There are many federal cash tax benefits available for startups impacted by COVID-19.
Payroll Tax Credits
As part of the Families First Coronavirus Response Act (“FFCRA”), employers with fewer than 500 full-time or part-time employees can quickly begin taking advantage of two new refundable payroll tax credits designed to reimburse them, dollar for dollar, for the cost of providing leave to employees affected by COVID-19.
- Payroll credit: there will be an immediate dollar for dollar tax offset against payroll taxes
- Includes withheld federal income taxes, employee’s share of SS and Medicare taxes, and employer’s share of SS and Medicare taxes with respect to all employees
- Where a refund is owed, employers can obtain an expedited advance from the IRS by submitting a streamlined claim form that should be released this week (1st week in April)
- Self-employed individuals will claim the credit on their income tax return and reduce estimated tax payments
- IRS Corona Virus Tax Relief Page
Cares Act Economic Stimulus Package
While the FFCRA focuses on providing relief to small businesses and individuals, Congress also created the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) to provide more broad economic stimulus to affected individuals and companies.
- The CARES Act’s economic stimulus package includes more than $500 billion of federal funding across three basic categories:
- Grants and direct lending dedicated to specific nonfinancial industries, such as the airline and national security sectors;
- A significant expansion of eligibility and other aspects of lending programs administered by the Small Business Administration, and
- Funding for several lending programs administered by the Federal Reserve. Financings under these programs place a number of requirements on the businesses that receive federal aid.
- Paycheck Protection Program allows small businesses, other business concerns, nonprofits and veterans organizations that generally have fewer than 500 employees; self-employed; sole proprietors; independent contractors; and businesses in the accommodation and food services sector with fewer than 500 employees per location, are eligible for small business loans to cover payroll; health care costs; mortgage interest payments, rent and utility payments; and interest on pre-existing debt obligations.
- Paycheck Protection Program also permits borrowers to refinance economic injury disaster loans made between January 31, 2020, and the date on which loans are made available under the program.
- The amount of the loan cannot exceed the sum of 2.5 times the average monthly payroll cost during the year prior to the loan and the amount of economic injury disaster loans being refinanced under the program;
- it must be capped at $10 million and have a maximum interest rate of 4%.
- Loans are available to eligible borrowers under the program through June 30, 2020, fees are waived, payments are deferred by at least six months (but not more than one year), and the SBA’s “credit elsewhere” test (the ability to obtain funding from other sources without undue hardship) is waived.
- The act’s broader mandate includes a facility to purchase certain new issuances by eligible issuers, potentially enabling these issuers to successfully market securities offerings that may otherwise be too costly or lack adequate investor interest in current market conditions. Notably, the act does not limit purchases to debt obligations.
- Loans, loan guarantees and other investments under the CARES Act will be subject to supervision, audits and investigation by a special inspector general who will keep Congress informed through quarterly reports.
- Note that companies that receive benefits under the CARES Act are not eligible for the benefits described under FFCRA. Companies will need to model the potential benefit and choose which will make the most sense for their situations.
The Internal Revenue Code allows deductions for companies incurring losses relating to COVID-19, including:
- Worthless stock deductions are available for write-off or write-down of investments
- Transaction costs relating to abandoned transactions, which may have been capitalized previously, will now be deductible
Net Operating Loss Carryback
Included within the CARES Act are several provisions that lift certain deduction limitations imposed by the Tax Cuts and Jobs Act (TCJA).
- Corporate taxpayers may carryback Net Operating Losses (NOLs) arising in 2018-2020 for up to five years (under the TCJA, no carrybacks were allowed); and for 2020 and years prior, corporations and pass-throughs may fully offset their income using NOLs (the TCJA imposed an 80% cap).
- Additionally, for 2019-2020, taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the TCJA). Taxpayers may also elect to use their 2019 adjusted taxable income for determining their 2020 interest deduction.
Other Refund/Saving Opportunities
Under the CARES Act, for employer payroll tax payments that would otherwise be due before January 1, 2021 are allowed a grace period for payment, as follows:
- 50% of such payments are now due December 31, 2021, with the remainder due December 31, 2022.
- Additionally, employers severely impacted by COVID-19 (either subject to a shut-down order or incurring a 50% decline in gross receipts) are eligible for a refundable payroll tax credit of 50% of wages paid to certain employees, with limitations.
The CARES Act also accelerates the use of corporate alternative minimum tax credits, makes Qualified Improvement Property generally eligible for 15-year cost-recovery and 100% bonus depreciation, raises the corporate charitable deduction limit to 25% of taxable income and provides that forgiveness of “Paycheck Protection Program” loans is not taxable income.