Information Type: Blog Posts

In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions.

Here are two changes that affect businesses: The limit on charitable deductions for corporations has increased. Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes). Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).

What changed? Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.

The deduction limit on food inventory has increased. At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities. In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy or infants. “Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions. Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.

What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

CARES Act questions

Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals. Contact us if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity.

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The Coronavirus Aid, Relief, and Economic Security (CARES) Act eliminates some of the tax-revenue-generating provisions included in a previous tax law. Here’s a look at how the rules for claiming certain tax losses have been modified to provide businesses with relief from the novel coronavirus (COVID-19) crisis.

NOL deductions

Basically, you may be able to benefit by carrying a net operating loss (NOL) into a different year — a year in which you have taxable income — and taking a deduction for it against that year’s income. The CARES Act includes favorable changes to the rules for deducting NOLs. First, it permanently eases the taxable income limitation on deductions. Under an unfavorable provision included in the Tax Cuts and Jobs Act (TCJA), an NOL arising in a tax year beginning in 2018 and later and carried over to a later tax year couldn’t offset more than 80% of the taxable income for the carryover year (the later tax year), calculated before the NOL deduction. As explained below, under the TCJA, most NOLs arising in tax years ending after 2017 also couldn’t be carried back to earlier years and used to offset taxable income in those earlier years.

These unfavorable changes to the NOL deduction rules were permanent — until now. For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs carried over into those years. So NOL carryovers into tax years beginning before 2021 can be used to fully offset taxable income for those years. For tax years beginning after 2020, the CARES Act allows NOL deductions equal to the sum of: 100% of NOL carryovers from pre-2018 tax years, plus The lesser of 100% of NOL carryovers from post-2017 tax years, or 80% of remaining taxable income (if any) after deducting NOL carryovers from pre-2018 tax years.

As you can see, this is a complex rule. But it’s more favorable than what the TCJA allowed and the change is permanent.

Carrybacks allowed for certain losses

Under another unfavorable TCJA provision, NOLs arising in tax years ending after 2017 generally couldn’t be carried back to earlier years and used to offset taxable income in those years. Instead, NOLs arising in tax years ending after 2017 could only be carried forward to later years. But they could be carried forward for an unlimited number of years. (There were exceptions to the general no-carryback rule for losses by farmers and property/casualty insurance companies).

Under the CARES Act, NOLs that arise in tax years beginning in 2018 through 2020 can be carried back for five years. Important: If it’s beneficial, you can elect to waive the carryback privilege for an NOL and, instead, carry the NOL forward to future tax years. In addition, barring a further tax-law change, the no-carryback rule will come back for NOLs that arise in tax years beginning after 2020.

Past year opportunities

These favorable CARES Act changes may affect prior tax years for which you’ve already filed tax returns. To benefit from the changes, you may need to file an amended tax return. Contact us to learn more.

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As a result of the coronavirus (COVID-19) crisis, your business may be using independent contractors to keep costs low. But you should be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well. These obligations don’t apply if a worker is an independent contractor.

In that case, the business simply sends the contractor a Form 1099-MISC for the year showing the amount paid (if the amount is $600 or more). No uniform definition Who is an “employee?” Unfortunately, there’s no uniform definition of the term. The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors.

But other factors are also taken into account. Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. In general, this protection applies only if an employer: Filed all federal returns consistent with its treatment of a worker as a contractor, Treated all similarly situated workers as contractors, and Had a “reasonable basis” for not treating the worker as an employee.

For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors. Note: Section 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.

Asking for a determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors. Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit. It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules. Be aware that workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities. If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

Contact us if you receive such a letter or if you’d like to discuss how these complex rules apply to your business. We can help ensure that none of your workers are misclassified.

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The law providing relief due to the coronavirus (COVID-19) pandemic contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings. This is referred to as qualified improvement property (QIP). You may recall that under the Tax Cuts and Jobs Act (TCJA), any QIP placed in service after December 31, 2017 wasn’t considered to be eligible for 100% bonus depreciation.Therefore, the cost of QIP had to be deducted over a 39-year period rather than entirely in the year the QIP was placed in service. This was due to an inadvertent drafting mistake made by Congress. But the error is now fixed.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It now allows most businesses to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. What’s also helpful is that the correction is retroactive and it goes back to apply to any QIP placed in service after December 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to not qualify under the definition of QIP. In the current business climate, you may not be in a position to undertake new capital expenditures — even if they’re needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP.

But it’s good to know that when you’re ready to undertake qualifying improvements that 100% bonus depreciation will be available. And, the retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided to identify QIP expenditures. For not-yet-filed tax returns, we can simply reflect the favorable treatment for QIP on the return. If you’ve already filed returns that didn’t claim 100% bonus depreciation for what might be QIP, we can investigate based on available documentation as discussed above.

We will evaluate what your options are under Revenue Procedure 2020-25, which was just released by the IRS. If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to contact us.

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