The CARES Act was designed to offer relief to business owners, keep businesses open and support their ability to meet payroll obligations. Even if your business doesn’t qualify for the loans offered under the act, it will have implications for your business from an income tax perspective. Here are highlights of the program’s tax implications:
- Corporate taxpayers are permitted a five year carryback of their 2018 to 2020 net operating losses (NOLs).
- The NOL restriction of 80% has been eliminated.
- Interest deduction increased from 30% to 50% for 2019 and 2020.
As a result, there are several tax aspects to consider:
- Remeasure your income taxes payable/receivable, as well as your deferred tax assets and liabilities related to prior periods (considered a current period item as of the date of the CARES Act).
- NOL carrybacks from 2018 through 2020 are at a 21% rate, and can be carried back five years to offset income that was taxed at 35%. The 35% tax rate for measuring the refunds in the prior periods is still applicable for measuring your refund.
- The NOLs that were limited to 80% on your 2018 and 2019 returns can be resubmitted at 100%.
- The allowable interest deduction percentage increased from 30% to 50%, which will affect the timing of temporary differences being reversed. With quicker turnover of these temporary differences, valuation allowances will need to be reassessed.
- Non-current deferred tax assets arising from minimum tax credit carryforwards will need to be analyzed as some will be realized through a deduction to income tax payable or become refundable.
- All of these adjustments will be recognized as current income tax expense/benefit from continuing operations from the date of the act.
COVID-19 may further impact your financial statements in the following ways:
- Consider the credit of your customers and the potential need for additional allowances for doubtful accounts.
- Inventory valuation allowances for potential spoilage or slow moving inventory may be required if sales are interrupted.
- Investments, intangible assets and goodwill may need to be evaluated for impairment.
- Estimates around revenue related to realizability.
- Strong disclosure of liquidity and risk of ability to continue as a going concern will be scrutinized.
If you have questions about COVID-19’s impact on your financial reporting, contact a Friedman professional today.