The CARES Act and Family First Coronavirus Response Act (FFCRA) had many tax nuances. Here’s what CFOs need to know.
Unwinding the stimulus bills reveals many tax implications
PPP Forgivable Loan May be Taxable Income
Under the Payroll Protection Plan (PPP) under the CARES Act, CFOs of companies with less than 500 employees can get forgivable loans from their local banks which is guaranteed by Small Business Administration (SBA). These loans are tax-free at federal level; however, they may be subject to state or local taxes. Typically, a forgiven loan is seen as taxable income at state level.
Expenses Covered by PPP May Not be Tax Deductible
The PPP loan provides government funding to payroll, utilities, rent, and interest on prior loans. However, if the PPP loan is forgiven, it’s unclear whether the payroll, utilities, rent, and interest expenses paid by the loan can be deducted for federal and state income taxes. “Based on the Centex case in savings and loans crisis, which was decided in 2005, the company may be able to take deduction for costs incurred for the loan, even if loan is forgiven.” Per Paul Dillon, Firm Director of National Tax with Baker Tilly, a global tax and accounting firm.
Companies Can Donate More, Especially Food
The CARES Act expanded deduction for charitable deductions for 25% of taxable income (up from 10% before CARES Act.) for donations to public charities. If taxable income is zero in 2020, the deduction can be carried forward for 5 years. Per Michelle Hobbs, Firm Director of National Tax for Baker Tilly, there’s a special provision for donating food. “Restaurants can donate food inventory to organizations helping the needy, the ill and infants. The deduction is capped at lower of twice the cost of the food or cost plus 50% of their normal profit.” If the restaurant pays $100 for vegetables and would normally sell the cooked vegetables at market price of $200 in their menu but can’t sell it because of pandemic, the restaurant can take deduction of $150 (subject to the taxable income limits). The food donation deduction is not limited to restaurants and is available to any company that carries food as part of inventory in their usual business.
Companies Pay Lower 2020 Estimated Taxes and Qualify for Refunds for 2018/2019
Per Hobbs, “For 2020 estimates, taxpayers can put together tax projections and annualize their 2020 taxable income and use that alternative way to compute estimated taxes for 2020. If taxpayers expect losses in 2020, they may not have to pay estimated taxes yet.” Many taxpayers rely on prior year for safe harbor estimate calculation. But this year, taxpayers may want to annualize if taxable income will likely be significantly lower than last year. Even though companies can wait to file until July 15th, they may want to compute 2019 taxes beforehand. The CARES Act rolled back some of the prior Tax Cuts and Jobs Act (TCJA) provisions. For example, the CARES Act retroactively fixed the so-called “retail glitch”. This will allow qualified improvement property placed in service by auto dealers and restaurants and other retailers to be deducted over 15 years instead of the error in TCJA which stated 39 years. This retroactively applies for 2018 and 2019 taxes. This CARES Act revision may create a loss for retailers for 2019 which could be carried back to 2018 on a return needing to be filed by June 30, 2020.
Federal Filing Pushed to July 15 But States May Have Earlier Deadlines
Companies can defer most tax filings and payments for federal income tax until July 15. This includes deferral for 1st and 2nd quarter estimated [HM1] [DP2] tax payments as well. The CARES act provisions for federal tax may not be accepted by the states. As states don’t have the budget and financial resources at federal level, the states may not give the same deferral until July 15.
Don’t Overlook the Fastest Way to Get Cash Relief
Payroll tax deferral is ”the fastest way to get cash relief to businesses. Companies are paying employees but don’t have to pay the employer’s share of social security tax (6.2% of wages) from March 27 to Dec 31 2020, “per Christine Faris, National Tax Director on Executive Compensation/Employee Benefits with Baker Tilly. The deferred payroll tax is due in 2 repayments with 50% on Dec 31, 2021 and 50% on Dec 31, 2022. The self-employed can use this deferral too. There is no application approval or affirmative election. There’s no double-dipping of the PPP and payroll tax deferral for the same payroll. However, IRS clarified that PPP loan recipients can still defer FICA employer portion until they receive notification that their loan is forgiven. There is no interest on the deferred payroll taxes.
Wait for the 4th Wave of Stimulus
Many are waiting to see what other stimulus will come from Congress. There were 3 bills of increasing impact to address the crisis. There may be a larger 4th coming. This 4th wave may repeal the $10k limit for state or local tax deduction or enact another payroll tax holiday or expand the PPP. There’s also discussion of tax support for large infrastructure investments. On the other hand, government may need to pass additional taxes to pay for the $2 trillion of government stimulus.
There are many nuances and exceptions which may apply for different tax payers. As with any tax decision, it’s important to consult a tax expert.
