The Most Important COVID Tax Easements for Businesses

We are experiencing an unexpected and unprecedented economic disruption due to the novel Coronavirus (COVID-19/COVID) pandemic. In response, a series of laws and administrative decisions have been taken to provide financial and tax relief. These measures include the COVID Tax Facility in the form of extended tax filing and payment deadlines, accelerated tax refunds, tax deferral and additional tax breaks. This article will summarize the most important COVID Tax Facility for businesses.

Extension of Tax Return Filing and Payment Dates

As the first step of the COVID Tax Facility, the Department of Treasury and the Internal Revenue Service (IRS) automatically extended the April 15 tax filing and payment deadline to July 15, 2020 for all taxpayers. While the due date for payment of accrued tax amounts on July 15 remains unchanged, taxpayers have been given the opportunity to extend their tax filing deadline for another 6 months, until October 15, if they apply by July 15.

While the IRS encourages taxpayers to pay as much of their accrued tax debt as they can on the due date and consider the various payment options provided by the IRS for the remaining amount, as an additional administrative COVID tax relief, the IRS also announced that it will restrict collection activities for delinquent taxes during the COVID-19 crisis.

COVID Tax Facilitation Arrangements

In response to the economic impacts of the COVID-19 pandemic, the Families First Coronavirus Measures Act (FFCRA), signed into law on March 18, 2020, and the Coronavirus Relief and Economic Security (CARES) Act, signed into law on March 27, 2020, provide important COVID tax relief for small and medium-sized businesses. These COVID tax reliefs include more flexible rules for business losses, accelerated tax refunds, tax benefits for maintaining employment levels and additional tax deductions.

COVID Tax Relief on Operating Losses

The COVID pandemic has caused unprecedented economic problems. This is likely to result in revenue losses and operating losses for many companies. The CARES law provides critical COVID tax relief by allowing losses incurred during the COVID crisis to be offset against retained earnings. With these COVID tax reliefs, companies will be able to offset losses incurred during this period against retained earnings and receive a cash tax refund.

Relaxation of the Net Operating Loss Rules

Net Operating Loss is a tax deduction item that arises when an entity's tax deductible amounts exceed its taxable income. Prior to 2018, it was possible to offset Net Operating Losses against profits of the previous 2 years or the following 20 years.

The 2017 enactment of the Tax Cuts and Jobs Act (TCJA) removed the time limit for offsetting losses against subsequent year profits for tax periods beginning after January 1, 2018, but removed the ability to offset losses against profits of the previous 2 years and limited the loss offset to 80% of taxable income.

The CARES Law temporarily relaxed the rules on the offsetting of net operating losses, removing the limitation on the amount of offsetting losses and allowing offsetting with profits of the previous 5 years. For net operating losses incurred or to be incurred between January 1, 2018 and December 31, 2020, the law allows offsetting with profits of the previous 5 years and removes the limit on the amount of the offset to 80% of taxable income.

This COVID Tax Relief is available to businesses that are normally profitable but have a net operating loss in this period (2018, 2019, 2020) due to COVID-19;

• Net operating losses can be offset up to 100% of their taxable income
• Offset their net operating losses against the profits of previous years and receive a substantial tax refund for the taxes paid in those years
• Offset their net operating losses with 100% of their future profits

has made it possible.

Normally, the deadline for offsetting net operating losses against retained earnings is the last day of the tax period following the tax period in which the loss was incurred. Therefore, the IRS has granted an additional 6-month grace period for tax periods ending on or before June 30, 2019.

Damages Due to COVID Disaster

According to the provisions of the Tax Code, taxpayers can receive a tax refund by offsetting the losses incurred due to federally declared disasters against the profit of the previous tax year. On March 13, 2020, the entire United States was declared a disaster area due to the COVID-19 pandemic, effective March 1, 2020.

With this announcement, as a COVID tax relief, taxpayers can choose to offset their losses incurred in 2020 due to COVID-19 against their 2019 profits with their original or amended tax returns. By offsetting 2020 losses against 2019, this may reduce this year's tax liabilities or increase the amount of tax refunds that can be received.

In some cases, this could lead to higher net operating losses. Thus, under the provisions of the CARES Law that losses can be offset against 5 years of retained earnings, it would be possible to offset more losses against retained earnings and save additional cash.

COVID Tax Facility Enabling Accelerated Tax Refunds

Accelerated depreciation and tax refunds as part of the COVID Tax Facility provided under the CARES Law provide companies with additional cash flow during the COVID-19 crisis.

Alternative Minimum Tax

The Alternative Minimum Tax is designed to ensure that taxpayers pay at least a minimum amount of tax by excluding or limiting certain tax deductions. Taxpayers who are liable for the Alternative Minimum Tax are entitled to an Alternative Minimum Tax Deduction that can be deducted from regular taxes.

The TCJA Law abolished the Alternative Minimum Tax obligation for companies and allowed existing Alternative Minimum Tax Deductions to be used until the end of 2021. According to this regulation, Alternative Minimum Tax Deductions could be deducted from regular taxes for the period 2018-2020 or 50% of the remaining amount could be taken as a refund, and in 2021, the entire remaining balance could be taken as a refund.

The CARES Law allows companies to have additional cash flow during the COVID crisis period by receiving an immediate refund of their Alternative Minimum Tax Deduction balances. Under the CARES Law, companies will be able to deduct the full amount of their Alternative Minimum Tax Deductions from their 2019 tax liabilities. In addition, companies will have until December 31, 2020 to apply for a tax refund by offsetting the full amount of Alternative Minimum Tax Deductions against taxes paid for 2018.

Depreciation of Qualified Building Improvements

The TCJA replaces the existing different definitions of building improvements with a single definition of Qualified Building Improvements. Qualified Building Improvements include improvements to the interior of non-residential buildings. The Law also increased the first year special depreciation rate for certain property acquired and placed in service between September 27, 2017 and December 31, 2022 from 50% to 100%. The Law envisaged a 15-year depreciation period for Qualified Building Improvements but was inadvertently not reflected in the text of the law. Thus, Qualified Building Improvements fell into the 39-year depreciation category for non-residential rental buildings and the 100% first year special depreciation rate could not apply to Qualified Building Improvements.

The CARES Law corrected a technical error in the TCJA by changing the depreciation period for Qualified Building Improvements to 15 years (20 years under the Alternative Depreciation System). This correction made it possible to use the special depreciation rate of 100% for Qualified Building Improvements.

Thus, businesses will be able to directly expense Qualified Building Improvements instead of depreciating them over a 39-year period and file an amended tax return for 2018 and 2019 to receive an immediate tax refund.

COVID Tax Facility for Employment Protection

Laws enacted due to the COVID-19 pandemic provide 2 new Employer Tax Breaks for businesses severely negatively impacted by COVID-19. These COVID Tax Reliefs are intended to encourage employers to continue to employ their employees during the COVID economic crisis.

Labor Protection Tax Deduction

The Labor Protection Tax Deduction provided by the CARES Law is intended to encourage employers to continue to employ their employees during this period. This relief is generally available to all employers, regardless of their size. The Labor Protection Tax Deduction is available to employers who meet the conditions and fall into the following two categories

• Employers whose activities have been partially or completely suspended by the authorities due to the COVID-19 crisis
• Employers whose gross revenues fell by more than 50% compared to the same quarter in 2019.

A tax deduction of 50% of eligible salary payments (including health insurance payments) paid by employers to employees between March 13, 2020 and December 31, 2020, up to $10,000, for which a tax refund can be claimed.

For employers with 100 or fewer employees on average in 2019, all salary payments will be eligible for tax relief, whether or not the employees work full-time. If the average number of employees in 2019 is more than 100, tax deductions will only be available for salary payments made when employees are unable to work due to COVID.

Businesses that receive SME Support Credits under the Salary Protection Scheme regulated by the CARES Act are not eligible for the Labor Protection Tax Deduction. If an employer who has received a loan under the Salary Protection Program has also benefited from the Workforce Protection Tax Deduction, this tax deduction must be repaid to the Internal Revenue Service (IRS).

Paid Leave Discount

The FFCRA Law entitles small and medium-sized enterprises to a tax deduction for salary payments made to employees on sick or childcare leave related to COVID-19, for which a tax refund can be claimed. This tax deduction will apply to qualifying salary payments made between April 1, 2020 and December 31, 2020 by businesses with fewer than 500 employees to employees on paid leave due to illness or to care for their children.

• Employees can take up to 80 hours of paid leave for their own health needs. In this case, the employer will be entitled to a tax deduction equal to the amount paid to the employee, up to $511 per day and $5,110 in total.
• Employees can take up to 80 hours of paid leave to care for relatives. In this case, the employer will be entitled to a tax deduction of two-thirds of the amount paid to the employee, up to $200 per day and $2,000 in total.
• Employees can take up to 10 weeks of paid leave to care for their children whose schools and daycare centers are closed due to COVID-19 measures. In this case, the employer will be entitled to a tax deduction of $200 per day and two-thirds of the payment to the employee, up to a total of $10,000.

In all cases, the employer will also be entitled to a tax deduction for Medicare taxes on qualifying health plan payments and qualifying salary payments. Some similarly-situated self-employed individuals will also be eligible for similar tax deductions.

The tax deduction for paid leave to care for children can be combined with the tax deduction for paid sick leave. Thus, employers may be entitled to tax deductions for a total of 12 weeks of salary payments, 2 weeks of sick leave and 10 weeks of childcare leave. However, employers cannot use the same salaries for both Labor Protection Deduction and Paid Leave Deduction.

COVID Tax Facility on Salary Taxes

Employers and the self-employed will be able to defer their share of the 6.2% Social Insurance Tax accrued until the end of the year after March 27, 2020, when the CARES Law becomes law. The deferred taxes will be paid within the following 2 years: 50% by December 31, 2021 and the remaining 50% by December 31, 2022. However, employers must continue to pay their share of Medicare taxes and collect and remit to the IRS their employees' share of Social Security and Medicare taxes.

COVID Tax Breaks Expanding Tax Breaks

The CARES Law has temporarily increased the limits of some tax reliefs. At a time when companies' revenues and profits are significantly reduced, even if they are not loss-making, these COVID tax reliefs, which allow for more tax relief, will reduce the amount of tax that companies pay.

Interest Expense Limit Change

Prior to the TCJA, businesses were generally able to deduct interest expense without limitation. However, the TCJA limits the amount of Net Interest Expense that can be used as a deduction to 30% of Adjusted Taxable Earnings, except for small businesses with annual gross receipts of $25 million or less (updated by inflation in subsequent years). Net Interest Expense is interest expense paid or accrued during the relevant tax period less interest income.

The Coronavirus Relief and Economic Security (CARES) Act temporarily increased the deductible Net Interest Expense from Adjusted Taxable Earnings from 30% to 50% for tax years beginning in 2019 and 2020 for companies with average gross receipts of more than $25 million for the last 3 tax years. In addition, businesses will be able to calculate the 50% limit for 2020 based on their 2019 Adjusted Taxable Earnings. As 2020 revenues are generally expected to be much lower due to the COVID-19 pandemic, for most companies this adjustment will allow for a larger deduction item and reduce their tax liability.

Tax Deductible Donation Limits

For 2020, the CARES Law increases the tax deductible amount of charitable cash and food donations by companies from 10% to 25% of taxable income. Tax-deductible donations must be made within the 2020 calendar year, regardless of the taxpayer's tax period. In case the tax deductible donations are more than 25%, it is possible to carry forward the increased amounts to subsequent years.

The COVID Tax Facility outlined above offers important opportunities for businesses to overcome the challenges they face during this period. Therefore, businesses should review all of these COVID Tax Reliefs and assess which ones, and to what extent, are applicable to their situation. If you have any questions or need professional support on these issues, please do not hesitate to contact us.