On Friday, March 27, 2020, President Trump signed into law the CARES Act, which contains many provisions designed to mitigate the impact of the Coronavirus pandemic on businesses. Those provisions include the following four significant changes to the business tax provisions contained in the 2017 Tax Cuts and Jobs Act.
Modifications to the Rules for Net Operating Losses
For taxable years beginning after December 31, 2017 and beginning before January 1, 2021 (tax years 2018, 2019 and 2020, each an “Impacted Tax Year” and collectively, the “Impacted Tax Years”), the CARES Act removes two significant restrictions imposed on the use of Net Operating Losses (“NOLs”) by the Tax Cuts and Jobs Act of 2017 (“TCJA 2017”).
First, the CARES Act eliminates the “80 percent of taxable income” limitation imposed on the use of an NOL during an Impacted Tax Year. This means, for example, that an NOL incurred for tax year 2017 could be carried forward to offset as much as 100 percent of taxable income for tax year 2018, rather than only 80 percent of such income, in order to obtain a refund of income tax paid for tax year 2018.
Second, the CARES Act re-instates a carryback period for NOLs incurred during the Impacted Tax Years as those NOLs now can be carried back to each of the preceding 5 taxable years to offset taxable income in those years.
For income tax returns already filed, the benefits of these changes may be achieved through the filing of an amended return or refund claim for the affected tax year. Individual taxpayers may be able to use Form 1045 and corporations Form 1139 to obtain a quick, tentative refund subject to subsequent review by the IRS.
Taxpayers intending to take advantage of the expanded use of NOLs per the CARES Act should consider the impact on other changes in the tax law brought about by TCJA 2017. For example, the carryback of an NOL incurred for tax year 2020 to either 2019 or 2018 could impact the taxpayer’s calculation of its GILTI deduction and perhaps its income tax liability for the carryback year. Further, taxpayers who otherwise did not intend to take advantage of the 100 percent expensing provisions in TCJA 2017 for acquisitions of qualifying tangible depreciable property should consider whether doing so could generate an income tax refund.
Modifications to the Rules for Using Prior Year Alternative Minimum Tax Credits
Prior to TCJA 2017, corporations were subject to the corporate alternative minimum income tax, which was paid if the alterative tax computation resulted in a tax liability that was greater than the liability computed under the regular income tax. Alternative minimum tax payments could be carried forward and credited against the regular income tax liability in later tax years.
TCJA 2017 repealed the corporate alternative minimum tax for taxable years beginning after December 31, 2017, but put in place a mechanism for corporate taxpayers to fully utilize their alternative minimum tax carryforward credits by the close of tax year 2021 by allowing 50 percent of the credit available in excess of the credit used for each of the tax years 2018, 2019, and 2020 to be refunded to the taxpayer and 100 percent of any remaining excess to be refunded to the taxpayer in 2021.
The CARES Act accelerates the refundability of the alternative minimum tax carryforward credits by providing for 50 percent refundability in tax year 2018 and 100 percent refundability for any remaining tax credits in tax year 2019.
For income tax returns already filed, the benefits of these changes may be achieved through the filing of an amended return or claim for refund for the affected tax year. Individual taxpayers may be able to use Form 1045 and corporations Form 1139 to obtain a quick, tentative refund subject to subsequent review by the IRS.
Modifications to the Limitations on Deductibility of Business Interest Expense
Effective for tax years beginning after December 31, 2017, TCJA 2017 limited the business interest expense deduction to 30 percent of the taxpayer’s “adjusted taxable income” for the taxable year.
For tax years beginning in 2019 and 2020, the CARES Act increases the limitation to 50 percent of adjusted taxable income unless the taxpayer elects to retain the 30 percent limitation. Special rules implementing the increase are provided for business entities classified as partnerships.
Recognizing that many taxpayers may have little, if any, adjusted taxable income for their 2020 tax year, the CARES Act also allows a taxpayer for its 2020 tax year to elect to substitute its adjusted taxable income computed for its 2019 tax year for its adjusted taxable income otherwise computed for its 2020 tax year.
Taxpayers considering taking advantage of these modifications should consider the impact of their decisions on their computations and uses of NOLs as modified by the CARES Act.
Modification of Limitation on Losses for Taxpayers other than Corporations
Prior to TCJA 2017, the Internal Revenue Code imposed three limitations on an individual’s ability to claim a pass-through loss (from a partnership, S-Corporation, or sole proprietorship): sufficient adjusted tax basis, the at-risk requirement, and the passive activity rules. TCJA 2017 implemented a fourth obstacle: the excess business loss limitation.
This limitation capped the amount of “net business losses” that an individual could take against other sources of income at $250,000 if single or $500,000 if married filing jointly. Any excess business losses (that is, business losses beyond those limits) were converted to net operating losses, subject to additional limitations.
The CARES Act eliminates the excess business loss limitation for the Impacted Tax Years (2018, 2019, and 2020) – though it remains in effect for the 2021 through 2026 individual tax years. As such, individual taxpayers adversely impacted by this provision in 2018 and 2019 should consider amending these prior year returns to capitalize on the change.
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