In response to the economic hardship resulting from COVID-19, governments at all levels have tried to provide relief to businesses. The Federal government, through a series of acts, passed stimulus and relief packages in excess of $2.5 trillion dollars with the focus on preserving jobs and maintaining economic activity. Additionally, Illinois and Chicago have made relief available to impacted businesses
Federal Programs: Payroll Tax Relief
Deferral of Employer Payroll Taxes: The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows for deferral of the employer share of Social Security taxes owed in 2020 (including the share owed by self-employed individuals), with the deferred amount to be paid over the following two years, half by December 31, 2021 and the other half by December 31, 2022. The payroll taxes that can be deferred are those incurred during the period beginning on the CARES Act’s date of enactment and ending before January 1, 2021.
Federal Programs: Income Tax Relief
Tax Due Date: The federal tax due date for returns due April 15, 2020, including related payments and estimated payments, was postponed to July 15, 2020.
Net Operating Loss Carrybacks: This provision reverses restrictions on businesses’ use of losses enacted as part of the TCJA. Those changes amended section 172 to limit taxpayers’ ability to carry back a Net Operating Loss (“NOL”) and introduced an 80% limitation on NOL carryforwards. The CARES Act allows for a 5-year carryback of NOLs arising in tax years beginning in 2018, 2019, or 2020 and temporarily removes the 80% of taxable income limitation.
Pass-Through Business Losses: Section 461(l) was enacted by the Tax Cuts and Jobs Act (“TCJA”), limiting the ability of individuals (and sole proprietors) from claiming excess business losses beginning in 2018. The CARES Act modifies the loss limitation rule, thereby reinstating taxpayers’ ability to deduct excess business losses attributable to pass-through businesses and sole proprietorships for tax years 2018-2020.
Acceleration of AMT Credit: The TCJA repealed the corporate AMT, but allowed corporate AMT credits to continue to be utilized, spread over several years ending in 2021. The CARES Act allows taxpayers to accelerate their ability to claim AMT credits into 2018 and 2019, or to make an election to claim the entire amount in 2018.
Increase in Taxable Income Threshold for Deducting Interest Expense: The TCJA vastly expanded the restrictions on deductibility of business interest expense, generally limiting it to 30% of taxable income (broadly defined). The CARES Act raises the threshold to 50% for 2019 and 2020 for taxpayers other than partnerships. The change can adversely impact taxpayers that may be subject to other loss limitation provisions, such as BEAT. The CARES Act allows taxpayers to elect out of the increased limitation. The act does not adjust the limitation for partnerships, but does increase the limitation at the partner level in a complex manner. 50% of a partner’s suspended excess interest expense allocated to them for 2019 can be fully utilized, while the remaining 50% is subject to TCJA-enacted rules applicable to partner excess interest expense. A partner can choose to elect out of the new rule.
Retail Glitch: A well-known drafting error in the TCJA classified qualified improvement property as 39-year property when it was intended to be treated as 15-year property. The CARES Act corrects this oversight by defining qualified improvement property as 15-year property. This means that qualified improvement property will now be eligible for bonus depreciation and a shorter recovery period. This provision is effective for property acquired and placed in service after September 27, 2017, thus affording taxpayers the ability to amend prior year returns.
Accelerating Loss Deductions to Prior Years: Pursuant to IRC section 165(i), taxpayers may elect to deduct certain losses attributable to a federally declared disaster in the “[…] taxable year immediately preceding the taxable year in which the disaster occurred.” In the past, generally, taxpayers deducting section 165(i) losses had tangible damage corresponding with their losses - i.e., a storm visibly damaging a building’s walls and infrastructure. With respect to coronavirus losses, although they seemingly qualify for section 165(i) relief, it may be difficult ultimately linking them to the coronavirus, because in many cases there is no visible, outward damage. Coronavirus may not be the only event which led to a taxpayer’s losses, so parsing out which losses qualify will be a nuanced task.
Enhanced Charitable Deduction for Food Donations: The enhanced tax deduction, subject to certain criteria, provides an extra incentive for food donation by allowing the donating business to deduct the lesser of (a) twice the basis value of the donated food or (b) the basis value of the donated food plus one-half of the food’s expected profit margin (if the food were sold at its fair market value). Charitable contribution deductions are limited to 25% of taxable income from corporations.
Federal Programs: Loan Programs
Paycheck Protection Program: The CARES Act establishes a new Paycheck Protection Program to let small businesses, nonprofits, and individuals seek loans through the Small Business Administration (“SBA”) 7(a) loan program. The program, plus subsequent updates, authorizes $659 billion in total 7(a) lending from February 15 through August 8 for fiscal year 2020. Recipients can use the loans to cover eligible payroll costs -- including salaries, commissions, regular paid leave, and health-care benefits -- as well as mortgage interest and utility payments. Recipients must make a “good faith certification” that they will use the funds to retain workers, maintain payroll, and pay for rent and similar expenses. The SBA allows deferment payments until the date on which the amount of forgiveness is determined under section 1106 of the CARES Act is remitted to the lender. Recipients of SBA-guaranteed loans under the Paycheck Protection Program (“PPP”) can apply for loan forgiveness over either eight weeks or 24 weeks for eligible payroll costs and for mortgage interest, rent, and utility payments.
Main Street Lending Program: The Main Street Lending Program is a new offering created by the Federal Reserve to help businesses during the ongoing COVID-19 crisis and accompanying economic downturn. It is a great alternative to the PPP, the Economic Injury Disaster Loan (EIDL) program and the Express Bridge Loan program. Note that companies that have already applied to the PPP are also eligible for loans through the Main Street Lending Program.
The Illinois Department of Revenue (IDOR) will waive penalties and interest for out of-state employers who fail to withhold Illinois income taxes for employees, where the sole reason for the withholding obligation is that the employee is working from home due to the COVID-19 pandemic.
The IDOR is following the federal government in providing special tax filing and payment relief to individuals and businesses in response to the COVID-19 Outbreak. The filing deadline for Illinois income tax returns has been extended from April 15, 2020, to July 15, 2020. This filing and payment relief includes: The 2019 income tax filing and payment deadlines for all taxpayers who file and pay their Illinois income taxes on April 15, 2020, are automatically extended until July 15, 2020. This relief applies to all individual returns, trusts, and corporations. This does not impact the first and second installments of estimated payments for 2020 taxes that are due April 15 and June 15. Taxpayers are required to estimate their tax liability for the year and make four equal installments. Taxpayers will not be assessed a late estimated payment penalty if the amount of the installments equals 90% or more of the current year’s liability or 100% of the previous year’s liability.
The Department of Revenue is to defer sales tax payments for more than 24,000 small- and medium-sized bars and restaurants. Eating and drinking establishments that incurred less than $75,000 in sales tax liabilities last year will not be charged penalties or interest on late payments due in March, April or May.
Chicago has extended the payment due dates for Amusement, Bottled Water, Checkout Bag, Ground Transportation, Hotel Accommodation, Parking, and Restaurant taxes for the periods of July 2019 through September 2020.
If you need help navigating through these complexities, please reach out to your trusted advisor. Or, click here to learn more about Mazars USA LLP.
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