There are tax implications for loans that are part of the CARES Act that could generate a bigger 2019 tax refund for your business, while reducing your 2020 tax bill.
While the details are still being sorted out in the recently enacted stimulus package, the United Motorcoach Association brought in a panel of experts to give an overview during its April 9 Town Hall session.
The biggest tax benefit comes with the Paycheck Protection Program (PPP) loan, because it isn’t taxable if the borrower qualifies for loan forgiveness. The PPP allows small businesses, with fewer than 500 employees, to take out a loan of 2.5 times average monthly payroll cost — up to $10 million. The loan is eligible for forgiveness if 75% is used for payroll expenses.
“The statute is clear in our interpretation that the amount of the loan forgiveness is not subject to taxation under Subsection i of Section 1106 of the CARES Act,” according to Rich Meade, Vice Chairman of Prime Policy Group, UMA’s Washington, D.C., lobbying firm for the past 15 years.
$10K advance not taxable
Also not taxable is the $10,000 loan advance available from the Economic Injury Disaster Loan program, which doesn’t have to be paid back if the EIDL loan isn’t approved.
“The SBA has added a little wrinkle in that they’re capping that amount of that loan to $1,000 per employee, so you need at least 10 employees to take the full amount,” Meade said.
“That loan does not have to be repaid, so it’s effectively a grant, although they’re terming it a loan.”
That’s because the legislation characterizes the relief as a loan, which doesn’t need to be repaid and isn’t subject to taxation.
“We are seeking confirmation of our interpretation of this provision of the CARES Act, and we’ll follow up with you all once we get that confirmed, either from the finance committee that wrote the law, or from the Treasury Department that’s interpreting it,” Meade added.
Increase tax refund
There’s some potential for increasing your 2019 refund, thanks to provisions in the CARES Act, said Keith Smith, Managing Director and head of the Tax practice at Prime Policy Group.
For partnerships and LLC businesses, there is a provision that allows for refiling tax returns to take advantage of net operating losses in previous years. The Section 2304 provision modifies the loss limitation applicable to pass through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.
“You’re allowed to take a loss and go back in order to get a refund from taxes that you paid in those years if you have a loss this year, which may occur,” said Smith. “But the provision allows you to file for 2019 and 2018, and you put this year’s loss against that tax-owed amount. This is a 5-year provision for losses. You can go back even further to refile your taxes if that happens.”
The provision allows a business to utilize excess business losses to refile its taxes and get a refund that can be used, even for payroll, right now, Smith said.
There’s a definition on what excess business loss is that is based on a specific calculation. UMA members should talk to their accountants about that definition and how it might apply to their situation.
The CARES Act also provides an opportunity to use corporate alternative minimum tax (AMT). The AMT was repealed as part of the Tax Cuts and Jobs Act of 2017, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. Section 2305 for the CARES Act accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.
“What this provision does in the CARES Act is allow you to sweep those future credits into this tax year,” Smith said. “You can take them all right now, and that will help your tax return this year and perhaps even produce a refund.”
Increased Interest Expenses
As businesses look to weather the storm of the current crisis, Section 2306 of the CARES Act will allow them to increase their interest expenses and perhaps increase their liquidity with a reduced cost of capital, so that they are able to continue operations and perhaps keep employees on the payroll.
This provision raises the amount of interest expense businesses are allowed to deduct on their tax returns, by raising the 30% limitation to 50% of taxable income with adjustments for 2019 and 2020.
“It was meant to provide income as fast as possible in the form of refunds or, in the case of your tax filing this year, with a much more generous expense allowance,” Smith said.
UMA members should talk to their accountants about that definition and how it might apply to their situation, Smith said.
The U.S. Treasury Department’s decision to extend the tax deadline by three months to July 15 gives companies time to sort through the provision and file their taxes.
Join UMA for the next online Town Hall meeting Thursday at 2 p.m. ET on the Zoom platform to discuss the most current issues that matter to operators.