We talked about what´s included in this act and what impact the measures have on enterprises in the U.S. and on multinational groups with subsidiaries in the U.S. with Mike Smith and Gretchen Whalen, both principals of our NEXIA-partner CliftonLarsonAllen LLP in Charlotte, U.S.
Mr. Smith, could you provide us with a short overview about what is included in the CARES Act?
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the third phase of legislation aimed at fighting the COVID-19 pandemic and mitigating the related economic harm for families, workers, and businesses. It is the largest stimulus package in history, with an estimated cost of $2.2 trillion.
Key aspects of the CARES Act are summarized below.
- The CARES Act allows for a five-year net operating loss (NOL) carryback for losses generated in the 2018, 2019, and 2020.
- The CARES Act added a refundable payroll tax credit equal to 50% of certain compensation paid from March 13, 2020, to December 31, 2020.
- The CARES Act allows for 100% bonus depreciation on certain qualified improvement property placed in service in 2018 and 2019.
- The Tax Cuts and Jobs Act of 2017 (TCJA) repealed the corporate alternative minimum tax (AMT) and provided an opportunity for corporations to claim a refund of minimum tax credit carryovers during 2018 through 2021. The CARES Act makes any remaining minimum tax credit carryovers fully refundable in 2019.
- Limitations on business interest expense deductions are eased under the CARES Act.
- Individuals are entitled to a “recovery rebate” of $1,200 ($2,400 married filing joint) under the CARES Act, plus an additional $500 per qualifying child, if you are a U.S. resident and can’t be claimed as a dependent of another taxpayer. This rebate is subject to modification for taxpayers reaching certain income levels.
- Under certain circumstances, the CARES Act waives the 10% penalty on an early withdrawal from an individual retirement account for up to $100,000 of distributions for coronavirus-related purposes made on or after January 1, 2020.
For additional information, please read CLA’s article.
Are the temporary rules surrounding net operating loss carrybacks useful to support companies in economically rough times?
The answer is a resounding “Yes”!
If an individual or Subchapter C corporation generated a net tax loss during 2018, 2019, or 2020, a CARES Act provision allows such taxpayers to carry the loss back to offset taxable income during the previous five tax years. This would generate a refund of taxes paid in earlier years. In many cases, the IRS will pay those refunds within 90 days, providing immediate cash flow benefits. Alternatively, taxpayers can choose to carry the loss forward to offset future income.
It is important to note that federal income tax rates generally were higher before 2018 and, thus, the cash flow value of an NOL carryback is likely more valuable than carrying forward the NOL. Moreover, it is to remember that this is a federal income tax benefit and state income tax laws adopting the CARES Act may vary. Last, taxpayers should consider approaches to maximizing their 2020 losses eligible for carryback, such as accelerating equipment purchases, writing off uncollectible receivables, disposing of obsolete inventory, and similar techniques.
For additional information, please read CLA’s article.
You mentioned a lifting of interest expense limitations, for how long and to what degree is this defined in the CARES Act?
The business interest limitation was added as part of the TCJA and generally limits the deduction for business interest expense to the sum of (i) business interest income, (ii) 30% of adjusted taxable income (ATI), and (iii) floor plan financing interest. Certain small taxpayers are exempt from the limit.
The CARES Act generally increases the limit to 50% of adjusted taxable income (ATI) for 2019 and 2020, potentially increasing interest expense deductions and reducing taxable income (or creating a net operating loss which can be carried back). Taxpayers can elect to use their 2019 ATI in computing the 2020 limit, providing relief for businesses whose income declines in 2020.
Mrs. Whalen, taking the CARES Act in consideration, should multinational companies with US subsidiaries or affiliates review their transfer pricing policies and evaluate opportunities to maximize these tax savings opportunities?
A company’s transfer pricing policy should be a living, breathing document. Now is an ideal time to revisit intercompany transaction pricing. As discussed above, the CARES Act provides numerous tax savings opportunities for U.S. corporations, notably the 5-year NOL carryback rule for losses incurred in 2018, 2019, or 2020. Conceivably, a multinational corporate group could enhance the NOL carryback capacity of its U.S. subsidiary by increasing the mark-up charged to such subsidiary for intercompany goods and services. A multinational group contemplating such a strategy should consider
- the extent to which such mark-up is supported by a formal transfer pricing benchmarking analysis;
- whether the cash tax savings of the U.S. federal income tax refund is greater than the additional income taxes paid in the home country on the corresponding income inclusion; and
- the professional fees necessary to effectuate a refund claim.
CLA’s tax professionals welcome the chance to assist with a refund claim assessment and encourages taxpayers to begin the evaluation process by the end of the 3rd quarter to allow time for proper analysis, documentation and execution.
From a worldwide perspective, will the economic downturn caused by the COVID-19 pandemic hinder the ability of state governments to collect taxes? How will they deal with budget shortfalls as already occurred in the last months?
Most U.S. states have experienced a significant decrease in tax collections with the impact of transaction-based taxes, such as sales tax, felt almost immediately as monthly reporting is required in many cases. There is also an expectation that income-based tax revenue will decrease significantly, although this does not occur in real time as businesses and individuals make estimated tax payments quarterly and file their tax returns annually.
Unlike the United States federal government, which has the capacity to borrow and create deficits, the individual states and local governments generally must balance their budgets each year. Thus, given states and cities have experienced a decline in tax revenue, they have to either increase tax collections – which they can do by enhanced enforcement of existing laws or by adding new laws to increase the tax rates – or broaden the tax base. There has not been much activity yet, but the expectation is that we will see higher levels of examination activity, such as what taxpayers experienced in 2008 and 2009. Additionally, many states seem to be contemplating broadening their sales tax base. Each state has its own rules for identifying transactions subject to sales tax. The rules vary widely from state to state. For example, some states assess sales tax on software and electronic goods and services while others do not.
In 2018 the Wayfair case decided by the U.S. Supreme Court outlined an economic nexus concept which stipulates that internet retailers without property nor employees in South Dakota are liable for sales tax in this state. Does this concept provide states with a useful tool for increasing tax collections? If so, how?
Absolutely. In the wake of Wayfair, many states passed laws that businesses were required to begin collecting sales tax once they reach a certain threshold in sales and transactions in the state – often $100,000 USD or 200 transactions. These laws have had varying effective dates, typically sometime between the second half of 2018 and early 2020. Currently only two states that impose a sales tax (only 45 states do) do not have an economic nexus threshold – Florida and Missouri. Even though these laws made news throughout the US, many businesses did not timely comply. Thus, states may find that they have a ready source of tax revenue within the companies that delayed complying or have not yet complied. There are a variety of ways that states can identify non-filers including matching up businesses that file other tax types, identifying vendors selling to in-state businesses as they audit those in-state businesses, reviewing financial transactions that may be shared by financial institutions and through reviewing contents of trucks and shipping containers entering the state.
Finally, are there any further tax breaks in the U.S. to be expected in the future to alleviate the economic hardship caused by COVID-19?
Both: As the 2020 Presidential Election season starts to heat up, it is becoming more likely that the White House and Senate Republicans will not reach agreement with House Democrats on a new round of COVID-19 economic relief.
In response to this stalemate, President Trump recently issued four executive orders that
- postpones collection of federal payroll taxes on workers making less than $104,000 annually for the period September 1, 2020 through December 31, 2020.
- waives all interest due on student loans held by the federal government through the end of 2020 and postpones principal payments until December 31, 2020.
- authorizes the Secretary of the Treasury and the Secretary of Housing and Urban Development to identify additional federal funds to provide temporary financial assistance to renters and homeowners who, as a result of the financial hardships caused by COVID-19, are struggling to meet their monthly rental or mortgage obligations.
- mandates FEMA to extend the lost wages assistance program to provide a $400 payment per week, which shall reflect a $300 Federal contribution, to eligible claimants from the week of unemployment ending August 1, 2020. A given state’s contribution would be $100 per week. The program extension would run no longer than December 6, 2020.
Now that President Trump has launched his opening salvo, what does Congress have in store for a response? In the near term, the answer is- probably not much. The political climate in the United States remains contentious (one might say toxic) and the likelihood of new legislation passing during the fall election cycle with a divided Congress is practically nil. But if we were to wake up tomorrow in the land of rainbows and unicorns and everyone got along, here is a glimpse of what House Democrats and Senate Republicans might pass as part of COVID-19 relief.
As previewed in the Health and Economic Recovery Omnibus Emergency Solutions Act (''HEROES Act') passed by the House in May 2020, the Democratic majority reiterated its distaste for corporate welfare by proposing to limit carrybacks of net operating losses incurred in 2019 and 2020 to one year. In contrast, the CARES Act enacted earlier this year allows for a five-year carryback for losses incurred in tax years 2018, 2019, and 2020.
In addition, the HEROES Act reinstates the $250,000 ($500,000 for joint returns) limitation on excess business losses for pass-through entities and sole proprietorships retroactive to tax years beginning after 2017.
The House Demorcrats’ plan would also eliminate the wildly unpopular- at least in high-tax “blue” states - $10,000 limitation on the deduction for (nonbusiness) state and local taxes that was enacted as part of the Tax Cuts and Jobs Act of 2017.
Furthermore, the HEROES Act contains modifications to the Employer Retention Payroll Tax Credit; provides for a payroll credit for certain fixed expenses of employers subject to closure by reason of COVID-19; grants a business interruption credit for certain sole self-employed individuals; and allows for payroll tax payment deferrals in certain situations.
On Monday, July 27, 2020, the Republican-controlled Senate unveiled the Health, Economic, Liability and Schools Act (“HEALS Act”). Similar to the HEROES Act, the HEALS Act contains provisions for modifying the Employer Retention Payroll Tax Credit as a means to incentivize workforce retention.
The Senate bill also expands the Work Opportunity Tax Credit (“WOTC”). Under current law, the WOTC equals 40% of an eligible new employee’s first $6,000 in wages. The proposal would increase the credit to 50% of the employee’s first $10,000 and expand the categories of eligible employees to include anyone receiving unemployment insurance immediately prior to their hiring and before next year.
Moreover, the HEALS Act would add a new business tax credit for qualified employee protection expenses, qualified workplace reconfiguration expenses, and qualified workplace technology expenses. The tax credit would equal 50% of the aforementioned qualified expenses, subject to a cap of equal to $1,000 for each of the first 500 employees, plus $750 for each employee between 500 and 1,000, plus $500 for each employee that exceeds 1,000. This tax credit is intended to incentivize employers to provide COVID-19 testing, protective equipment, cleaning supplies, and office modifications aimed at detecting, containing, and eliminating coronavirus in the workplace.
Despite differences in the Senate and House bills, the idealist holds out hope that the parties will come together to reconcile their disagreements and pass legislation for the good of the American people. Yet it is difficult to tune out the cynic, who recites a quote by President Reagan from a generation ago, that “In this present crisis, government is not the solution to our problem, government IS the problem.” In the end, perhaps, we compromise by agreeing that there’s always 2021.