Some of the relief outlined in this article, including the employee retention credit, payroll tax deferral, and net operating loss carryback for some businesses, has changed following passage of the federal COVID relief bill. Click here or contact your Mika Meyers attorney for further information.
While the United States Congress continues to debate if it will pass additional COVID relief legislation before the conclusion of 2020, many provisions of the legislation passed earlier this year, the CARES Act, expire at the end of 2020. As the end of 2020 approaches, taxpayers may wish to take advantage of remaining benefits available under the Act and to plan for changes which will go into effect in 2021.
1. Employee Retention Credit
The Employee Retention Credit is a refundable payroll tax credit which employers whose operations were wholly or partially suspended during a 2020 calendar quarter (beginning March 13, 2020) may take on federal employment taxes on 50% of qualified wages paid to employees up to $10,000. In other words, employers can take up to a $5,000 credit against federal payroll taxes for employee wages paid in a quarter where an employer qualifies for the Employee Retention Credit. Since the credit is refundable, an employer can receive payment to recover amounts paid.
To take the Employee Retention Credit, an employer will report its total qualified wages on its federal employment tax return, such as Form 941.
The Employee Retention Credit and Paycheck Protection Program are mutually exclusive, meaning any employer which received a PPP loan cannot claim the Employee Retention Credit. There are also limitations regarding eligibility of employers for the Employee Retention Credit based upon the employer’s revenue.
2. Payroll Tax Deferral
The CARES Act allows employers to defer the employer’s share of Social Security Tax on an employee’s wages between March 27, 2020 and December 31, 2020. Deferred amounts are then repaid in the next two tax years, with one half of payroll taxes being repaid in 2021 and the other half repaid in 2022.
Like the Employee Retention Credit, deferred payroll taxes are reported on Form 941.
While payroll tax deferral was not initially available for employers which received a Paycheck Protection Loan, the Paycheck Protection Program Flexibility Act of 2020 made payroll tax deferral available for all employers.
3. Net Operating Loss Carrybacks
The CARES Act allows taxpayers to carryback net operating losses arising in the tax years beginning in 2018, 2019, or 2020 for a period of five years. This means that a taxpayer which experiences a net operating loss in 2020, or which experienced a net operating loss in 2018 or 2019, can choose to apply the loss to a prior year’s tax return and receive a refund of taxes previously paid in a year where it did not experience a loss. Many taxpayers are familiar with the net operating loss carryback provision as it is a reinstatement of the net operating loss carryback provisions which were previously eliminated by the Tax Cuts and Jobs Act. The Government Accountability Office previously reported that approximately 14,000 businesses had applied for net operating loss and alternative minimum tax carryback refunds.
4. Charitable Donations
The CARES Act raises the cap on deductibility of corporate donations to 25% of taxable income.
Contact your Mika Meyers’ attorney with any questions regarding relief which your business may wish to take advantage of prior to the end of 2020.