The CARES Act: Commonly Asked Questions for Technology CompaniesMay 1, 2020
With Congress swiftly passing the largest economic stimulus package in history, it’s no surprise that the provisions of the CARES Act raised a significant amount of questions. In the past week alone we’ve seen more guidance and continued confusion amongst taxpayers. We hope the confusion subsides as more guidance is released over the coming days. Although we have received many questions, here are some of the most commonly asked questions we have recently discussed with technology companies:
1. Can my business take the Payroll Tax Deferral under the CARES Act if I have a loan under the Paycheck Protection Program (PPP)?
The Payroll Tax Deferral offers an opportunity for businesses to defer payment on the employer portion of the Social Security tax due on their payroll, beginning March 27, 2020 through December 31, 2020. The Act originally prohibited this deferral for recipients of PPP loans who intended to file for forgiveness. However, the IRS recently clarified that recipients of PPP loans may defer these tax payments through the date that loan forgiveness is approved by the lending institution. The amount of Social Security taxes deferred is interest free and at least 50% will be due by December 31, 2021, with the balance due no later than December 31, 2022.
2. How does the Payroll Tax Deferral under the CARES Act impact my business’ Research & Development (R&D) Tax Credit?
As noted in question 1, the Payroll Tax Deferral allows your business to defer payment of the employer’s portion of Social Security taxes. The R&D Tax Credit is generally an income tax credit that can be used to offset personal and corporate income taxes of the owners and the company, lowering their effective tax rate.
For “start-ups” in their first 5 years of generating revenue with gross receipts of less than $5,000,000, the R&D Tax Credit generated in those years can be offset against the employer share of Social Security taxes, essentially making it a refundable tax credit. During the period that the business is taking advantage of the Payroll Tax Deferral under the CARES Act, there would be no employer Social Security taxes being paid, and thus, the R&D Tax Credit would not be utilized at that time but would start to be utilized again when the business once again is paying the employer portion of the Social Security taxes (i.e. at the end of the deferral period).
Consider that the R&D Tax Credit for “start-ups” can be used against employer Social Security taxes and is a permanent tax benefit, while the Payroll Tax Deferral is only a deferral and must be paid back in full.
3. How do the changes in the treatment of Net Operating Losses (NOLs) under the CARES Act affect my business?
The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the ability to carryback Net Operating Losses (NOLs), and limits the use of an NOL carryforward to 80% of taxable income in each carryforward year. The CARES Act repealed the TCJA NOL carryback rules for NOLs incurred in tax years beginning after December 31, 2017 and before January 1, 2021, now providing companies with a new 5 year carryback opportunity. Further, NOLs incurred in these tax years are not subject to the 80% taxable income limitation, and instead can be used to offset all taxable income in those years. This means that NOLs from these tax years may be offset against previous taxable income from as early as 2013, recapturing tax that was likely paid at higher rates in prior years.
The IRS has procedures for filing quick refund claims as opposed to filing amended tax returns in order to carry back your NOLs, allowing for a much faster refund from your NOL. Typically, a taxpayer only has 12 months after the end of the year to file a quick refund claim. For NOLs arising in tax years beginning in 2018 and ending before July 1, 2019, the IRS granted a six-month extension to file a quick refund claim application on Form 1139 or Form 1045. Therefore, a calendar year taxpayer with a 2018 NOL may file a quick refund claim by June 30, 2020.
4. As a portfolio company of a venture capital (“VC”) and/or private equity (“PE”) firm, how do the recent developments regarding eligibility for the Paycheck Protection Program (“PPP”) affect us?
On April 24th, legislation increased funding for the PPP by $310 billion. On the same day, the Treasury Department issued a new Interim Final Rule which clarifies eligibility rules for certain types of businesses. Specifically, the Treasury determined that “hedge funds and private equity firms” are ineligible for PPP because they are primarily engaged in investment for speculation. Although not specifically identified, this newly issued Interim Final Rule could lead one to believe that other investment vehicles such as funds of funds, venture capital funds and real estate funds may not be eligible for PPP loans.
The Interim Final Rule also addressed whether a portfolio company owned by these firms would be eligible for a PPP loan. Portfolio companies are eligible if they satisfy the affiliation rules with respect to ownership and control. The Interim Final Rule also states that portfolio companies should carefully consider the certification on the PPP borrower application stating that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” It is possible that upon review of the loan, the Small Business Administration may look to the VC or PE firms’ balance sheets to determine if the loan was necessary.
Businesses that have applied for a PPP loan prior to April 24th, or have already received a PPP loan, have until May 7th to repay the loan in full. For borrowers who repay the PPP loan in full by that date, it will be deemed that their original application was submitted in good faith based on a misunderstanding or a misapplication of the rules. We suggest carefully considering this additional guidance and reviewing it with your investors and legal counsel as soon as possible.
Please reach out to your Anchin Relationship Partner or a member of our Technology Group so that we can personally address your questions. In addition, our COVID-19 Resource Team can be contacted at COVID19@anchin.com.
Disclaimer: Please note this is based on the information that is currently available and is subject to change.