Business assistance for COVID-19 (FFCRA & CARES Act)
The CARES Act creates business assistance with tax benefits including employer retention credit and penalty relief. Also, find more information on small business assistance available through the SBA.
Editor's note: This article was last modified on May 13, 2020. The following business relief were announced in the CARES and FFCRA Acts to help businesses dealing with the coronavirus (COVID-19) pandemic.
Also see the Insights article, "New rules for NOLs under CARES Act" for further guidance on how the rules for NOLs changed under the CARES Act.
Deadlines for direct deposit and PPP loan repayment
Direct deposit information in the Get My Payment tool
The last chance to enter direct deposit information in the Get My Payment tool ends Wednesday, May 13, at noon ET. Starting in the second half of May the IRS will accelerate payment of EIPs by paper check. NRTFs may still use the non-filers tool to enter simple return and direct deposit information by October 15. Reminder: individuals with a filing obligation should not use the NRTF tool to enter bank information.
IRS news release IR-2020-92
Employee retention credit and PPP loan repayment.
Employers have been given a short extension to repay PPP loans and receive the employee retention credit. An eligible employer who repays the PPP loan by May 14, 2020 (originally, May 7, 2020 under earlier guidance) will be treated as through the employer did not receive a covered loan for purposes of employee retention credit eligibility.
Employee retention credit FAQs (see FAQ 79)
Business activities of U.S. persons in foreign countries
The IRS is continuing its cross-border guidance for individuals who are unable to leave or return to the U.S. because of COVID-19 related emergencies or travel restrictions. Business activities conducted by a U.S. person in a foreign country (including U.S. territories) may give rise to foreign branch reporting responsibilities.
Generally, a foreign branch is defined as an integral business operation carried on by a U.S. person outside of the U.S. The individual may need to complete Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs).
Rev. Proc. 2020-30 explains that temporary activities are not taken into account in determining whether a U.S. domestic corporation has a foreign branch, or a U.S. person has an obligation to file Form 8858.
The term “temporary activities” refers to business activities that are:
- conducted by one or more individuals in a foreign country during any single consecutive period up to 60 days in 2020,
- to the extent the individual or individuals were temporarily present in the foreign country during that period, and,
- that would not have been conducted in the foreign county but for COVID-19 emergency travel disruptions.
Example: an employee of a U.S. corporation travels to a foreign country on March 1, 2020. Because of COVID-19 travel restrictions, the employee is unable to return to the U.S. until April 27, 2020. Business activities conducted by the employee during this period are treated as temporary activities to the extent that the individual would have left and not conducted the activities in the foreign country.
The corporation and the individual should retain contemporaneous documentation to establish that the business activities are temporary activities, including establishing the applicable 60-day period. The revenue procedure advises that no inference should be drawn as to whether business activities that run on longer than 60 days are temporary activities or would be considered a foreign branch.
Qualified improvement property and CARES Act retroactive changes
A provision in the CARES Act treats qualified improvement property (QIP) as 15-year property, making it once again eligible for 15-year MACRS depreciation or bonus depreciation. Affected taxpayers who previously treated QIP as 39-year property have several options for correcting depreciation for 2018 and 2019.
Background on bonus depreciation and the “retail glitch”
The TCJA allowed 100% additional first year “bonus” depreciation for qualified property acquired after September 27, 2017 and placed in service after December 31, 2017.
The TCJA also grouped qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property in a category called qualified improvement property, or QIP. However, the Act did not provide a 15-year recovery period for QIP. Consequently, QIP defaulted to the 39-year recovery property for nonresidential rental property. The so-called retail glitch also made QIP ineligible for bonus depreciation, which is generally allowed only for property with a class life of 20 years or less.
The CARES Act and QIP
The CARES Act provides a technical correction to the TCJA by designating QIP as 15-year MACRS property. Also, QIP is assigned a 20-year recovery period for the alternative depreciation system (ADS). This change is in effect as if it had been included in the TCJA. As a result, QIP acquired after September 27, 2017 and placed in service after December 31, 2017 is eligible for 100% bonus depreciation. The CARES Act provision thus “fixes” the retail glitch.
The Treasury Department and IRS provide guidance in Rev. Proc. 2020-25 for handling this retroactive change. The revenue procedure permits taxpayers to:
- File amended returns, or
- File Form 3115 Application for Change in Accounting Method, or
- Make an Administrative Adjustment Request (AAR) for tax year 2018, 2019, or 2020. (See the next section for an AAR example.)
For 3115 purposes, the change is treated as an automatic §481(a) adjustment changing from an impermissible to a permissible depreciation method.
Example: DDT Co. placed $25,000 of QIP in service during 2018 and claimed depreciation deductions of $400 in 2018 and $600 in 2019. DDT may now amend its 2018 return to claim the full $25,000 bonus depreciation deduction. If amending 2018, the company would also have to amend its 2019 return to remove the $600 depreciation deduction claimed for that year. DDT could instead wait to claim the $24,000 remaining deprecation on its 2020 return filed in 2021 using 3115 procedures.
Alternatively, DDT could amend its 2018 and 2019 returns or use 3115 procedures to elect out of bonus depreciation and instead claim depreciation based on the 15-year instead of the 39-year recovery period.
These procedures do not apply to:
- Certain large retail trade or businesses and large farm businesses that made or withdrew elections regarding the §163(j) interest expense limitation (discussed later), and
- Property that was already expensed, for example, under the de minimis safe harbor rules.
Rev. Proc. 2020-25 also provides automatic extensions of time for making, revoking, or withdrawing several §168 elections for QIP property placed in service in 2018, 2019, or 2020:
- The §168(k)(7) election not to deduct bonus depreciation.
- The §168(k)(10) election to deduct 50% instead of 100% bonus depreciation for property acquired after September 27, 2017 and place in service during a tax year that includes September 28, 2017 (tax year 2017 for calendar year taxpayers).
- The §168(g)(7) election to use the ADS for property placed in service during the taxable year.
- The §168(k)(5)(A) election regarding depreciation rules for specified plants in a farming business.
In general, taxpayers who filed timely tax returns or Form 1065 for tax years 2018, 2019, or 2020 have until October 15, 2021 to make or revoke these elections.
Partnership procedural relief for CARES Act changes
Under the centralized audit regime, starting with tax years beginning on or after January 1, 2018, partnerships could make changes to previously filed tax returns only through an Administrative Adjustment Request (AAR). This means that without procedural relief, partnerships could not take advantage of certain CARES Act changes, such as the suspension of the excess business loss rules or bonus depreciation for qualified improvement property (discussed in the previous section) for tax years beginning in 2018 or 2019. Affected partnerships would have to wait until they filed their current year return, which would be the 2020 return filed in 2021 for calendar year partnerships.
In order to allow partnerships to benefit from the CARES Act as quickly as possible, the IRS is allowing partnerships to file amended Forms 1065 and reissue Schedule K-1s by September 30, 2020 for tax years beginning in 2018 and 2019. The amended Form 1065 must have the amended box checked and show “FILED PURSUANT TO REV PROC 2020-23” at the top. The partnership must also attach a statement with the same notation to each reissued K-1. The partnership may either file electronically or mail the amended return.
Note: this relief only applies to partnerships that have not opted out of the centralized audit regime and only to partnerships that have already filed tax returns and issued Schedule K-1s for tax years beginning in 2018 or 2019.
Example: ABC partnership timely filed its tax year 2019 return that included a depreciation deduction for qualified improvement property (QIP) that was placed in service in 2019. The deduction for depreciation for the QIP was calculated based on a 39-year depreciable life.
The new rules provided by the CARES Act allow ABC to amend tax year 2019. For 2019, QIP is eligible for bonus depreciation which would allow ABC to deduct the full cost of the property immediately instead of spreading it over 39 years.
Under the new procedures set forth under Rev. Proc. 2020-23, ABC will be able to file an amended Form 1065 and issue new K-1s to its partners immediately which, in turn, will result in relief faster than reporting the changes on its 2020 Form 1065 filed during the 2021 tax season. ABC must check the amended return box on the revised Form 1065, have “FILED PURSUANT TO REV PROC 2020-23” written at the top, and attach a statement to each reissued K-1.
Form 3115 duplicate copy reminder
Taxpayers who file Form 3115 must also send a signed duplicate copy of the completed form to the IRS in Ogden, UT. An IRS Associate Chief Counsel memorandum explains that under Reg. §301.9100-2(b) taxpayers have until on or before the end of the automatic 6-month extension period to file the duplicate form. For example, a taxpayer who timely files a 2019 Form 1040 that includes Form 3115 on June 1, 2020 could file the duplicate Form 3115 in August 2020 and it would still be considered timely. See Form 3115 instructions for the correct address to send the form.
Business interest limitation for large businesses
The CARES Act modified the §163(j) business interest expense limitation introduced by the TCJA.
Important! The limitation applies only to businesses with average annual gross receipts over $25 million.
Under the TCJA, starting in 2018 (for calendar year businesses), the business interest expense deduction is generally limited to business interest income plus 30% of adjusted taxable income (ATI) and certain financing expenses.
- Business interest income means interest includable in the taxpayer’s gross income, such as income from late receivables.
- ATI means taxable income without regard to business interest income, the interest expense deduction itself, NOLs, the §199A deduction, and depreciation.
Small business exception. The business interest expense limitation does not apply to businesses with average annual gross receipts of $25 million or less.
Electing businesses. Real property trades or business and farming business may elect out of the §163(j) limitation. However, electing businesses are generally required to use the slower alternative depreciation system (ADS) and may not use bonus depreciation. These are referred to as “electing businesses.”
Partners. Partnerships allocate excess business interest expense or EBIE to partners who, in turn, treat the EBIE as business income paid or accrued in succeeding taxable years.
The CARES Act temporarily increases the 30% of ATI limitation to 50% of ATI for tax years beginning in 2019 and 2020. For partnerships, the change only applies to tax years beginning in 2020. Rev. Proc. 2020-22 explains how taxpayers can take advantage of new §163(j) elections available to taxpayers because of the CARES Act changes.
- An election not to apply the 50% limitation and instead apply the 30% limitation for tax years 2018, 2019, or 2020 (for partnerships, only tax year 2020).
- An election to use ATI for tax year 2019 to calculate the limitation for tax year 2020.
- Electing businesses. Real property trades or businesses and farming businesses have an automatic extension of time to elect out of the business interest expense limitation for tax years 2018, 2019, or 2020. Also, those that previously elected out of the limitation may withdraw the election and have be treated as if it had not been made.
- EBIE. Partners may elect out of a CARES provision that allows them to deduct 50% of 2019 EBIE in tax years beginning in 2020.
See Rev. Proc. 2020-22 for the time and manner of making these elections.
Social security tax deferral (CARES Act)
The CARES Act permits employers to defer their share of social security taxes starting March 27, 2020 through December 31, 2020, without incurring failure-to-deposit or failure-to-pay penalties. One-half of the deferred deposits must be paid on December 31, 2021, and the remainder on December 31, 2022. These are referred to as the “applicable dates.”
An IRS FAQ provides additional details about the deferral and clarifies how the deferred taxes are coordinated with employer credits for paid leave and with PPP loans.
- Employer credits. The employer social security tax deferral is in addition to retained employment taxes in anticipation of the FFCRA paid leave credits and the CARES Act employee retention credit. Retained employment taxes include withholding taxes (income tax and the employee share of social security and Medicare tax) and the employer’s share of Medicare tax. All employers are eligible to defer their share of social security tax until the applicable dates, whether or not they qualify for the FFCRA and CARES Act credits.
- PPP loans. An employer who has received a PPP loan that is not yet forgiven may continue to defer through the date the PPP loan is forgiven. For example, an employer who receives notice on April 22 that their PPP loan is forgiven may defer employer social security taxes March 27 through April 22 to the applicable dates. Starting April 23, employer social security taxes must be deposited on a timely basis.
- Self-employed taxpayers. Taxpayers who are subject to SE tax may defer one-half of the social security portion of SE tax until the applicable dates. They may adjust estimated taxes accordingly.
- Form 941. The second quarter Form 941, Employer’s Quarterly Federal Tax Return, will be revised to accommodate deferred taxes. The IRS will provide information before the first quarter Form 941 is due (i.e. before April 30) on how employers should indicate they are deferring deposits and payments otherwise due March 27 through March 31, 2020.
See the IRS FAQs on employment tax deferral.
FFCRA employer credit for paid emergency sick and family leave
In addition to the new employee retention credit described in the next section, the CARES Act also provides business assistance provisions to advance the employer credit for paid emergency sick and family leave introduced in the Families First Coronavirus Response Act (FFCRA).
Small business exemption. Businesses with fewer than 50 employees will be eligible for an exemption from mandated leave relating to childcare (both emergency sick leave and expanded family leave). The Department of Labor (DOL) will provide guidance on how small employers obtain the exemption. There are no other exemptions for mandated leave under the FFCRA.
Paying for mandated leave. Ordinarily, employers must deposit payroll taxes withheld from employees according to their deposit schedule. These include federal income tax, social security tax, and Medicare tax withheld from employees’ pay plus the employer’s share of Medicare taxes.
Reminder: Under the CARES Act employers may postpone paying the employer’s share of the social security portion of FICA taxes.
Employers who pay qualifying mandatory leave to eligible employees may retain a corresponding amount of payroll taxes they would otherwise have to deposit. If there are insufficient payroll taxes to cover the cost of qualified leave, employers will be able to request an accelerated payment from the IRS.
The IRS has developed new Form 7200, Advance Payment of Employer Credits Due to COVID-19 and related instructions on how to request the accelerated credit for emergency leave. This form will also be used to get an advance on the employee retention credit discussed in the next section.
Non-enforcement period. The DOL is issuing a 30-day non-enforcement policy to allow employers to come into compliance with the Act. During this time, the DOL will not bring enforcement actions against employers who act reasonably and in good faith to comply. The DOL will focus on compliance assistance instead.
Employee retention credit (CARES Act)
The employee retention credit applies to businesses that have:
- Fully or partly suspended operations because of a government-ordered shutdown during the calendar quarter, or
- Gross receipts that have fallen below 50% of receipts in the comparable quarter in 2019.
The employee retention credit is a refundable credit of 50% of the first in qualifying wages (including the cost of health insurance) paid by the affected employer to an eligible employee. For employers with more than 100 employees, continued pay must be to employees who did not work because of one of the above two reasons. For employers with 100 or fewer employees continued pay may be to all employees, whether they worked or not.
- Unlike the required leave and credits discussed in the previous section, continued pay is not mandatory.
- Wages used to claim the qualified sick leave and family leave credits may not be used to claim the employee retention credit.
- Employers receiving emergency small business loans may not claim this credit.
Paying for leave. Similar to the qualified sick and family leave credits, employers can be immediately reimbursed for the credit by reducing their required deposits of withheld income taxes, security and Medicare taxes plus the employer’s share of Medicare taxes. If retained taxes are not sufficient to cover the credit, the employer may receive an advance payment by submitting a new Form 7200 to the IRS.
Penalty relief (FFCRA and CARES Act)
The IRS is providing relief from the §6656 failure-to-deposit penalty for employers who retain employment taxes in anticipation of claiming one of the new refundable credits for paying:
- Qualified required leave wages including health plan expenses starting April 1, 2020 through the end of the year (FFCRA).
- Qualified retention wages including health plan expenses starting March 13, 2020 through the end of the year (CARES).
Employment taxes that may be retained for credit purposes include withheld income taxes and FICA taxes (employee’s share of social security and Medicare taxes) plus the employer’s share of Medicare taxes. Retained taxes may not be more than qualified wages paid.
Employers may not retain employment taxes and seek an advance payment to cover the same qualified wages.
SBA business assistance programs for temporary business assistance
In addition to traditional Small Business Administration (SBA) loan programs, including Economic Injury Disaster Loans (EIDLs), the CARES Act established four temporary programs to expedite assistance to small businesses during the COVID-19 outbreak.
The Paycheck Protection Program (PPP) is a direct incentive to keep workers on the payroll. The program is available to small businesses with fewer than 500 employees (higher numbers may be allowed for some industries). Eligible businesses include sole proprietorships, independent contractors and self-employed persons, private non-profit organizations or 501(c)(19) veterans organizations affected by COVID-19. The loan has a maturity date of two years with a 1% interest rate. Payments may be deferred for six months. The loan will be forgiven if at least 75% of proceeds are used for payroll costs and the rest for mortgage interest, rent, and utilities.
Business expenses and PPP loans. IRS Notice 2020-32 provides guidance on the deductibility of business expenses paid with proceeds of Paycheck Protection Program (PPP) loans. The program was established under the CARES Act to help business owners cover payroll and other costs. Business that pay for certain “covered expenses” can receive debt forgiveness equal to expenses paid during an 8-week period beginning on the loan’s origination date. Covered expenses include:
- Payroll costs
- Interest on mortgage loans
Ordinarily, taxpayers must include forgiven debt in gross income. The CARES Act in §1106(i) specifically provides that forgiven PPP loan debt is not taxable. However, the CARES Act does not address whether expenses paid with proceeds of a PPP loan that is forgiven are also deductible.
Although the covered expenses listed above are ordinary and necessary business expenses, §265(a)(1) disallows otherwise allowable deductions paid with tax-exempt income. Notice 2020-32 concludes that PPP forgiven debt meets the definition of a “class of exempt income” under Reg. §1.265-1(b)(1). Accordingly, under IRS guidance in Notice 2020-32, expenses paid with proceeds from a forgiven PPP loan are not deductible.
Note: Ordinary and necessary business expenses paid with proceeds of a PPP loan or other SBA loan that is not forgiven would be fully deductible.
An Economic Injury Disaster Loan (EIDL) Emergency Advance of up to $10,000 is available to provide relief to businesses currently experiencing a temporary loss of revenue. Like the PPP it is available to any type of small business with fewer than 500 employees, including sole proprietorships, etc., affected by COVID-19. Businesses applying for an EIDL may apply for the advance. The advance can be made available quickly following a successful loan application and does not have to be repaid.
An Express Bridge Loan Pilot Program is available to small businesses who already have a relationship with an SBA Express Lender. Businesses may quickly borrow up to $25,000 while waiting for a decision on the EIDL. The express loan can be repaid through EIDL proceeds.
Various types of SBA Debt Relief are available to small businesses. The SBA will automatically pay principal, interest and fees on 7(a), 504, and micro- loans. This will apply to new loans issued prior to September 27, 2020 and will apply for six months to existing loans. Also, automatic deferral through December 31, 2020 will be applied to SBA home and business disaster loans in “regular servicing” as of March 1, 2020. Interest will accrue during the deferral period and borrowers may continue to make regular payments.
Loan guidance and resources (CARES Act)
The Small Business Administration (SBA) has provided the following loan guidance and resources available to small businesses during the pandemic:
See the Insights article Coronavirus COVID-19 tax relief resources and Coronavirus (COVID-19) stimulus rebate payments to individuals for more information about the CARES Act.