General Business Tax Provisions of the CARES Act

The following outlines the general business tax provisions of the Coronavirus Aid, Relief and Economic Security Act passed on March 27, 2020.

Delay in employer and self-employment payroll taxes

The bill allows employers and self-employed individuals to defer payment of the employer share (6.2%) of the social security tax they otherwise are responsible for paying in 2020, effective for payments due after the date of enactment. Fifty percent of the deferred payroll taxes are due on December 31, 2021, and the remaining amounts are due on December 31, 2022.

Employee retention payroll tax credit for certain businesses

The bill provides a refundable payroll tax credit for 50% of wages paid by certain employers to employees. The bill provides the credit is available to eligible employers carrying on a trade or business in calendar year 2020 whose:

  • Operations were fully or partially suspended, due to the COVID-19 crisis, or
  • Gross receipts declined by more than 50% when compared to the same quarter in the prior

In the case of an employer that qualifies by virtue of the gross receipts test, eligibility ceases at the end of the calendar quarter in which gross receipts are greater than 80% of gross receipts for the same calendar quarter for the prior year. For tax-exempt entities, they are eligible is the operations are fully or partially suspended due to COVID-19.

The credit is for “qualified wages.” For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19 circumstances. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit.

The credit is capped at the first $10,000 of compensation, including health benefits, paid to the employee. The credit is refundable to the extent it exceeds the employer portion of social security taxes reduced by the paid sick leave and paid extended FMLA established by the Families First Coronavirus Resource Act. The provision is effective for wages paid or incurred from March 13, 2020 through December 31, 2020.

If an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act as detailed above in this article, no employee retention credit will be available.

Temporary changes to business interest expense disallowance rules (section 163(j))


As section 163(j) stood before enactment of the bill, in any given tax year, a  taxpayer  could  deduct  business interest only up to the sum of:

  • The taxpayer’s business interest income for the tax year,
  • 30% of the taxpayer’s adjusted taxable income (“ATI”) for the tax year, plus
  • The taxpayer’s floor plan financing interest for the tax

For these purposes, ATI equals a taxpayer’s taxable income computed without regard (i) any  item  of  income, gain, deduction, or loss that  is not  properly allocable to a trade or business, (ii) business interest or business interest income, (iii) the amount of any net operating loss (“NOL”) deduction, (iv) the 20% deduction for certain passthrough income, and (v) in the  case of  tax years beginning before  January 1,  2022, any deduction allowable for depreciation, amortization, or depletion.

Generally speaking, business interest that is not allowed as a deduction is carried forward indefinitely.

Temporary changes made by the bill

As indicated below, the bill makes several temporary changes to section 163(j). These amendments apply to tax years beginning after December 31, 2018.

50% of ATI: For tax years beginning in 2019 and 2020, the 30% limit on ATI is increased to 50%.

Partnerships: The 50%-instead-of-30% ATI rule does not apply to a partnership tax year beginning in 2019, but (unless a partner otherwise elects out) for any of the partnership’s 2019 excess business interest expense that is allocated to a partner under section 163(j)(4)(B)(i)(II):

  • 50% of that excess business interest expense will be treated as business interest that is paid or accrued by the partner in its first tax year beginning in 2020 and will not be subject to the limits of section 163(j)(1) and is thus deductible in such tax year (subject  to any other limitations that may  apply), and
  • The other 50% will be subject to the limitations of section 163(j)(4)(B)(ii) in the same manner as any other excess business interest so

Electing out of the 50%-of-ATI rule: Taxpayers can elect not to have the 50%-of-ATI rule apply to any tax year. Such an election will need the Secretary’s consent to be revoked. This is a partnership-level election and may be made only for tax years beginning in 2020.

Using 2019’s ATI in 2020: For any tax year beginning in 2020, taxpayers can elect to use their ATI from their last  tax year  beginning in 2019 for  their  ATI in the 2020 tax year. This is a partnership-level election.  If such an election is made for a short tax year, the taxpayer’s 2019 ATI will be prorated.

Changes to NOL rules, including NOL technical correction

The bill includes several changes to the net operating loss (NOL) rules.

Five-year carryback of NOLs generally permitted for 2018, 2019, and 2020

The bill grants taxpayers a five-year carryback period for NOLs arising in tax  years  beginning  after  December 31, 2017 and before January 1, 2021 (i.e., calendar years 2018, 2019, and 2020).  Losses that are carried back are carried to the earliest of the tax years to which the loss may be carried.

Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable.

The bill provides that life insurance companies treat loss carrybacks to pre-2018 tax year as operating loss deduction carrybacks (a special type of loss deduction allowed to life insurance companies under section 810 as in effect in those years).

In general, as a result of  the bill (including the provisions discussed below), there  are now three buckets of federal NOLs, as shown in the following table:


NOL Generated in Tax Years Eligible for Carryback Eligible for Carryforward Eligible to Offset % of Taxable Income
Beginning on or before December 31,


Two tax years 20 tax years 100% of taxable income
Beginning after December 31, 2017 and beginning before January 1, 2021 Five tax years Indefinite 100% of taxable income (prior to 2021)

80% of taxable income (after 2020)

Beginning on or after January 1, 2021 Generally, no carryback Indefinite 80% of taxable income


Suspension of NOL 80% of taxable income limitation for 2018-2020

Prior to its amendment by the 2017 legislation commonly called the Tax Cuts and Jobs Act (or “TCJA”), section 172(a) allowed taxpayers to claim an NOL deduction in an amount equal to the aggregate of the NOLs that could be carried  forward  and  back to that  year. The TCJA altered this rule by imposing an 80% of taxable income  limitation on the  use of NOLs, which applied to  NOLs arising in tax years beginning after December 31, 2017. Pre-TCJA law continued to apply to NOLs arising in pre-effective date years.

The bill temporarily suspends the 80% of taxable income limitation on the use of NOLs for tax years beginning before January 1, 2021, thereby permitting corporate taxpayers to use NOLs to fully offset taxable income in these years regardless of the year in which the NOL arose.

Reinstatement of NOL 80% taxable income limitation in 2021 – Modified calculation

The bill reinstates the NOL 80%-of-taxable-income limitation for tax years beginning after December 31, 2020. This limitation will apply with respect to the use of post-TCJA NOLs (i.e., NOLs arising in tax years beginning after December 31, 2017).  In addition, the bill makes two changes to this limitation, the first of which is a potentially unfavorable technical correction, and the second of which is a substantive change that can be either favorable or unfavorable, depending on the taxpayer’s circumstances.

First, incorporating a technical correction to the TCJA, the bill provides that the limitation is to be calculated based on 80% of taxable income after giving effect to the use of pre-2018 NOLs. In other words, taxable income for this purpose is to be determined after reduction to reflect absorption of pre-TCJA NOLs. Second, the bill provides that taxable income for purposes of section 172(a) is determined without giving effect to the deductions for qualified business income, FDII and GILTI under sections 199A and 250, respectively.

Technical correction for fiscal year filers with an NOL arising in the 2017-2018 straddle year

Taxpayers with a tax year straddling December 31, 2017 found themselves unable to carry back losses generated in that straddle year because the TCJA provision that generally terminated the ability to carry back NOLs was made applicable to losses in tax years ending after December 31, 2017. This was an apparent drafting error.

The bill corrects the effective date provision, with the result that NOLs that arose in a tax  year  that  straddled December  31, 2017 (a tax  year  beginning  before January 1, 2018 and ending  after  December  31, 2017) are eligible for the two-year carryback period and 20-year carry forward period of the pre-TCJA law. Affected taxpayers are given 120 days after the date the bill is signed into law to file an application for a carryback of that loss, or to elect to forgo the carryback.

Changes to loss limitation rules for taxpayers other than  corporations

The bill repeals the excess business loss limitation under section 461(l) for tax years beginning prior to January 1, 2021 (i.e., calendar years 2018, 2019, and 2020). This is accomplished by amending the statute to have the excess business loss limitation rule apply for any tax year beginning after December 31, 2020, and before January 1, 2026. This modification has been made on a retroactive basis, back to December 31, 2017.

The bill also includes several technical corrections to section 461(l). The section 461(l) calculation now excludes items which are attributable to the trade or business of performing services as an employee. In addition, net operating loss deductions under section 172 and qualified business income deductions  under section 199A are not taken into  account  in  determining  excess  business  losses.  Further, deductions for losses from the sale or exchange of  capital assets are not  taken into account  in increasing a section 461(l) limitation. Certain gains from the sale or exchange of capital assets may continue to be taken into account in reducing a potential section 461(l) limitation, but since the gains would first need to be netted with other capital losses, there is the potential for a reduction to this inclusion.

Technical correction regarding qualified improvement property (“QIP”)

The bill includes a technical correction to the TCJA with respect to qualified improvement property (QIP). Such property has a 15-year recovery period for purposes of the general depreciation system of section 168(a) and a 20-year recovery period for purposes of the alternative depreciation system of section  168(g). QIP is any improvement made by the taxpayer to the interior of a non-residential building that is placed in service after the building’s initial placed in service date other than improvements attributable to elevators, escalators, building enlargements or the building’s internal structural framework.

Because it has a recovery period of 15 years, QIP is eligible for the additional first-year depreciation deduction (“bonus depreciation”) under section 168(k). Note that any “electing real property trade or business”—i.e., a real property trade or business that  has elected out of the interest limitation provisions    of section 163(j)—is required to use the alternative depreciation system (“ADS”) for QIP and thus cannot claim bonus depreciation on QIP.

The provision is effective as if it had been included in the TCJA section that changed certain real property recovery periods. That section was effective for assets placed in service after 2017.  Accordingly, to comply with this provision, taxpayers are required to change the depreciation methods of QIP placed in service after 2017 that has been depreciated as 39-year building property. Taxpayers should generally be able to change QIP depreciation methods by filing an automatic accounting  method  change.  If a QIP asset was only depreciated on a single tax return—e.g., it was placed in  service in 2018  and  the  2019  return has not yet been filed—the asset’s depreciation method may also be corrected with an amended return.

Modification of charitable contribution limitation for corporations

The bill increases the limitations on deductions for charitable contributions for corporations who make cash contributions in 2020 from 10% of taxable income to 25% of taxable income. Contributions must be made to a public charity or foundation described in section 170(b)(1)(A), but contributions to a supporting organization or a donor-advised fund would not qualify for the increased limits. The relevant percentage limitation applicable to certain donations of food inventory (namely, those that are eligible for an enhanced charitable deduction) are also increased for donations made in 2020, from 15% to 25%.


Advance refunding of paid sick leave and extended FMLA credits

The bill provides that the new payroll credits for required paid sick leave and paid family leave (including the refundable portion) may be advanced to the  employer  in  accordance  with  forms and  instructions to be provided by the Secretary pursuant to the bill. Any penalties for failure to deposit the tax are waived if such failure is due to the anticipation of the credits. See overview of Families First Coronavirus Response Act for Payroll Tax Credits.

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