The Coronavirus Aid, Relief, and Economic Security Act (the Act) includes several provisions intended to provide tax relief to both businesses and individuals, including by rolling back some measures implemented by the Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act).
- Business Tax Provisions.
- Temporarily Repeal Excess Business Loss Limitation. Section 461(l), enacted as part of the 2017 Tax Act, generally precludes non-corporate taxpayers from deducting net business losses in excess of $250,000 (adjusted for inflation) in any taxable year before 2026. The Act repeals this limitation for 2018 and 2019.
- Temporarily Increase Business Interest Deduction Limitation. Section 163(j), enacted as part of the 2017 Tax Act, generally precludes taxpayers from deducting interest expense in excess of business interest income plus 30% of EBITDA (or of EBIT, beginning in 2022). The Act raises the 30% EBITDA threshold to 50% for 2019 and 2020 and allows taxpayers to elect to use 2019 EBITDA for taxable years beginning in 2020.
- Temporarily Ease NOL Limitations. The 2017 Tax Act prohibits most corporate taxpayers from carrying back net operating losses (NOLs) to offset a previous year’s taxable income and limits the NOLs that can be deducted in any year to 80% of taxable income (calculated before giving effect to the NOLs). By contrast, before the 2017 Tax Act, NOLs generally could be carried back up to two years and could offset up to 90% of taxable income. The Act permits taxpayers to carry back 2018, 2019, and 2020 NOLs for up to five years, and to offset 100% of their income with NOLs in taxable years beginning before 2021.
Corporate taxpayers will welcome the Act’s temporary repeal of the 2017 Tax Act’s ill-conceived limits on deductions and NOL usage. However, it remains to be seen whether and to what extent these changes will generate immediate cash savings. Most corporations operate on a calendar-year basis, and many did not have significant losses in recent years. Accordingly, many corporations may have to wait until 2021 to calculate their 2020 losses, carry them back and file for refunds. Moreover, the ability to carry back NOLs might not be as valuable for companies with offshore operations because reductions in a company’s U.S. taxable income could increase the company’s tax bill in respect of global intangible low-tax income.
- Preclude Government Investment from Causing a Section 382 Ownership Change. Section 382 strictly limits the amount of net operating losses and built-in losses a corporation can use after it undergoes an ownership change. As with the TARP program implemented in response to the last financial crisis, the Act requires Treasury to provide guidance to the effect that the government’s investment in a company in accordance with the Act “does not result in an ownership change for purposes of section 382.” The Act is silent as to the consequences of a subsequent sale of an acquired interest.
- Accelerate Corporate AMT Credit Recovery. Before its repeal, the corporate alternative minimum tax (AMT) generated tax credits that could be used against a corporation’s regular tax in future years. The TCJA repealed the corporate AMT and provided that these credits could be taken as refundable credits over several years, with 100% of any remainder being paid out in 2021. The Act makes any remaining AMT tax credits fully refundable for the 2019 taxable year.
- Individual Tax Provisions.
- Provide Cash Payments to Individuals. The Act provides for direct cash payments of up to $1,200 per adult individual, plus $500 per child, with phase-outs beginning at $75,000 of taxable income for individuals (and a complete phase-out at $99,000).
- Expand the Charitable Contribution Deduction. The Act (1) allows non-itemizing taxpayers to deduct up to $300 of cash contributions in 2020, (2) allows itemizing taxpayers to take charitable deductions on cash contributions in 2020 without regard to the 60% of adjusted gross income limitation and (3) allows corporations to take charitable deductions on cash contributions in 2020 up to 25% of their taxable income (instead of 10% under current law).
- Exclude Certain Employer Student Loan Payments from Employee Income. The Act excludes from an employee’s taxable income the first $5,250 of student loan payments made by his or her employer after the enactment of the Act and before 2021.
For a full summary of the CARES Act, see our Clients & Friends Memo.
