The nearly 900-page CARES act, signed this week by the President, can overwhelm small businesses and their advisers. But the new law provides small businesses with shockingly large tax breaks, attractive loan programs and just generally speaking “free money.”
Accordingly, I thought I’d point out and then briefly discuss the new law’s tax breaks for small businesses.
Note: If you want a quick overview of the new law, check out this summary of the legislation provided by Senator Grassley’s offices here: CARES Act Section by Section summary.
Section 2301 Employee retention credit for employers subject to closure due to COVID-19
The CARES act provides a tax credit based on wages. That credit equals 50 percent “of wages paid by employers to employees during the COVID-19 crisis” and it applies to “the first $10,000 of compensation, including health benefits, paid to an eligible employee.”
Example: You have ten employees who each make $2000 a month. To keep the example simple, suppose that healthcare benefits run $500 a month per employee. In total, then, each employee costs $2500 a month and over the next four months, the employer would spend $10,000 on each employee.
The Section 2301 “employee retention credit” gives you, the employer, a $5,000 tax credit. That’s per employee. With ten employees, then, you enjoy $50,000 in tax credits.
Some details to know…
The tax credit is what’s called a “refundable tax credit.” That means you get the credit regardless of whether you’ve paid taxes.
Example: Your business generates no taxable income due to the COVID-19 crisis. As a result, you pay no income taxes. You still get a $50,000 “tax refund.”
Another thing to know? Not every employer qualifies but the rules are pretty loose. An employer may use the credit if “operations were fully or partially suspended, due to a COVID-19-related shutdown order” or if quarterly revenues shrink by more than 50 percent as compared to the previous year.
An obvious comment maybe: You’ll need a real accounting system to easily determine whether you qualify based on a decline in quarterly revenues.
One other thing to note: The formula works differently for employers with more than 100 full-time employees than it does for smaller employers. For “big” small businesses, the formula looks only at ”wages paid to employees when they are not providing services due to the COVID-19-related circumstances.” Again, this means you’ll need a good accounting system operating to determine this.
For “small” small businesses, so those with 100 or employees or less, the formula just says “all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.”
Tip: I’ve got a longer, detailed discussion of this tax break here: The 50 percent Section 2301 Employee Retention Credit.
Section 2302 Delay of payment of employer payroll taxes
The CARES act provides another small-business-friendly tax break related to employee costs: a deferral, or delay, in when you remit payroll taxes.
As you probably know, employers pay a 6.2% Social Security on most wages. Usually during or by the end of each quarter. Note that this employer Social Security tax isn’t the only payroll-related tax an employer pays. But it’s a significant one.
Example: An employer pays $10,000 in wages for the current payroll period. As part of the payroll, the employer calculates and withholds federal and state income taxes that tally $1000, Medicare taxes paid by both the employer and employee that add up to $300 or so, Social Security taxes paid by both the employer and employee that add up to roughly $1200, and a few other state-specific taxes. The Section 2302 deferral applies to the 6.2% employer Social Security, or $620.
How long does an employer get to delay? Two years. Half in 2021 and half in 2022.
By the way? Talk with your accountant about whether or not this deferral really makes sense. I’m not sure you want to get behind on your payroll taxes…
Section 2303 Modifications for net operating losses
Perhaps the most interesting small business friendly tax break? The loosened rules for using net operating losses.
The CARES act allows a business owner to carryback a net operating loss from 2018, 2019 or 2020 to the previous five years.
Example: The COVID-19 crisis creates a net operating in your business for 2020. Say, for sake of illustration, that you lose $100,000. The new rules allow you to take this $100,000 “net operating loss” and treat it as a deduction on an amended 2016 tax return. If that year, so in 2016, you made $300,000, you’ll essentially “redo” your 2016 tax return only this time with an extra $100,000 tax deduction, which means your taxable income drops from $300,000 to $200,000. That tax deduction may create a $25,000-ish refund.
A caution: You will probably need your accountant’s help to handle the net operating loss carryback. His or her other clients will very possibly need the same help. Accordingly, if you think this tax break applies, you’ll want to get into the queue quickly.
Let me also say that historically the IRS takes a while to pay net operating loss refund claims. And the larger the claim, the longer the processing times. Probably we’re talking weeks at the minimum. I would not be surprised if these refunds take months.
Postscript
I don’t want to end this blog post without pointing out that tax breaks aren’t the only resources you have available if you’re a small business owner struggling to survive the COVID-19 storm. Be sure to look at the COVID-19 loan programs too, especially the “Paycheck Protection Loans” (more information here.)
Hi Stephen
Thanks for the notes. I have a question though on NOL. Prior to this CARES act, beginning 2018 all NOL’s were to be carried forward. Can a business owner stay with the carry forward of a 2018 loss into 2019 or will they have to conform to the CARES act rule of carrying back 5 years?
Hi Narayan, I think we need to see the final statute and probably get an IRS notice to actually carry back an NOL. However, I anticipate this will resemble the past approaches to “economic shock triggered” changes in the NOL carry back rules. For example, even though we all thought 2018 NOLs could only be carried forward, we can now carry them back. Also, you or clients will still have a choice to either go back or forward. Presumably, the NOLs will need to be ordered, too. E.g., a big 2018 loss would be carried back to 2013… and then to 2014, 2015, etc.
What about SBA loan forgiveness?
I don’t see forgiveness of old loans described in the summaries of the CARES act. But new small business loan programs are referenced. And those appear to provide for total forgiveness. We don’t know the details though yet… or at least I don’t. Sorry.
Small business owner here: I assume that I won’t have a clearly defined and documented 2020 NOL until the end of my fiscal year-end that can be applied to any previous year’s profits?? If correct, why would I need to jump in the “cue” at this time, or are you referring to the 2020 tax season??
Hi Barry, so yes, I think you’re right about a 2020 net operating loss. You won’t know what that is until the year ends. And at that point, you’ll be able to carry back to, say, 2016.
What I meant about getting in the queue was anyone who had an NOL for 2018… or maybe even for 2019 if they’ve already filed their return. These folks, prior to the new law, were only able to carry forward. Now, they can carry back. Accordingly, these folks may want to talk with their tax accountants ASAP, get them going on this or get scheduled, and then file the refund claim ASAP so IRS can process.
This maybe obvious comment: Your tax accountant is probably already totally swamped. Their business was getting impacted by COVID-19 just like everybody else. At the exact time of the year when they are busiest anyway. And then (understandably) they’ve been deluged with questions from clients about the changing deadlines and payment dates.
This is great, thanks Steve.
So, if a business wants to keep its employees on payroll during an isolation order it could get a loan to fund the wages, then use the CARES Act tax credits to pay back the loan. Thoughts?
There is also The Families First Coronavirus Response Act, so do you think the CARES Act is the better direction to go if a business has to shut down due to an isolation order?
I think that’s the question to ask and answer, yes, as regarding CARES act. I’m not sure what you’re thinking about Families First CoronaViruse Response ACt, though… love to have you elaborate…
In what months is this valid for?
We need law enacted to see statute details, but when we see that, I think it’ll be effective going forward for sure… and then very possibly “backwards” a little bit too. Though one thing to maybe ponder: Maybe this is really an incentive going forward for small businesses to keep people on the payroll?
Steve,
It seems like the bottom line of the 50% refundable credit economics is that a small employer who shuts down will still incur a net per employee cost of at least 50% of the wages paid. So a small employer strapped for cash will still lay off all of their employees to eliminate all payroll costs. Am I missing something?
One other thing, IF (but I don’t know if) the employer’s wage expense on the employers 2019 tax return has to be reduced by the refundable credit, the ACTUAL net benefit of the credit is even less by the marginal tax bracket of the employer.
Thoughts.
Agree that IRS is only in effect paying half a firm’s wages and benefits via this credit. (Also note that some of this credit is paid for wages paid to shareholder-employees probably.) In any case, it seems pretty meaningful to me, though. It’s a way to get through the next few weeks or couple of months of chaos.
One other thing to remember, I think: This isn’t the only form of assistance that’s available. Presumably one will need to combine several forms of assistance.
Dear Stephen,
The content you provide is always top notch! Thank you for your devotion to small businesses health!
I have a question for you? What can one do, and I’ll use myself as an example, if I am the only employee in my company, I am an L.L.C. And file as an S-Corp, I own a Personal Training Studio and was forced to shut down by the state government. This assuming that I will not apply for a loan since I am not generating any income to pay it back.
Best regards,
Luis
Hi Luis, First, sorry your business has been shut down temporarily… Second, I think the two things you look at in the CARES act are the employee retention credits and then next year the NOL carry back. The employee retention credit means, I think, that you can keep Luis on the payroll for at least the next $10,000 of wages and healthcare. You will need to pay as much as $1530 in payroll taxes to do that. But you’ll get a $5,000 tax refund with next year’s tax return. That’s unfortunate you have to wait… but if you can make it, a great trade-off.
Regarding the NOL carryback, if your business ends up losing money in 2020, you’ll use that loss to shelter income from 2016. Or some year between 2016 and 2020. And hopefully that’ll provide another tax refund.
To amplify something that Kevin Greig says in another comment, these small business tax breaks don’t, alone, fix the problem. But they are a partial fix. Or maybe another way to describe them, they are useful tools small business owners can employ to help get through this really tough patch.
Ok, that is more clear. I have 2 questions.
1. Regarding the CARE Act, what if I get a loan to help me bridge the gap for the next 3 months given that not only would I pay my salary but also I have to pay all the fixed costs such as utilities, property & liability insurance and the lease just to name a few. When do I start repaying the loan, where do I get it, what is the length term of the loan, and at what interest rate? what if business doesn’t comeback and i can not pay the loan?
2. Regarding the NOL carryback, when you say “loosing money”, how do you define that? Net income or gross income?, and in what time frame? does that apply to the second quarter only, or to the whole year?
How do these apply, if they do at all, to cases of single employee corporation, such as S-Corp or LLC?
I read the description to say it’ll apply. As noted in an earlier comment, I think a small one person S corporation, based on what we know right now, wants to pay at least $10K in payroll to the shareholder employee and so get at least the $5K credit.
Most small businesses that are my clients have already laid off employees. This act appears to be too late to help them. Also, it would require them to access credit or obtain a new loan to keep everyone on payroll to get the refundable credit in a year. Most small business don’t have the capital or safety net to hold out that long. In my mind, it is too little too late…
For some it maybe is too late. But one probably does want to consider is whether, even though this is later than is ideal, if the combination of assistance and aid makes a difference.
As a small business planning issue, I think the objective is to get through this economic storm…
How does it look like these will apply to pass-through entities? Like a single employee llc treated as an scorp?
I think this applies to the shareholder-employee. I would not therefore discontinue shareholder-employee payroll until you have at least $10K of shareholder-employee wages from this point forward.
How does a tax credit of 50,000 help me today, I need relief today not when I file my taxes next year or even this year for that matter since it has been extended . Please let me know how a tax credit helps me now??
I actually think knowing a credit is coming a few months down the road does help some today. Maybe not in the way you want. Maybe not fast enough or as fast as one would like. But for some, knowing they’re in the end only going to need to cover 50% of payroll and not a 100% of payroll helps.
The net operating loss carry back thing may help some small businesses more quickly. E.g., if someone had an NOL for 2018 or 2019, they can turn that into a cash refund pretty quickly.
I think we look at these as tools a small business can use to get through the very tough pass we’re going through and will be going through for the next few weeks.
I think you are assuming that a small business has a cash reserve that they will use as carry over. Lets assume there is no cash, it has been used up keeping employees paid during a time of zero revenue due to the disaster waiting on a stimulus package.
Well, if that’s case, you’re going to immediately get a refund of your Q1 payroll taxes. That’ll help, right?
Refund of payroll taxes for 6 employees ? How much could that be ?
As much as $30,000, right?
Have you looked at this? https://evergreensmallbusiness.com/the-50-percent-section-2301-employee-retention-credit/
Thanks for the info, Steve!
I have a quick question: I own a bar in California that was asked to close and had all of my workers on unemployment. When we are able to open again and start paying wages do we get to use the tax credit based on wages going forward with the employees that come back on payroll? Or would I only be able to use this tax credit if I continued to pay them when we were not open??
I think you get the credit for paying wages, period. So in effect because you’ve been hit, Feds will help you (via credits) with 50% of the first $10K per employee of wages and healthcare benefits.
Note: You’ll want to check on the details before you restart…
Does any of this apply to Solo LLCs or Solo LLC’s with S Corp elections who pay themselves a salary?
I think “yes.”
House passed the bill, I’m excited to see the updates here.
I am interestrd to see changes on 2019 individual income tax law chnges on Earn Income tax credit issues… is it going to changes by the new covid-19 reief act???
Steve,
Thank you for the timely update.
Is the NOL carry back 5 years from the loss year? For example if I had a loss in 2018, can I carry back to 2013?
Yes. Good right?
Wait, wasn’t there supposed to be loans to small businesses to cover full payroll for some period of time, that were to be forgivable if the loans were used to cover payroll?
I’m guessing you’re referring to the “small business interruption” loans… those are a separate and additional program. As noted in above, you can’t use both. See that “eligibility requirement #3” discussion above…
Thanks for a very insightful summary. I have an S-Corp with NOL in 2018 and 2019, can I carry it to 2016 or 2017 and take it against my other income in those years? Thanks
I meant taking S Corp NOL from 2018 and 2019 against my NON S-Corp income from another Job when I file my personal 1040 return, in above post. We used to be able to do that in the past. Thanks
Yes, you can. And I think what you’ll do is carry back your 2018 NOL to 2013… and then your 2019 NOL to 2014…
E.g., say you lost $100K in 2018 and again in 2019. Say you had other income on your 2013 and your 2014 returns that added up to $200K for each year. You’ll use the NOLs to “retroactively” add a $100K deduction to those old tax returns and get a refund for each year equal to roughly $20K or $25K.
Bottomline: You need to have some tax returns prepared. One way to do this is to amend the 2013 and 2014 tax returns. And then you’ll need file with IRS to wait a few weeks for the two refunds. (In my example above, you’d be waiting for IRS to send you $40K to $50K.)
We have a SubS with 2 shareholders. Took a few equity draws first two quarters of 2019 and then started payroll in Sept 2019. Haven’t taken any draws or written any payroll checks in 2020 yet. Will we qualify if all our payroll was in last 2 quarters of 2019, but no payroll yet in first quarter of 2020?
Yes. Both for employee retention credit and, if you do this right, for the paycheck protection program described here:
https://evergreensmallbusiness.com/paycheck-protection-program-loan-small-business-life-saver/
Thank you for quick reply. I don’t think we will qualify for retention credit. Landed a big acct in December so January sales (down payment on job) were much much higher this year compared to first qtr 2019. Still hoping to complete job before end of 2nd quarter (final payment) which will make quarter 2 higher as well. I think we will only qualify for paycheck protection. Am I correct?
That sounds right… BTW it’s good to remember that it’s actually good if you don’t qualify for these programs. Sort of like not needing to file a fire insurance claim.
Yes, we will survive!!
Thank you for the great read…but where is the actual BEST PLACE to apply for this type of loan and payroll protection? Should I apply at various banks or is there ONE central site I need to go to??? Thank you!
JJ
Great question. And I don’t know the answer. You can probably contact your regular bank. I will guess they’re only trying to get up to speed on this right now. But maybe in a few days, they’ll be starting to queue small businesses up? Maybe?
BTW I talked with a banker at US Bank over the weekend. They had already had in branch meetings about this, were planning to hire a bunch of “case workers,” and had already set up a way (as you see above) for collecting names of potential borrowers.
Any idea whether a church/non-profit would qualify for the loan program?
I think it maybe will. See the statutory language about exempt organizations. (I’m focusing on small businesses obviously.) But it appears this is all (and maybe only) about protecting people’s jobs and wages.
Hello Steve,
As in Independent contract with a Small Business, I am eligible to get a loan to pay for business expenses, and office spaces for the remaining of the year.
I think so… also I think for the amounts you have drawn from the business. BTW, you need to be a trade or business per Section 1402 of the Internal Revenue Code… which would mean you’re paying self-employment taxes basically.
Thanks Steve. I do have a trade name, my company is set up as an LLC / S Corp
My salary to myself is $4000 a month, plus I have to pay for my office spaces and other business expenses, Will this qualify me for the loan forgiveness?
Thanks Steve. Greatly appreciate your reply. Do I need to go back to 2013 or 2014 return or just select the tax year for example 2017 or 2018 where my W-2 was high and will allow greater refund as I am in higher tax bracket in 2017/2018. Thanks!
I think you would carry back 2018 to 2013 and then ahead to 2014, 2015 etc as necessary… and then I think would carry back 2019 to 2014, and 2020 to 2015…
But maybe once we have chance to fully digest this and or get more guidance, we’ll see we have a bit of flexibility. (I feel like I remember points in the past where you have some flexibility.)
Hi Steve,
Thanks for providing valuable insights and guidance. This content is really helpful. I have a quick question on NOL. I had bigger S corp losses in 2013, 2014 and 2015 , that I took against my smaller W2 income on my 1040.
Cares act allows to carry back losses from 2018, 2019 and 2020 to prior tax years (2013, 2014 and 2015 W2’s). My question is could I refile my 2013, 2014 and 2015 1120 and take the loss against by 2018, 2019, 2020 W2 income? The reason being my W2 is in higher tax bracket in these later years. My apologies for a long question. Thanks for your help! greatly appreciate it.