CARES Act Summary – Relief and Liquidity

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and President Trump signed it into law. The provisions of the CARES Act largely focus on providing prompt liquidity to businesses through access to capital from the Small Business Association (“SBA”), as well as easing of tax provisions that may be immediately challenging the cash flows of businesses of all sizes.

Below are some of the highlights of the CARES Act

Enhanced Net Operating Losses (“NOLs”) Opportunities – The Act largely rolls back many of the net operating loss limitations that were put in place by the Tax Cuts and Jobs Act of 2017 (“TCJA”). Specifically, the Act suspends the limitation providing that NOLs can only offset 80% of taxable income and reverts to previous guidance allowing for 100% offset. Additionally, it reinstates past provisions allowing for the carryback of NOLs originating in tax years 2018, 2019, or 2020 to the previous five tax years (previously existing guidance for carryback only allowed for two-year carryback). Similarly, the bill removes limitations introduced by the TCJA on individuals ability to utilize business losses. These provisions could provide immediate opportunities for cash for both individual taxpayers and businesses.
Qualified Improvement Property – The much-maligned drafting error from the TCJA that prevented the use of accelerated depreciation on qualified improvements to building property is being corrected in this Act. The language of the Act provides for the correction to apply as though it was originally enacted in 2017. Additional guidance is needed, but this should allow taxpayers to claim accelerated depreciation on 2019 returns currently in process and should allow for taxpayers to quickly claim benefits that were missed out on for tax year 2018.
Tax Credit/Rebates – The Act provides for tax credit/rebates to be paid to taxpayers “as rapidly as possible.” The amounts are $1,200 per taxpayer and $2,400 in the case of a joint return. Additionally, there is credit available for $500 per qualifying child. Rebates are reduced for taxpayers with adjusted gross income in excess of $150,000 (married filing joint), $112,500 (head of household), and $75,000 (for all others).
SBA Loan Assistance– The Act provides a new avenue for liquidity through loans available through the SBA for covering rent, utilities, payroll, salary, PTO, sick leave and severance of employees. Payments on these loans are to be deferred for at least six months. Additionally, subject to limitations, borrowers on these loans may be allowed to be permanently forgiven of repayment of portions of the loans. The forgiven amount is not taxable income. These loans are generally available to companies and nonprofits of less than 500 employees.
Payroll Tax Holiday – The Act provides for the payment of the employer portions of 2020 payroll taxes to be deferred over a period of two years. The first 50% of the deferred amount will be due December 31, 2021, and the remaining portion of the deferred tax is to be due on December 31, 2022.
Interest Expense Limitations – The Act eases limitations of the TCJA that reduced the deductibility of interest expense to 30% of adjusted taxable income. The Act increases the applicable percentage of this limitation to 50%. This change does not impact partnership tax filings for the tax year 2019.

Accounting Treatment of CARES Act Funds by Healthcare Companies

While there are various ways to qualify for funding under this Act, there are three main sources of relief a healthcare facility can qualify for under CARES:

Paycheck Protection Program (Sections 1102 and 1106)
Public health and social services emergency fund (Division B Title VIII)
Medicare Advanced Payments (Section 3719)

While there are varying opinions on the accounting for governmental funds received by healthcare entities, the most prominent methodologies are discussed in this document.

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CARES Act Modified NOL Limitations Providing Taxpayers Relief

This section reviews the modifications for net operating losses (NOLs) and guidance provided in Revenue Procedure 2020-24.

The CARES Act included changes to the rules for deducting NOLs. The Act eased the taxable income limitation on deducting NOLs.

A provision included in the 2017 Tax Cuts and Jobs Act (TCJA) limited NOL carryforwards arising after Dec. 31, 2017, to 80 percent of the taxable income for the carryforward year, calculated before the NOL deduction.

For tax years beginning prior to 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs carried forward into those years. Therefore, NOL carryforwards to tax years beginning before 2021 can be used to fully offset taxable income for those years.

For tax years beginning after Dec. 31, 2020, the CARES Act allows NOL deductions equal to the sum of:

100 percent of NOL carryforwards from pre-2018 tax years, plus
The lesser of 1) 100 percent of NOL carryforwards from post-2017 tax years, or 2) 80 percent of remaining taxable income (if any) after deducting NOL carryforwards from pre-2018 tax years.

This is a complicated rule but is now more taxpayer-friendly than what the TCJA allowed.

COVID Relief Allows Carrybacks for Certain NOLs

The TCJA provision for NOLs eliminated carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income (as discussed above). It repealed carryback provisions, except for certain farm and property and casualty losses allowing NOLs to be carried forward indefinitely.

Under the CARES Act, NOLs that arise in tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021 can be carried back for five years. This means that a taxpayer could carry back an NOL arising from 2020 to 2015 and recover federal income tax paid for that year. That could be very beneficial because the federal income tax rates for both individuals and corporations were higher before the TCJA rate cuts took effect in 2018.

Taxpayers can also take advantage of tax savings by electing to waive the carryback privilege for an NOL and carry the NOL forward to future tax years. Barring a further tax law change, the no-carryback rule will come back into play for NOLs that arise in tax years beginning after 2020.

Excess Business Loss Disallowance Rule for Non-Corporate Taxpayers Is Postponed

Under the TCJA, a non-corporate taxpayer is disallowed current deductions for excess business losses for tax years beginning after December 31, 2017, and before January 1, 2026. An excess business loss is an amount that exceeds $250,000 ($500,000 for a married filing jointly). These limits are adjusted annually for inflation.

The CARES Act postponed the excess business loss disallowance rule for losses arising in tax years beginning in 2018 through 2020. Barring further tax law changes, the excess business loss disallowance rule will come back into play for losses that arise in tax years beginning in 2021 through 2025. Any disallowed excess business loss for one of those years will be carried forward to the following year and can be deducted under the rules for NOL carryforwards.

Amended Return Opportunities

These advantageous CARES Act modifications can affect prior tax years for which you’ve already filed returns. Amended returns may be needed to benefit from the changes. Contact your tax professional for more information.

Please contact your tax advisor for more information on this or any tax matter. If you do not have a tax advisor, please call 615-377-4600 or contact us through our website with your questions.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.

As this continues to evolve we encourage you to reach out to your LBMC Tax Advisor with particular questions on what this means to you and your business. Thank you as always for your support and trust in LBMC.