Coronavirus Aid, Recovery and Economic Security (CARES) Act
Key Provisions for Taxpayers
Changes to Net Operating Loss Rules
Net operating loss (NOL) rules were favorably changed by the CARES Act, to allow NOLs arising in tax years 2018, 2019 and 2020 to be carried back five years. In addition, the rule limiting NOL usage to 80% of taxable income (created by the Tax Cuts and Jobs Act of 2017) has been eliminated for tax years beginning before January 1st, 2021, and NOLs can be used to offset 100% of taxable income.
Delay of Excess Business Loss Limitation
The CARES Act included a provision which delays the application of excess business loss limitations until 2021. The Tax Cuts and Jobs Act (TCJA) of 2017 limited the ability of individuals, trusts and estates to deduct excess business losses. Any unused excess business losses are carried forward as NOLs.
TCJA Limitation on Excess Business Losses
$250,000 per year
$500,000 married filing jointly
Excess business losses = generally, the excess of aggregate business gross deductions over aggregate business gross income
The CARES Act provision delays implementation of the excess business loss limitation until 2021.
Non-corporate taxpayers could potentially deduct all excess business losses created through the end of the 2020 tax year.
This CARES Act provision does not impact the application of passive loss and at-risk limitations, and as such may provide a reduce tax benefit for passive investors.
Temporary Higher Limits on Business Interest Expense Deduction
The CARES Act provided for a temporary increase in limits on business interest expense deductions
TCJA limited the business interest deduction to 30% of adjusted taxable income for taxpayers with average gross receipts of $25,000,000, for tax years beginning in 2018
CARES Act increased the deduction to 50% of adjusted taxable income for 2019 and 2020
Under the CARES Act, a taxpayer can elect to treat their 2020 adjusted income as if it were the same amount as 2019 adjusted taxable income, for purposes of applying the interest expense limitation. This could be a source of additional NOL’s in 2020, depending upon the taxpayer’s situation.