Cares Act: Tax Benefits for Businesses and Employees in 2023

6 min read

This stimulus package helped many eligible employers retain employees during the Covid-19 pandemic via tax ERC refunds, EIDL, and PPP loans. Deferment of payroll taxes via CARES Act provisions helped many large corporations and nonprofits with maintaining payroll costs, while the Paid Leave Credit was widely claimed by solo entrepreneurs and small businesses.

C.A.R.E.S. Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed into legislation by the US federal government in late 2020. This bill was established to aid eligible employers and employees in dealing with financial hardship during the COVID-19 pandemic.

Within the act was a $2.2 trillion economic stimulus package that bore crucial business survival programs such as the: Paycheck Protection Program loan, Economic Injury Disaster Loan (EIDL), the Employee Retention Tax Credit (ERTC), and the Paid Sick and Family Leave Credit.

Further amendments to this business stimulus package were then added via the Taxpayer Certainty and Disaster Tax Relief Act, Consolidated Appropriations Act, American Rescue Plan Act, and the Infrastructure Investment and Jobs Act.

Employee Retention Credit

This fully refundable payroll tax credit was introduced to encourage employers to retain and continue paying their employees during the pandemic. Eligibility requirements for the ERTC allow businesses that experienced a significant decline in gross receipts or where a government led to a nominal impact on normal business operations to claim a refund for qualified wages paid. A stipulation in CARES act tax benefits for businesses was also added to include qualified health plan expenses, and certain health insurance costs like Medicare taxes to be counted as qualified employee wages.

Gross Receipts Test

This qualifying factor helped many business owners become eligible for the ERC via a 50% revenue loss in 2020 or a 20% loss in 2021 of the immediately preceding calendar quarter when compared to the same calendar quarter in 2019. If a non-essential business was fully or partially suspended due to an appropriate governmental authority mandate this too could qualify them for an ERC refund.

Supply Chain Issues

Another key qualifying factor was determining eligibility based on supply chain disruptions, which allowed many essential businesses and those who turned a profit to claim the ERC credit. This eligibility factor was especially helpful for private nonprofits or tax-exempt organizations, as well as those who received PPP loan forgiveness, a Restaurant Revitalization Fund grant, or a Work Opportunity Tax Credit (WOTC).

Employee Count

Small and large employer designations were further added to help eligible employers qualify for a maximum credit based on an employee limit of 100 or fewer full-time employees in 2020 or 500 or fewer in 2021. Large corporations that have a higher employee count can still claim employer tax credits if they were able to pay qualified wages or qualified health expenses to employees who were able to work.

Advance Payments

The US Treasury Department originally allowed an eligible employer to defer paying an employee pretax portion on their applicable employment tax return such as a Form 941 or Form 943, via also filing an IRS Form 7200.

Recovery Startup Business

Lastly, a late amendment in Infrastructure Investment and Jobs Act allowed recovery startup businesses that commenced operation on or after February 15, 2020, to also apply for the ERC. While they were restricted to claims for the third and fourth quarters of 2021, recovery startups can still receive up to a $100,000 refund check.

Paycheck Protection Program

PPP loans were the most widely used stimulus contained in the CARES Act with close to one trillion dollars ($953 billion) being handed out to both small and large businesses. The two separate PPP draws were said to have cumulatively saved between two-to-three million jobs during the pandemic. On May 31, 2021, however, the federal government stopped the Paycheck Protection Program (PPP) loan program, while the Employee Retention Credit deadline was extended to 3 years from a business’s expected filing date of their amended employer’s quarterly federal tax return.

Loan Forgiveness

The PPP flexibility Act of 2020 also added vital changes to PPP loan forgiveness eligibility which allowed a whopping total of roughly 11.5 million loans to be either partially or fully forgiven.

For eligible businesses to qualify for full loan forgiveness, application criteria required their having spent 60% of their PPP loans on average monthly payroll costs. The other 40% of the PPP loan amount could be spent on qualifying non-payroll costs like transportation and utility payments, rent or mortgage payments, along with mortgage interest.

It was stipulated that workers be rehired and their salary restored by the end of the year 2020. Businesses then had 24 weeks once the PPP loan funds were received to use the loan, and then 10 months to apply for loan forgiveness on the principal and interest payments.

Loan Repayment

Successful applicants received loan amounts up to 2.5x of the borrower’s average monthly payroll costs. Businesses that could not qualify for full forgiveness, were given 5 years to repay their PPP loan balances with a 1% annual interest rate.

This refundable tax credit helps employees who had to stop working due to personal sick leave, school closures, or caring for sick family members.

There is a 10-day maximum for paid sick leave, which can be related to employee health or taking care of their family. Days missed for personal health reasons must be calculated first, and can only be counted between April 1 and December 31, 2020.

A self-employed individual must calculate per day earnings, by dividing their total annual earning, by 260 days. The maximum claim allowable is 10 days of $511 paid sick leave credit per day, and $5,110 in the aggregate.

Family Leave

An employee taking care of a child affected by a school closure can receive two-thirds of the paid sick leave credit. They can claim a maximum family leave credit of $200 per day per employee with $2,000 in the aggregate. There is also a maximum of 50 days of leave credit allowed, along with $10,000 in the aggregate.

EIDL Program

These low-interest working capital loans of up to 2 million dollars were provided by the Small Business Administration (SBA) for eligible companies affected by the pandemic. The terms and conditions of the Economic Injury Disaster Loans were established on a case-by-case basis, and even a tax-exempt organization or nonprofit organization could apply.

The eligible recipient of the loan program funding typically began their loan repaying obligations 12 months after receiving their first installment. Small business owners were then given up to a 30-year repayment term for their approved loan amounts at an annual interest rate of 3.75%.

Payroll Tax Deferment

Through the CARES Act, an eligible employer that had to fully or partially suspend their operations during the pandemic was allowed to submit reduced employment tax deposits through Form 7200 (Advance Payment of Employer Credits Due to COVID-19).

Early payroll tax filings that were due between March 2020 and December 2020 could have been deferred with 50% due in 2021 and the remaining 50% in 2022.

Submission of the social security taxes paid by individual employees during this period was made compulsory for businesses. Employers’ inability to deposit payroll tax fees was overlooked for the applicable years.

Net Operating Losses

The primary beneficiaries of this deduction are taxpayers that carry back an NOL from 2018, 2019, and 2020 using a five-year carryback period. C corporations in particular can offset high-tax income via post-TCJA NOLs.

A net operating loss that is exhausted during the 5-year carryback period or in 2018, or 2019, can be fully offset rather than being subject to an 80% income limitation.

Excess Business Losses

Under the CARES Act, limitations on excess losses for sole proprietors and other non-corporate businesses were removed for tax years starting from January 1, 2017, through December 31, 2020.

Business Interest Expenses

The expense deduction amount of the business interest was also increased to 50% for tax years 2019 and 2020 as part of the Relief Act.