Previously, non-corporate taxpayer losses were limited to $250,000 ($500,000 for a jointly filed married personal tax return) under Tax Code Section 461. The CARES Act eliminates the prior dollar limit on such losses, so any current year loss amount may be utilized in the relevant tax year from 2018 to 2020, thus creating possible prior year federal income tax refund claim situations.
Changes to the 2017 Tax Cuts and Jobs Act: Alternative Minimum Tax credits that were deferred under the 2017 Tax Cuts and Jobs Act (TCJA) may now be fully utilized and refunded in 2018 or 2019 without the previously required four-year (2018-2021) utilization period. If the taxpayer’s 2019 tax return is delayed, the refund may be elected to be paid for 2018 by the taxpayer.
Tax Code Section 163(j), previously amended by the TCJA, increases the limit on deductible interest expense paid from 30% to 50% for the greater of the 2020 or 2019 (by taxpayer election) tax return adjusted taxable income amounts. The 2019 election may be more beneficial if 2020 net income declines materially.
Tax returns for tax years 2018 and 2019 may be amended to claim bonus depreciation amounts that were not available due to a drafting error that was enacted as part of TCJA, making further tax refund claims possible.
Accounting Changes: Congress has enacted certain changes in the accounting rules that apply when an idle asset is placed in service, and for depreciation of idle assets among other matters, and which will also involve GAAP and SEC Disclosure questions as well.
Small Business Loans: Government-sponsored small business loans provided under the CARES Act are stated to not result in cancellation of debt income for federal income tax purposes if later forgiven. Separate grants provided by the government to certain qualified businesses appear to result in taxable gross income to the grantee. Tax Code Section 118(b) had previously excluded from gross income grants that were treated as capital contributions received from the government by a corporation. Other kinds of entities tax treatment for this purpose are less clear but such grants are likely to result in taxable income absent further legislation. IRS Notice 2020-32, issued on April 29, 2019, prohibits an allocable income-tax-related deduction for the employer, where a portion of such SBA loan is forgiven on a tax-free basis, thus barring a double tax benefit for the employer from such loan cancellation.
On May 5, The Senate Finance Committee and the House Ways and Means Committee asked the IRS to withdraw Notice 2020-32 as incorrect and reflecting a result that was not intended by Congress when the CARES ACT was enacted. How this inconsistency will be resolved is not now known.
Richard J. Hindlian is a tax and business lawyer at the Boston law firm of Davis Malm, focusing primarily on tax controversies, international and domestic tax planning and employee benefit plans. He can be contacted at [email protected].