The federal government’s response to the novel coronavirus (COVID-19) crisis has included many tax law changes. To simplify matters, let’s look at three issues that contractors should keep an eye on in light of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act): payroll, net operating losses and qualified improvement property.
As of this writing, some construction work has been continuing in parts of the country, but many projects have seen slowdowns or shutdowns. To help employers retain their workforces, the CARES Act created a refundable credit against payroll tax.
The credit is generally available to employers whose operations have been fully or partially suspended because of a COVID-19-related governmental shutdown order. Employers whose gross receipts have dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter) are also typically eligible.
Qualifying employers whose workforces exceed 100 employees may claim the credit for employees who’ve been furloughed or had their hours reduced because of the reasons noted. If an employer has 100 or fewer employees, it can qualify for the credit regardless of whether it has furloughed employees or reduced employee hours.
The credit equals 50% of up to $10,000 in compensation, including health care benefits, paid to an eligible employee after March 12, 2020, through December 31, 2020. Note that the $10,000 limit is per employee. (Additional rules and limits apply.)
The CARES Act also enables employers to delay payment of their share (6.2% of wages) of the Social Security payroll tax. Employers can pay the tax over the next two years, with the first half due by December 31, 2021, and the second half due by December 31, 2022.
Dealing with losses
When a trade or business’s deductible expenses exceed its income, a net operating loss (NOL) generally occurs. Many construction companies may incur NOLs as revenue drops while expenses persist.
Before the Tax Cuts and Jobs Act (TCJA), taxpayers could carry back NOLs two years and carry them forward 20 years, to offset taxable income. The TCJA limited the NOL deduction to 80% of tax-able income for the year, eliminated the carryback of NOLs and removed the time limit on carryforwards.
Helpfully, the CARES Act allows NOLs arising in 2018, 2019 or 2020 tax years to be carried back five years. Additionally, it removes the taxable income limitation on deductions for prior-year NOLs carried forward into tax years before 2021 so that NOLs can fully offset income. It also removes that limitation for certain NOLs carried forward to tax years after 2020.
Finally, it temporarily eliminates the limitation on excess business losses for pass-through entities and sole proprietors. These taxpayers can now deduct excess business losses arising in 2018, 2019 and 2020 tax years.
Saying bye to the retail glitch
Since the passage of the TCJA, the construction industry has been keenly aware of the “retail glitch.” Because of an inadvertent drafting error by Congress, any qualified improvement property (QIP) placed in service after December 31, 2017, wasn’t considered eligible for 100% bonus depreciation. This typically includes upgrades to retail, restaurant and leasehold property.
When drafting the CARES Act, Congress eliminated the glitch. Most businesses can now claim 100% bonus depreciation for QIP, assuming all applicable rules are followed. Better yet, the correction is retroactive to any QIP placed in service after December 31, 2017. (Improvements related to a building’s enlargement, elevator or escalator, or internal structural framework don’t qualify.)
Unfortunately, given the current drag on the U.S. economy, many of the businesses looking to undertake QIP projects may not be able to immediately do so. Nonetheless, in the spirit of optimism, contractors should look for such projects to eventually ramp up.
Learning it all
Construction company owners should familiarize themselves with these and other relevant provisions of the CARES Act — such as those related to expanded Small Business Administration assistance. Also keep in mind that, by the time you’re reading this, additional IRS guidance may have been released or other important relief legislation may have been signed into law.