Manufacturers have a lot on their minds, from maintaining operations and adapting business models to navigating supply chain and workforce issues. The CARES Act was enacted in March in an effort to lessen the economic hit taken by Americans and their businesses. The legislation continues to evolve alongside the effects of the COVID-19 crisis. To ease some of the pressure and assist with some of the current industry challenges, we are taking a closer look at how certain CARES Act provisions may help manufacturing companies.
Net Operating Losses
Generally, a net operating loss (NOL) occurs when your deductible expenses exceed your income. Under the 2017 Tax Cuts & Jobs Act (TCJA), NOLs were subject to an 80% taxable income limitation and carrying back NOLs to reduce income in a prior year was not allowed. To increase liquidity, the CARES Act has made temporary modifications. NOLs arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, may be carried back over the preceding 5 taxable years. For NOLs arising in a taxable year that began in 2017 and ended during 2018, the carryback period is two years. There is an election to forego the carryback; however, manufacturers may want to consider that, before 2018, the maximum corporate tax rate was 35%, which was much higher than the current 21%. Ultimately, this provision allows corporate taxpayers to use NOLs to offset taxable income, dollar-for-dollar, for 2018, 2019, and 2020.
Under the CARES Act, the 80% of taxable income limitation has also been suspended for tax years beginning before January 1, 2021. NOLs carried forward from the 2018, 2019, and 2020 to taxable years beginning after December 31, 2020, however, would still be subject to the 80% limitation. This means, for tax years beginning before 2021, manufacturers are generally allowed an NOL deduction equal to 100% of taxable income and can, potentially, carry back an NOL generated in 2018 to 2013.
Excess Business Loss Limitation
For non-corporate taxpayers, the TCJA created an excess business loss limitation, a limit on deductions for current-year business losses. The CARES Act retroactively eliminates the excess business loss limitation for 2018 and 2019, deferring its effective date to tax years beginning after December 31, 2020. Amended returns may be filed for 2018 and 2019 to further reduce your tax liability and receive a refund or to create and carry back an NOL.
Credit for Prior Year Minimum Tax Liability of Corporations
The CARES Act temporarily accelerates the refundability of alternative minimum tax (AMT) credits for corporations under Section 53(e). The CARES Act eliminates the gradual refund schedule set over four years, beginning in 2018 and ending in 2021, and allows AMT credits to be claimed fully in 2018 and 2019. Corporate taxpayers may make an election to take the entire refundable credit amount as of December 31, 2018, by filing an amended return or Federal Form 1139, Application for Tentative Refund.
Business Interest Limitation
Beginning in 2018, the TCJA limited the business interest deduction to 30% of the taxpayer’s Adjusted Taxable Income (ATI). Small manufacturers, with average annual gross receipts of $25 million or less for the 3 previous tax years, are generally already exempt from this limitation. For non-exempt corporations, the CARES Act increases that limitation for 2019 and 2020 to 50%. For 2019, partnerships are not eligible for the increase; however, for 2020, partners with allocated disallowed interest from partnerships in 2019 will be able to deduct 50% of the limited interest without restriction. The remaining 50% will be subject to standing legislation, and these partners do have the ability to elect out for taxable years beginning in 2020.
Additionally, the CARES Act allows businesses to use their 2019 ATI to calculate their 2020 business interest limitation, which can increase their deduction for interest expense. This is still permitted for short taxable years in 2020. The 2019 adjusted taxable income is simply prorated. For 2019 and 2020, if a larger interest expense deduction results in or increases an NOL, it may be carried back to earlier years without being subject to the 80% limitation.
Qualified Improvement Property
The CARES Act included QIP within the category of property that qualifies for bonus depreciation, which, for many, will allow for much-needed write offs for building improvement costs. The Act changes the depreciable life of QIP from 39 years to 15 years, making it eligible for 100% bonus depreciation through 2022. This technical correction is retroactive, and is now in effect back to January 1, 2018.
An immediate influx of cash flow may be available as a result. Taxpayers with QIP in 2018 or 2019 can file an amended return in order to change the depreciable life of QIP from 39 years to 15 years or to claim 100% bonus depreciation. Additionally, taxpayers may claim an adjustment by filing Federal Form 3115, Application for Change in Accounting Method.
ARB’s Manufacturing Services Group is dedicated to helping you consider available options to increase your bottom line and meet your unique industry and business needs. Contact us for more information, or for your other tax, accounting, and business advisory needs.
Take a look at some additional resources below:
COVID-19 Financial Resource and Tax Center
The CARES Act: A Closer Look at Certain Provisions for Businesses
The CARES Act: A Closer Look at Certain Provisions for Employers
by Robin Cyr, CPA, MST, JD