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Understanding the tax impact of federal covid-19 relief laws

By Adam D. Schurle

Amid the covid-19 pandemic, Congress recently enacted two pieces of legislation, the Families First Act1 and the CARES Act,2 which are designed to provide economic stimulus and tax relief to businesses and employees affected by the pandemic. 

Together, the acts provide benefits to employees who are unable to work, incentives to employers who keep employees on staff, and tax relief to businesses to assist with cash flow issues. Following is a summary of some of the key tax provisions of the Families First Act and the CARES Act.3 

Families First Act 

Emergency FMLA expansion & paid sick leave

The Families First Act amends the Family Medical Leave Act (FMLA) to allow an employee who is unable to work to take paid leave to care for the employee’s under-18 child if the child’s elementary school, secondary school, or place of care has been closed due to a covid-19 “public health emergency” declared by a federal, state, or local authority.4 The benefits apply to employers with fewer than 500 employees, and are capped at $200 per day and $10,000 in the aggregate.

Additionally, for qualified reasons related to covid-19, the Families First Act requires employers with fewer than 500 employees to make available (i) 80 hours of paid sick leave for each full-time employee, and (ii) for each part-time employee, the employee’s average number of hours worked for a two-week period.5 Paid sick leave must be paid at the employee’s regular rate of pay, but is capped at (i) $511 per day and $5,110 in the aggregate in certain circumstances, and (ii) $200 per day and $2,000 in the aggregate in others.

Employer tax credits

New refundable tax credits against the 6.2 percent Social Security employer payroll tax help offset the cost to employers of providing the benefits described above.6 Employers are entitled to a refundable tax credit equal to 100 percent of the wages required to be paid each calendar quarter under the FMLA expansion and paid sick leave provisions of the Families First Act.7

These credits are subject to limits. For credits in connection with paid sick leave benefits, if an employee takes leave because she is sick or quarantined, the amount of wages taken into account with respect to the employee is limited to $511 per day.8 The limit is $200 per day for workers taking leave to care for another person or because of Health and Human Services-specified conditions. For credits claimed for providing the expanded FMLA benefits, the available credit is limited to $200 per day per employee.9

The Families First Act authorizes employers to receive additional payroll tax credits for the 1.45 percent Medicare payroll tax on wages paid to employees pursuant to the FMLA expansion and sick leave provisions described above.

Tax credits for self-employed

The Families First Act also provides a similar tax credit for sick leave for certain self-employed individuals that may be taken against the self-employment tax.10 Self-employed individuals are generally eligible for the credit if they would be entitled to paid sick leave had they been an employee (rather than being self-employed). Subject to special limitations related to average daily self-employment income, the amount of the self-employment tax credit is similar to the employer paid sick leave credit described above (up to $511 per day for an individual who is sick or quarantined and up to $200 per day for an individual who cares for another person or is on leave due to a Health and Human Services-specified condition). 

A credit is also available for an individual’s “qualified family leave equivalent amount,” which is equal to: (i) the number of days (up to 50) during the taxable year that the individual cannot work for reasons that would entitle the individual to the benefits of the FMLA expansion provisions of the Families First Act if the individual were an employee, multiplied by (ii) the lesser of (A) $200 or (B) 67 percent of the individual’s average daily self-employment income for the year.11

The CARES Act

Employee retention credit for employers subject to closure 

As an incentive for employers to keep employees on staff, the CARES Act provides a refundable credit against an employer’s share of Social Security taxes for up to a maximum of 50 percent of the first $10,000 in qualified wages paid to each employee after March 12, 2020 and before January 1, 2021.12 To be eligible, an employer must carry on a trade or business in calendar year 2020. Furthermore, with respect to any calendar quarter, either (a) the operation of that trade or business must be fully or partially suspended during the quarter due to orders from an appropriate governmental authority because of covid-19, or (b) the applicable calendar quarter is within a period running from (i) the first calendar quarter beginning after 2019 in which the business has suffered a more than a 50 percent decrease in gross receipts compared to the same calendar quarter for the prior year until (ii) the first subsequent calendar quarter in which the business’s gross receipts are at least 80 percent of gross receipts for the same calendar quarter for the prior year. This means that certain employers may be eligible for the credit even if their business has not been shut down by a governmental order.

The refundable tax credit may only be taken against “qualified wages,” and different rules apply depending on the employer’s number of full-time employees. For employers with more than 100 full-time employees, the credit is only available with respect to wages paid to employees not providing services due to covid-19. However, for employers with 100 or fewer full-time employees, the credit is available with respect to any wages paid to an employee. In the case of employers with more than 100 full-time equivalent employees, qualified wages are also limited to the amount of wages the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the relevant period. 

Qualified wages do not include amounts paid to employees pursuant to the paid sick leave and paid family and medical leave credit provisions in the Families First Act (described above). The credit is generally not available for government employers or employers receiving a small business interruption loan under other provisions of the CARES Act.

Deferral of employer Social Security payroll taxes

The CARES Act also permits employers to defer payment of the employer’s share of Social Security taxes for the period beginning on the date of the enactment of the CARES Act and ending before January 1, 2021.13 One half of the deferred taxes must be paid by the employer on or before December 31, 2021, and the remaining half must be paid by the employer on or before December 31, 2022. Self-employed persons are eligible for a comparable deferral of 50 percent of the Social Security portion of self-employment taxes.

For employers eligible for the Families First Act employment tax credit described above, that credit would reduce employment tax due and would reduce the amount of tax subject to deferral under this provision of the CARES Act. The deferral also is not allowed with respect to persons receiving loan forgiveness with respect to certain small business loans created under other provisions of the CARES Act.

Exclusions for 2020 employer payments of employee student loans

The CARES Act expanded the exclusion from income for certain educational assistance programs so that an individual may exclude from gross income up to $5,250 of payments made by an employer to the individual or directly to a lender of principal or interest on any qualified education loan of the employee.14 Only payments made after enactment of the CARES Act and before January 1, 2021 qualify for the exclusion, and the exclusion does not apply to highly compensated employees (generally employees who received more than $125,000 in compensation from the employer in 2019).

Net operating loss changes

Congress also amended the net operating loss (NOL) rules to help ease cash flow for certain businesses.15 The Tax Cuts and Jobs Act (TCJA),16 enacted in 2017, limited the deductibility of NOLs generated after December 31, 2017 to 80 percent of the taxpayer’s taxable income in the year in which the NOL is claimed. The CARES Act repeals the limitation for tax years beginning before December 31, 2020, allowing taxpayers to use NOLs to offset 100 percent of taxable income.

The TCJA also eliminated NOL carrybacks to prior years for NOLs generated after December 31, 2017. The CARES Act amends the NOL carryback rules to permit NOL carrybacks to each of the five taxable years preceding a loss for losses generated in 2018, 2019, and 2020, including tax years when the top marginal tax rate for corporations was 35 percent instead of 21 percent.17 This allows some business taxpayers to carry back NOLs that were not permitted to be carried back before enactment of the CARES Act and, in some cases, receive cash payments for tax refunds attributable to prior tax years.

Business interest limitation

The TCJA imposed a limit on the amount of business interest a business may deduct.18 Under the TCJA rules, a business interest deduction generally may not exceed business interest income, plus 30 percent of adjusted taxable income for the year. The CARES Act increases the percentage limitation for tax years 2019 and 2020 to allow a business to claim a business interest deduction up to its business interest income, plus 50 percent of its adjusted taxable income.19 In addition, a taxpayer may elect to calculate its 2020 business interest limitation based on its 2019 adjusted taxable income. Special rules apply in the case of partnerships.

Loss limitation changes

The TCJA disallowed deductions for excess business losses (generally losses in excess of the taxpayer’s aggregate gross income or gain plus $250,000) of noncorporate taxpayers for tax years beginning after December 31, 2017 and before January 1, 2026.20 The CARES Act delays the effective date of this limitation, so that it applies to tax years beginning after December 31, 2020 and before January 1, 2026.21

Charitable contribution deduction changes

Under current law, an individual generally may deduct charitable contributions up to 50 percent of the individual’s adjusted gross income, and a corporation generally may deduct charitable contributions up to 10 percent of its taxable income.22 The CARES Act modifies these limitations by permitting individuals to deduct cash contributions up to 100 percent of adjusted gross income and by permitting corporations to deduct cash contributions up to 25 percent of taxable income.23

The CARES Act also provides an “above-the-line” deduction for individuals making cash charitable contributions up to $300 for tax years that begin in 2020.24 The deduction is allowed for individual taxpayers who do not itemize deductions.

Conclusion

It remains unclear how effective these provisions will be in addressing the potential economic devastation wrought by covid-19. Nonetheless, together the Families First Act and CARES Act should provide some relief to employees who are unable to work and employers whose workforce and business operations have been impacted by the pandemic. 


ADAM SCHURLE is a tax partner in the Minneapolis office of Stoel Rives LLP.  He counsels on a variety of federal and state tax issues, including entity formation, mergers and acquisitions, transactions involving pass-through entities, tax credit transactions, employment taxes, equity compensation arrangements, and cooperative tax matters.
 

Notes

1 Families First Coronavirus Response Act, Public Law 116-127, 116th Cong. (3/18/2020) (the “Families First Act”).

2 Coronavirus Aid, Relief, and Economic Security Act, Public Law, Public Law 116-136, 116th Cong. (3/27/2020) (the “CARES Act”).

3 Although the $1,200 (or less) cash recovery rebates paid to certain individuals are technically tax credits, see CARES Act §2201, an in-depth discussion of those payments is beyond the scope of this article. 

4 Families First Act, §3102.

5 Families First Act, §5102.

6 Families First Act, §7001.

7 Families First Act, §7003.

8 Families First Act, §7001.

9 Families First Act, §7003.

10 Families First Act, §7002.

11 Families First Act, §7004.

12 CARES Act, §2301.

13 CARES Act, §2302.

14 CARES Act, §2206.

15 CARES Act, §2303.

16 Tax Cuts and Jobs Act of 2017, Public Law 115-97, 115th Cong. (12/22/2017) (the “TCJA”); IRC §172. 

17 CARES Act, §2303.

18 IRC § 163(j).

19 CARES Act, §2306.

20 IRC § 461(l).

21 CARES Act, §2304.

22 IRC § 170.

23 CARES Act, §2205.

24 CARES Act, §2204.