More Relief Available for Technology CompaniesAnchin AlertApril 16, 2020
The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) includes a wide range of financial and tax relief for businesses and individuals. The Paycheck Protection Program (“PPP”) has been the recent focus for “small” businesses. The PPP allows qualifying small businesses to borrow up to $10,000,000 based on qualified compensation paid to employees. These loans are eligible for forgiveness if the loan proceeds are used for qualified purposes during the 8-week “benefit period” that begins with receipt of the funds, based on criteria defined in the CARES Act. Evaluating your PPP spending options is crucial and could hold the key to the future survival and success of your business. Click here for more information on PPP loan forgiveness and related documentation requirements.
PPP Loans are only one choice for supporting your business during these challenging times. What are some additional relief opportunities available to Technology Companies during these crucial times? The CARES Act provides a series of other benefits that are relevant for Technology Companies:
Possible Tax Refunds from Net Operating Losses (NOL):
The CARES Act offers several NOL related opportunities. Any Net Operating Losses (NOLs) incurred in tax years 2018, 2019 or 2020 can now be carried back for five years. NOLs incurred in a tax year beginning after December 31, 2017 and before January 1, 2021 can now be carried forward indefinitely, while NOLs incurred prior to this time are still subject to the 20 year carryforward period. Finally, all NOLs incurred in tax years beginning after December 31, 2017 and before January 1, 2021 are not subject to the 80% taxable income limitation that was part of the 2017 Tax Cuts and Jobs Act (TCJA) and instead can be used to offset all taxable income. This provision can provide carryback claims for tax refunds of prior years’ taxes, which may have been paid at higher tax rates.
Tax Savings on Qualified Improvement Property (QIP):
Qualified Improvement Property is defined as qualified leasehold improvement, qualified restaurant property and qualified retail improvement property. The TCJA made QIP a 39-year asset and therefore not eligible for bonus depreciation in error. The CARES Act corrects this error retroactively to years beginning after December 31, 2017.Therefore, QIP is now depreciable over 15 years and is eligible for bonus depreciation. Taxpayers will have the option of amending prior year tax returns or taking the benefit on their next filed return by applying for an accounting method change. Technology companies should review their recent asset additions as this provision could provide an opportunity for tax refunds in certain cases.
Payroll Tax Deferral Can Help Cash Flow:
Technology firms can defer the employer’s portion of Federal social security payroll taxes (but not Medicare taxes) due from March 27, 2020 through December 31, 2020. One half of the taxes deferred will be due by December 31, 2021 and one half will be due by December 31, 2022. This deferral is essentially an interest free loan. Note: Employers who receive a PPP loan are eligible for this deferral up until the time any portion of the PPP loan is forgiven, at which point no additional amounts will be eligible for further deferral. Many employees have not reached the Social Security wage base yet so these deferrals can provide interest free financing.
Employee Retention Tax Credits:
If you are carrying on a trade or business in 2020 and your business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority as a result of COVID-19, or your businesses gross receipts have declined at least 50% starting with the first quarter of 2020 as compared to the same quarter in the prior year, you can receive a credit for each quarter equal to 50% of the qualified wages (including health care costs) with respect to each employee. The credit is limited to $10,000 of qualified wages per employee, which results in a max credit of $5,000 per employee. Any amounts in excess of federal payroll taxes owed will be refunded. The employee retention credit is effective for wages paid after March 12, 2020 and before January 1, 2021. Employers with greater than 100 full-time employees are only entitled to the credit for any employee not providing services for the employer due to COVID-19 causes. Note: This credit will not be available to any taxpayer which avails themselves of a PPP loan.
An alternate and valuable source of funding for Technology Companies, not part of the CARES Act, is the Federal Research and Development (R&D) Tax Credit:
The R&D Tax Credit is often an overlooked source of funding. The R&D tax credit benefits U.S. companies that develop new or improved products or processes through technical activities that lead to an elimination of design or development uncertainty. These qualifying activities are widely prevalent in the software and technology industries. A business’ qualifying expenses for these initiatives include certain employee wages among other qualified costs. The R&D tax credit can offset personal and corporate income taxes of the owners and the company, lowering their effective tax rate. Further, startup businesses with gross receipts of less than $5,000,000 can take the R&D tax credit against their payroll taxes, essentially making it a refundable credit for up to 5 years. Any unused R&D tax credits are allowed to be carried forward for 20 years.
Our professionals at Anchin are here to offer support and insight in providing guidance on these benefits as well as other opportunities to support your business through the current crisis. Please reach out to your Anchin Relationship Partner or a member of our Technology Group so that we can personally address your questions. 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.