CARES Act tax breaks and cash flow for small businesses

Editor’s Note: This article was updated on May 8, 2020, to include new information about net operating loss and qualified improvement property procedures. It was originally published on April 28, 2020.

While the coronavirus stimulus checks have gotten a lot of media coverage lately, there are a handful of other benefits that the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides for average Americans and small business owners, that deserve recognition, especially those that can improve cash flow. From expanded unemployment benefits to bonus depreciation, those who need it the most are covered.

Although temporary, these changes are designed to get those most impacted by COVID-19 back on their feet as quickly as possible.

Now, let’s get into the details of the specific CARES Act tax breaks and their impact on cash flow for small businesses.

Need more info about the CARES Act in general? Read our article about 4 small business temporary assistance programs.

Deferment of payroll taxes

Small businesses can defer the 6.2% employer portion of the Social Security tax under the payroll tax deferral relief offered by the new CARES Act.

The deferment of this tax is only allowed on employee’s first $137,700 earned in during the deferral period (social security taxes don’t apply to wages over this amount).

Employers will have until Dec. 31, 2021 to pay the first half of these deferred taxes, while the remaining half will be due by Dec. 31, 2022.

The payroll tax is available to employers across the board, and there are currently no requirements to prove need due to COVID-19. However, you’re no longer eligible to defer payroll taxes after you receive loan forgiveness for a Small Business Administration (SBA) Paycheck Protection Program (known also as the paycheck protection loan.) Under the CARES Act, certain SBA loans received during this period will be all or partially forgiven. Read more about this relief on the IRS website.

Federal tax payment deferment

To create immediate cash flow for small businesses, all federal tax payments that were normally due on April 15 are automatically postponed until July 15, 2020. You don’t need to do anything to get this extension and there are no limits on how much you can defer. No penalties or interest will be charged during this period.

Returns included in postponed federal tax deadline under the CARES Act:

  • Form 1040 (Individual federal income tax return)
  • Form 1120 (Federal income tax return for C corporations)
  • Form 1041 (Federal income tax return for trusts and estates)
  • Form 709 (Federal gift tax and GSST)

Visit the IRS website to see the full list of returns that can be deferred.

Carryback net operating loss (NOL) modification

If a business’ deductions are more than its taxable income for the year, then a net operating loss (NOL) tax credit can occur. Before the 2017 tax reform, businesses could carry back NOLs to the previous two tax years and forward for up to 20 years, allowing businesses to offset taxable income. The changes from the 2017 tax reform eliminated this two-year carryback NOL provisions and allowed NOLs to be carried forward indefinitely. The TCJA also limited the NOL deduction to 80% of excess taxable income.

Although the indefinite carryforward rule hasn’t changed, the CARES Act temporarily requires a five-year carryback for 100% of losses arising in 2018, 2019, and 2020 unless the carryback period is waived.

This is a game-changer for small business owners and sole proprietors since it allows them to carryback certain net operating losses to as far back as 2013. This adjustment can help you offset taxable income and increase cash flow to support your operations this year and in the future.

Update: The IRS has issued Revenue Procedure 20-24 explaining the procedures for waiving the 5-year carryback period, the exclusion of certain repatriated income inclusions and how fiscal year filers should treat tax years that straddle 2017 and 2018. In addition, Notice 2020-26 provides an extension to file Forms 1045 and 1139 to take advantage of the new carryback rules.

What expenses create a net operating loss?

A NOL must be caused by certain deductions in order to qualify. The most common are expenses incurred while operating the business. Trade or business expenses, as well as property damages, rent, theft, and even natural disasters all fall into your deductions bucket.

While not all business deductions will change due to COVID-19; others will stem directly from it. Small businesses have had to adapt their tools and processes to keep up with the new normal and survive. For example, they’ve seen business expenses rise due to the need for having mass quantities of masks and sanitizer on hand to operate.

Other businesses aren’t as flexible and have had to revamp the way they stay profitable altogether. Restaurants are moving to delivery and carry out options. Distilleries are manufacturing hand sanitizer, which means new costs related to machinery adjustments, goods, and distribution channels.

Small businesses across the board can expect to see changes in some deductions directly impacted by COVID-19 in some way, shape, or form.

CARES Act bonus depreciation of qualified improvement property (QIP)

The CARES Act bonus depreciation update includes retroactive corrections to the 2017 Tax Cuts and Jobs Act (TCJA) that deeply affected qualified improvement property (QIP), particularly for restaurants, retail, and leaseholders.

What is Qualified Improvement Property?

Qualified improvement property is an upgrade to the inside of a non-residential building. Some exclusions include things like enlarging the building, adding an elevator or escalator, or updating the internal structural framework of the building.

CARES Act and QIP amendments

The CARES Act’s QIP update allows for better depreciation rules and gives businesses the opportunity to claim 100% of first-year bonus depreciation for QIPs placed in service between 2018 and 2022.

2018 or 2019 returns can be amended in order to claim that 100% first-year bonus depreciation under the CARES Act. This new amendment could also result in an updated NOL deduction, which can then also be carried back to a prior year to recover taxes paid, as we explained above.

All the CARES Act tax breaks implemented during this worldwide pandemic have been pushed through as ways for businesses to access cash flow more efficiently, incentivize them to keep their employees on the payroll, and continue to invest in business improvements. As more policy changes and updates roll in, we’ll continue to keep you updated.

Update: The IRS issued Revenue Procedure 2020-25 that provides the procedure for taking advantage of the new rules involving QIP.

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