Opportunities for Enhanced Cash Flow and Debt Management
CARES Act income tax provisions provide much needed economic relief to small business nationwide. It temporarily lifts some of the restrictions imposed by the 2017 Tax Cuts and Jobs Act that limited tax benefits for deductions and losses. The TCJA tax reform disallowed carryback of NOLs, allowed the NOL to only offset 80% of taxable income, limited excess business loss deduction for pass-through business owners, and also limited business interest deductions to 30% of the taxpayer’s adjusted taxable income.
Carryback of Net Operating Loss (NOL)
A net operating loss (NOL) occurs when a company’s tax deductions exceed its taxable income for a given tax period. Before 2018 the NOLs could be carried back 2 years and carried forward 20 years. The Tax Cuts & Jobs Act changed the tax law to (1) eliminate the carryback of NOLs (they could only be carried forward), and (2) allow the NOL to only offset 80% of taxable income.
Modifications to NOLs provided by CARES Act:
- NOLs incurred in 2018, 2019, or 2020 may be carried back to each of the 5 tax years preceding the tax year loss
- Repeals the 80% taxable income limitation for NOL limitation (it can offset 100% of taxable income) and reinstates it for tax years after 2020.
Small business owners can use Net Operating Losses from 2018, 2019, and 2020 to get a refund for taxes paid in prior years. This new tax provision can provide a refund given that there were taxes paid anytime during the carryback period. C-corporations can make carryback claims at the entity level. S-corp and partnerships pass losses to individual owners, who can claim refunds. Taxpayers may claim an NOL carryback by either filing an amended tax return for the carryback year or by filing an application for a tentative refund. Corporations file form 1139, Corporation Application for Tentative Refund, and all other taxpayers must use form 1045. However, the deadline for filing a Form 1045 is normally only 12 months from the end of the year in which the loss was generated. The IRS deadline to file these forms for the 2019 tax year is December 31st, 2020. If this date is missed, then an amended tax return would need to be filed to claim a refund.
Excess Business Loss Limitations
The TCJA temporarily limited business loss deduction against non-business income for non-corporate taxpayers. Any business loss exceeding the thresholds above was carried forward as an NOL.
The owners of pass-through entities were subject to excess business loss limitations of (1) $250,000 for individuals, and (2) $500,000 for married filing joint taxpayers, in taxable years beginning after December 31, 2017, and ending before January 1, 2026.
- The CARES Act lifts the limitation for 2018, 2019, and 2020, tax years. Permitting the deduction of business losses in excess of the above threshold. This excess business loss limitation for pass-through business owners does not apply until January 1, 2021.
If you had a business loss that was limited in 2018 or 2019 under the excess business loss rules, then you may be able to obtain a refund by filing an amended tax return. Excess business losses will not be allowed for any tax years beginning after Dec. 31, 2020, and before Jan. 1, 2026.
Limitation on Business Interest
The 2017 tax reform imposed a new limitation on the amount of net business interest expense a business could deduct. The deduction was generally limited to 30% of a taxpayer’s adjusted taxable income (ATI).
- The CARES Act temporarily modifies the ATI limitation and increased the limit from 30% to 50% of adjusted taxable income for tax years 2019 and 2020, potentially increasing interest expense deductions and reducing taxable income.
You have the opportunity to amend your return if you already filed your 2019 tax returns and your deduction for business interest was limited.
