The Coronavirus Aid, Relief, and Economic Security Act (CARES Act): Benefits for the Financial Services Industry
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), passed on March 27, 2020, provides relief to various sectors of the economy to alleviate the strain caused by the COVID-19 pandemic. This article will provide guidance pertaining to sections of the CARES Act relating to the financial services industry.
Section 163(j) – Business Interest Expense Limitation
Under the Tax Cuts and Jobs Act of 2017 (“TCJA”),Section 163(j) of the Internal Revenue Code, business interest expense is limited to business interest income, 30% of adjusted taxable income (“ATI”) for the taxable year, and floor plan financing interest. Any excess business interest expense can be carried forward to the following year and shall be treated as paid or accrued in that year. The CARES Act added Section 163(j)(10) for taxable years beginning 2019 and 2020. This new section substitutes 30% of ATI with 50% of ATI. The idea behind the higher ATI threshold is to allow businesses to deduct more interest expense at a time when many are using debt to help carry them through the COVID-19 economy. Taxpayers may elect to keep the 30% ATI threshold under Section 163(j)(10)(iii), however, once this election is made, consent is needed to revoke the election for the taxable year.
For partnerships, the increased ATI threshold applies only to the 2020 tax year. For the 2019 tax year, the 30% threshold remains.
Under Section 163(j)(10)(B)(i), taxpayers may elect to use their 2019 ATI for tax year 2020. The benefit of this election assumes that taxpayers’ 2019 ATI is greater than their ATI in 2020 due to the pandemic. The result of the combined amendments will, in theory, allow a taxpayer a higher ATI with an increased threshold in a year in which they have a greater amount of debt. This will allow an increased business interest expense deduction for the 2020 tax year.
Payroll Tax Deferral
The CARES Act allows for the deferral of the employer’s portion of deposits and payments of Social Security taxes. Under Section 2302 of the CARES Act, employers may defer these payroll taxes incurred between March 27, 2020, and December 31, 2020, without accruing any penalties or interest. Fifty percent of these deferred taxes must be paid by December 31, 2021, and the remainder paid by December 31, 2022. There is no election necessary to take advantage of this deferral. Form 941 (Employer’s Quarterly Federal Tax Return) has been modified for the second quarter of 2020 to reflect the deferral. The deferral allowance does NOT include the Medicare (1.45%) tax, or the employee’s portion of the Social Security tax (6.2%).
Under the CARES Act, these provisions will apply to self-employed individuals as well. Self-employed individuals may defer their 6.2% share (one half of the total amount owed) of Social Security taxes on net earnings in a similar manner as other businesses. Fifty percent of these deferred taxes must be paid by December 31, 2021, and the remainder by December 31, 2022.
Employers that received or will receive a loan under Section 1102 of the CARES Act (Paycheck Protection Program “PPP”) are unable to continue to defer the employer’s share of the Social Security taxes if the loan is forgiven.
Net Operating Losses
Another change the CARES Act provides is a modification to the net operating loss (NOL) carryback rules. The Act allows corporations, individuals, trusts, and estates to carryback NOLs from the 2018, 2019 and 2020 tax years, for up to five years, with 100% NOL utilization until 2021. While this might not affect partnerships directly, it may impact investors, blocker corporations or portfolio company investments. As the tax rates decreased for years after 2018, allowing carrybacks to earlier years could allow losses generated in lower-tax years to offset income generated in higher-tax years. Companies considering this should reach out to their Marcum professional to discuss ways of possibly recognizing more expenses due to timing differences in these years in order to help utilize NOLs.
Qualified Improvement Property (QIP) Bonus Depreciation
The CARES Act corrects an oversight made in the drafting of the TCJA. It now allows a 100% first-year bonus depreciation for QIP real estate and leasehold improvements. The TCJA did not allow bonus depreciation to be taken on these types of assets post-2017. This change can generate additional expenses in the current and previous tax years. Companies that did not take advantage of this change for tax years 2018 or 2019 should determine if this increased expense would benefit the partnership and/or their partners. Also note that while you can amend filed tax returns, you can also file Form 3115 and apply for an accounting method change the following year. When weighing the option to take the bonus depreciation, taxpayers should look into pairing it with NOL modification. The QIP and NOL provisions of the CARES Act have the ability to drastically impact a corporation’s tax through the years.
The CARES Act provides a tax planning opportunity for the prior, present and future tax years, in hopes of injecting liquidity into the economy to offset certain impacts the COVID-19 shutdown. Marcum will continue to keep you informed as additional information and guidance is provided. For specific questions, contact your Marcum professional.
Coronavirus Resource Center
Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.