Coworkers Sitting in Office

CARES Act and Economic Relief Provisions for Businesses

The Senate through the Coronavirus Aid, Relief and Economic Security Act (“The CARES Act”) has brought with it several economic relief provisions as well as expansions and modifications to several areas of the tax code in an attempt to provide relief to taxpayers during the COVID-19 pandemic.

Among the provisions included in the CARES Act is a modification of the excess business loss (“EBL”) limitation imposed under Internal Revenue Code (“IRC”) §461(l). The Tax Cuts and Jobs Act of 2017 (“TCJA“) created §461(l) which disallows the deduction of EBL’s by non-corporate taxpayers (e.g. individuals, trusts, and estates) starting in the 2018 tax year. The modification under the CARES Act retroactively eliminated the loss limitation for the 2018 and 2019 tax years and suspends the limitation until tax years beginning after December 31, 2020. This allows taxpayers to fully deduct business losses without taking into consideration the limitations imposed under §461(l).

Under TCJA, EBL’s are calculated by looking at the aggregate trade or business deductions compared to the aggregate trade or business gross income/gain. The aggregate of these deductions is taken over the sum of the aggregate gross income attributable to the trade or business and limited to an allowable loss of $250,000 for single filers or $500,000 for married filers that file a joint return. Any excess loss would be carried over as a net operating loss (“NOL”). This change provides an opportunity for taxpayers to amend their 2018 and 2019 (if filed subject to the limitation) tax returns to benefit from the previously disallowed losses. If the 2019 tax return has not yet been filed, the EBL limitations will no longer apply.

Through the CARES Act the current NOL rules from TCJA have been amended for the 2018-2020 tax years, allowing losses that arose in those years to be carried back five years. Additionally, there has been a suspension of the provision which limits NOL’s to only 80% of a taxpayer’s taxable income through tax years ending before 12/31/2020. This may permit taxpayers to fully offset taxable income by carrybacks or carryforwards. These changes together may provide opportunities for taxpayers to receive a refund of income taxes that have been paid in those prior years and receive an influx of cash to help mitigate the losses incurred by the pandemic interruptions.

Along with these opportunities, the CARES Act also includes a technical correction to the TCJA provisions of the EBL. Under the CARES Act, any excess business loss shall be “determined without regard to any deductions, gross income, or gains attributable to any trade or business of performing services as an employee.” This disallows W-2 wages from being included as business income for purposes of an EBL calculation when the limitation returns in the 2021 tax year. Previously, the tax forms used to calculate the EBL limitation drafted by the IRS allowed W-2 income to be included in business income. Additionally, the CARES Act noted that capital gains are included in the computation of EBL only up to the lesser of gains and losses attributable to a trade or business, or the net capital gain income of the taxpayer. The CARES Act also provided technical corrections to the language of §461(l) clarifying that EBL’s are calculated without including §172 or §199A deductions, and net capital losses are not included in the EBL calculations.

Taxpayers should also be mindful of their state tax implications/liabilities arising from these changes. There are several types of IRC conformity laws that a state may have adopted, for instance static conformity states conform to the updated IRC provisions from a set date, which may not include these changes under the CARES Act. States that have rolling conformity will conform to the current IRC that applies federally, and there are some states which have selective conformity which only adopt specific provisions of the IRC.

As taxpayers are looking to file their 2019 returns, these updates should be taken into consideration and changes to their 2018 returns may be beneficial. Please reach out to your HBK Tax Advisor to discuss how these changes may impact you.

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About the Author(s)
Cassandra Baubie is an Associate at HBK CPAs & Consultants and is a member of its Tax Advisory Group (TAG). Cassandra joined HBK in 2017. She works in the firm’s Youngstown, Ohio office. She has experience in tax law research and writing. Prior to joining HBK, she worked for, a global legal news organization, and was a member of the University of Pittsburgh Tax Law Review Journal. Cassandra also worked for the University of Pittsburgh School of Law’s Low-Income Tax Clinic where she performed IRS litigation and Tax Court work and provided compliance work for low income individuals and businesses. Cassandra focuses on issues pertaining to State and Local Taxation (SALT), as well as flow through entity taxation. She has been involved in numerous sales and use tax, franchise tax, and corporate income tax audits, VDA’s, and refund requests. She focuses on complex sales and use tax compliance planning, nexus studies and on-site review and training for all SALT related issues, and has managed various engagements as the in-charge team member and has significant experience in multi-state tax issues.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.