A Closer Look at the CARES Act: Unemployment Insurance, Payroll Taxes, Net Operating Losses

Chris Gaetano
Published Date:
Mar 30, 2020

With the president having recently signed the $2 trillion coronavirus relief package into law, The Trusted Professional is doing a deep dive into various sections of the over-800-page bill. Today we are looking at the unemployment provisions, the payroll tax provisions, and changes to net operating loss rules.

Unemployment Insurance

The CARES Act greatly expands the unemployment insurance program, in consideration of the now millions of people who have lost their jobs as a result of the pandemic. Under this provision, eligible individuals will receive, for up to 39 weeks, $600 in addition to the unemployment benefits already given out by the states (states will be provided extra cash through the U.S. Labor Department via either a reimbursement or an advance payment, though the funding itself will come from the Social Security Administration's Unemployment Trust Fund.)

Those covered include those who are otherwise able to work but cannot due to the following circumstances: being diagnosed with COVID-19 or currently awaiting diagnosis; having a member of their household who has been diagnosed; caring for a family member or member of their household who has been diagnosed; having a child or other person for whom they have a primary caregiving responsibility who is unable to attend school; being unable to actually reach one's place of employment due to quarantine; having been advised by a health care provider to self-quarantine; having had a job lined up that fell through because of the pandemic; becoming a breadwinner or major support in their household because the head of household died from COVID-19; having their place of employment  closed as a direct result of COVID-19; or any additional criteria established by the Labor secretary. Also included are those who are self-employed, those who are seeking part-time employment, those lacking a sufficient work history and those who are otherwise ineligible for regular unemployment who still meet the above conditions.

If someone cannot actively seek work due to COVID-19 conditions, states are instructed to provide flexibility in their standards to allow them to still receive unemployment benefits.

The provision does not include anyone who has the ability to telework with pay or anyone receiving paid sick leave or other paid leave benefits, regardless of whether they meet the above conditions.

The bill says  that the states will deliver benefits to those who qualify without any waiting period. If the states need additional funding in order to expedite payments, the federal government can provide it.

Relief for Business Closures

The bill also provides relief to small businesses that either already have closed due to the pandemic or are anticipating that the might.

One is a credit against certain employment taxes equal to 50 percent of qualified wages for each employee up to $10,000 each. The specific taxes this applies to are those governed by Section 3111(a) of the tax code or those imposed by Section 3221(a), which are affected by the rates in Section 3111(a). A business will qualify, provided that it has been operating during calendar year 2020 and has had operations partially or totally suspended due to the pandemic or to government order. Alternately, businesses that have seen a significant decline because of the pandemic, defined as gross receipts that are below 50 percent of what were at the same quarter last year, can also apply.

All persons treated as a single employer under Section 52 or Section 414 of the tax code shall be treated as one employer, in terms of aggregation rules. If an employer did not pay their payroll taxes in anticipation of this credit then the Labor secretary may choose to waive penalties under Section 6656.

If an employer takes a small business loan as described in other parts of this bill, then it will not be able to claim the 50 percent payroll tax credit as well.

The bill also says that, generally, the 50 percent of the payment for employment taxes "shall not be due before the applicable date." The deferral period is defined as "the period beginning on the date of the enactment of this Act and ending before Jan. 1, 2021." What's more, the deferral period extends to Dec. 31, 2022, "with respect to the remaining such amounts." If a third party agent processes the payroll for the employer, the employer is solely liable for payments before the implementation of this measure.

Net Operating Loss Rules

This same section also has a measure that temporarily changes the rules on the maximum deduction amount for net operating losses, applicable for taxable years between Dec. 31, 2020, and Jan. 1, 2021. Under these rules, the deduction amount is the aggregate of net operating losses that began before Jan. 1, 2018, and that have been carried forward to that taxable year. To this will also be added the aggregate of net operating losses from before Dec. 31, 2017, that have been carried forward to that taxable year, or 80 percent of taxable income (without deductions) over the carried forward net losses from before Jan. 1, 2018, whichever of the two is less.

Further, in the case of any net operating loss arising between the Dec. 31, 2017, and Jan. 1, 2021 tax years, the loss is considered a net operating loss carryback to each of the five years preceding the taxable year of this loss. Real estate investment trusts and insurance companies received similar relief specific to their industries.

The bill also repeals many provisions in the tax code section governing limitation on excess business losses of noncorporate taxpayers. The bill says that, for any taxable year beginning after Dec. 31, 2017, and before Jan.1, 2026, limits on excess farm losses shall not apply. Additionally, for any taxable year beginning after Dec. 31, 2020, and before January 1, 2026, "any excess business loss of the taxpayer for the taxable year shall not be allowed."

Businesses can also expect an enhanced credit for prior year minimum tax liability. Companies will be able to take the entire refundable credit amount for the 2018 tax year. The limitations on business interest in Section 163(j) of the tax code will also be calculated to account for 30, versus 50, percent of adjusted taxable income for the taxable year. If the business produces hand sanitizer, then they will also get excise tax relief on things used in its production.

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