The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") has come up with several relief measures to aid businesses to get through the coronavirus pandemic. Rules have been modified to help overcome net operating losses and interest expense deductions, minimum tax credits, and more. Employers now have several tools at hand to reduce tax liabilities and increase cash liquidity.
One of the provisions is allowing businesses to increase their tax deductibles over loan interests from 30 to 50 percent, which will amount to a nearly $13 billion tax break in total and save millions for companies who may not be too overburdened by the pandemic.
Under the 2017 tax reform, the interest that can be deducted by most taxpayers is 30 percent of the adjusted taxable income. But under the revised provisions under CARE, taxpayers can increase this limit on allowable business interest deduction from 30 percent to 50 percent of adjusted taxable income (ATI). This is allowed for both 2019 and 2020. The taxpayers can also use their ATI in 2019 in place of their 2020 ATI for purposes of determining the deductibility of their business interest expense for 2020, which could increase the business interest deduction.
"It has a huge impact," said Mark Peltz, a senior advisor at accounting firm Mazars USA LLP to Business Insider. "A lot of our clients are in desperate need of cash right now. They're trying to survive, they're just trying to make their payroll."
It is this provision that is leading to some concerns among tax experts and economists who believe that this provision will end up benefiting bigger companies who do not need the leverage to see them through the pandemic.
"I really don't see how this provision is addressing the COVID-19 crisis, particularly when it's not really targeted," said Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy. Manufacturing, telecommunications, and oil and gas are most likely to benefit as they borrow heavily to facilitate expansion and equipment upkeep. Most such companies go into debts heavily to pay for acquisitions, or simply to stay afloat. Also, companies that borrow for acquisitions and mergers will see a benefit as their tax bills will definitely lower.
"I think you're definitely going to see a lot of companies benefit from this," said Amanda Wilson, a tax attorney at Lowndes, a Florida law firm. Another critical factor of the CARES Act is that it allows the 2019 income to be included in the interest calculation for 2020. This will help many companies tremendously as otherwise, interest will form a greater part of most companies' costs this year as earnings are sure to decline in 2020, and many will be pushed over to the interest deduction cap.
Business Insider has pointed out that companies like Dell Technologies with reportedly adjusted interest costs of just 30 percent in 2019 will benefit if earnings drop this year. Then interest will form a significant part of their income, and now they can claim 50 percent deductibles instead of 30 percent after EBITDA.
"I really don't see how this provision is addressing the COVID-19 crisis, particularly when it's not really targeted," said Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy.
The easing of the limitations on deducting interest are also going to help highly leveraged companies who may not need the help, experts are saying. "In general, the CARES Act was not terribly surgical in the way it went about helping companies," said Thornton Matheson, a senior fellow at the Tax Policy Center, a Washington think tank. "Some companies that were hit hard by the virus will benefit from this, but so will a lot of companies that are less hard hit."
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