Clients with business property might find a tax break in the recent Coronavirus Aid, Relief and Economic Security Act.

A provision of the CARES Act suspends, through 2020, the excess business loss limitation imposed by the Tax Cuts and Jobs Act (TCJA). This will allow increased deductions such as for real estate depreciation for non-corporate taxpayers, said Robbin Caruso, CPA, CGMA and partner at Prager Metis in Cranbury, N.J.

Under the TCJA, taxpayers could have been subject to excess business loss limitations when the total deductions from their trades or businesses exceeded their total gross income (and gains from those trades or businesses) by more than $250,000 for single filers and $500,000 for a married couple filing jointly.

A greater business loss was disallowed and had to be converted into a net operating loss (NOL) that could be utilized in a future tax year, said Lisa Knee, CPA, a tax partner at co-leader of the national real estate practice and leader for the national real estate private equity group at EisnerAmper in New York City.

“The loss limitation put in place by the TCJA eliminated the ability for taxpayers to fully use business losses to offset current income,” she said. “The [CARES] Act temporarily eliminates this problem.”

The idea behind these provisions is to free up cash for business owners to plow back into the economy, Caruso said. Critics, however, have called it a break for the wealthy.

“Wealthy? This only impacts those with non-business income above the limits,” Caruso said. “But what happens if I’m single and have $500,000 in non-business income and a business, and that business has a $500,000 loss, so I essentially made nothing. Under the TCJA I’m limited to a $250,000 deduction and can’t offset the other $250,000. The losses subject to the limitation would be treated as a [NOL] carryforward.”

The objective of the Act is to provide relief for taxpayers, including business owners, said Craig Richards, director of tax services at Fiduciary Trust Company International in New York City. “The postponement on the limitation of excess business losses helps provide that relief by giving those folks immediate relief and by potentially putting tax refunds or reduced liabilities in their hands now,” he noted.

Caruso added that the CARES Act also suspended limitations on deductions for NOLs carried over from prior years. The previous limit was 80% of taxable income. Now taxpayers with any unclaimed net-operating business loss carryovers may offset up to 100% of taxable income in 2018, 2019 and 2020. The CARES act also allows current NOLs to be carried back to the preceding five years. Taxpayers would need to file a Form 1139, 1045 or an amended return to request refunds.

Caruso pointed out that the CARES Act did correct an omission in the Tax Cuts and Jobs Act. The clarification assigns a 15-year depreciable life to qualified improvement property (formerly known as qualified leasehold improvements, qualified restaurant property and qualified retail improvement property), allowing clients who own such properties to amend returns starting with 2018 and claim bonus depreciation. Taxpayers can also carryback any NOLs arising from such bonus depreciation costs for tax years 2018, 2019 and 2020.

“There are new opportunities to request refunds and/or amend prior returns,” Caruso said, adding that even relatively sophisticated business-owning clients who receive good tax information from various associations and trade groups would benefit from a tax advisor well-versed in the new bonus depreciation and other CARES Act provisions and guidelines. 

Added Richards, “For 2020, taxpayers and their advisors may look to accelerate deductions that may cause excess business losses that they can use sooner rather than later.”