater incentive to simply stay at home.
“In addition to just the overall employee absence, from an administrative standpoint, tracking – as it relates to your quarterly payroll tax filing – how that rolls into your PPP… it’s really become an administrative burden,” she said.
Another feature of the CARES Act lets employers defer payroll taxes for an employee’s share of Social Security taxes, 6.2%, between Sept. 1 and Dec. 31, 2020. Employers now have until Dec. 31 to pay back those taxes. Penalties and interest on unpaid taxes does not kick in until Jan. 1, 2022.
The initial CARES Act called for a refundable employee retention credit capped at $5,000 per employee, for wages paid between March 12 and Dec. 31, 2020. That cap was increased to $14,000 for the first half of 2021, $7,000 per quarter for each employee.
“ERTC is a sleeping monster, it’s really helpful and not gotten a lot of attention,” said William McDevitt, a shareholder at WilkinGuttenplan. “Monster in terms of size.”
Once the dust settles around the PPP application process, he added, businesses could very likely turn their attention to the ERTC. Wages cannot be claimed for both the employee retention tax credit and the wages paid to satisfy the requirements of the PPP program. But the measure Trump signed on Dec. 27 at least allows businesses to apply for both the ERTC and PPP loans, rather than just one or the other.
“This means that PPP borrowers who also qualify for the ERTC can claim the ERTC prospectively in 2021, and they can claim the ERTC retroactively for 2020, even though they were previously barred from claiming it because they obtained PPP loans,” according to a Dec. 30 blog post by Daniel Mayo, whose practice at accounting firm Withum in Whippany focuses on federal tax policy. “[Q]ualified wages paid from March 13, 2020 through June 30, 2021 can give rise to an ERTC even if the taxpayer obtained a PPP loan,” he said, noting that “any wages upon which an ERTC is computed are not forgivable under the PPP.”
The money a business gets from the PPP loan is deductible on tax returns, meaning businesses do not have to include it as income for 2020. “Not all clients realized the impact. If you spent the money and you really were still struggling and you couldn’t deduct those expenses, the taxable income was going up to $1 million, and where were clients going to come up with the money,” said Karen Henderson, senior manager with SobelCo. Businesses would essentially get the “benefit of the cash of $1 million and the tax benefit of deducting $1 million,” she added.
The latest version of the CARES Act makes business meals fully deductible, up from just 50%. The controversial tax break has been whittled down for decades, and critics have dubbed it the “three-martini lunch tax deduction,” arguing it allows business owners to write off the costs of lavish meals.
The federal stimulus bill also loosens the rules around the kinds of deductions that business owners can claim on their tax returns. For one, the bill increases the amount of expenses and losses that owners can deduct. And the package adds in more years’ worth of income that can be deducted.
For example, net operating losses – incurred when expenses exceed income – can now be carried forward from five years ago. Owners can claim the deduction at the 35% tax rate, rather than the 21% rate enacted after the 2017 tax law.
“[T]hey can always carry it forward if they have losses coming up this year, you can also file that on the 2020 tax return if you generate a loss in 2020, which a lot of businesses did,” said Jeremias Ramos, a tax manager with Withum.
“…PPP borrowers who also qualify for the ERTC can claim the ERTC prospectively in 2021, and they can claim the ERTC retroac-tively for 2020, even though they were previously barred from claiming it because they obtained PPP loans.”
– Daniel Mayo in a Dec. 30 blog post