House Approves $2.2 Trillion Rescue Package

AP News
March 27, 2020 - 10:52 am
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WASHINGTON (AP) — Acting with exceptional resolve in an extraordinary time, the House rushed President Donald Trump a $2.2 trillion rescue package Friday, tossing a life preserver to a U.S. economy and health care system left flailing by the coronavirus pandemic.

The House approved the sweeping measure by a voice vote, as strong majorities of both parties lined up behind the most colossal economic relief bill in the nation's history. It will ship payments of up to $1,200 to millions of Americans, bolster unemployment benefits, offer loans, grants and tax breaks to businesses large and small and flush billions more to states, local governments and the nation's all but overwhelmed health care system.

“Today we've all acknowledged our nation faces an economic and health emergency of historic proportions,” said House Speaker Nancy Pelosi.

President Donald Trump said he would sign the bill immediately.

THIS IS A BREAKING NEWS UPDATE. AP's earlier story is below.

With exceptional resolve in an extraordinary time, the House on Friday debated a $2.2 trillion package tossing a life preserver to a U.S. economy and health care system left flailing by the coronavirus pandemic, even as one maverick Republican threatened leaders' plans for swift passage.

Democratic and Republican leaders were working in tandem and hoping to quickly pass the measure by voice vote to accommodate members scattered around the country and reluctant to risk flying back to the Capitol. There were hand sanitizers at the end of each aisle in the chamber, where most lawmakers sat scattered apart from one another.

There was no doubt the House would give overwhelming final congressional approval to the largest economic bailout legislation in U.S. history. For the most part, Democrats who saw a taxpayer giveaway to big business and Republicans who considered it ladened with waste were set to back the measure for the greater good of keeping the economy alive.

But libertarian Rep. Thomas Massie, R-Ky., was threatening to slow action by demanding a roll call vote. That would force many lawmakers to make the journey to Washington to cast a vote on legislation that is certain to pass anyway, and it infuriated President Donald Trump and lawmakers from both parties.

Trump, who is certain to sign the legislation, tweeted that Massie is “a third rate Grandstander” and said he should be drummed out of the GOP. “He is a disaster for America, and for the Great State of Kentucky!” Trump wrote.

Massie, who opposes the massive bill, was in the chamber during the debate, chatting occasionally with others and checking his phone. He did not respond to reporters' repeated efforts to reach him. Posting on Twitter, he cited a section of the Constitution that requires a majority of lawmakers — some 216 of them — to be present and voting to conduct business.

The debate was mostly conciliatory, with members of both parties praising the measure as a rescue for a ravaged nation. The lecturns in the chamber's well were wiped down between many of the speeches.

“While no one will agree with every part of this rescue bill, we face a challenge rarely seen in America’s history. We must act now, or the toll on lives and livelihoods will be far greater,” said Rep. Kevin Brady, R-Texas.

“We have no time to dither," said Rep. Gerald Connolly, D-Va. "We have no time to engage in ideological or petty partisan fights. Our country needs us as one.”

But still, there were outbursts.

Freshman Rep. Haley Stevens, D-Mich., donned pink latex gloves and yelled well beyond her allotted one minute, saying she was speaking "not for personal attention but (to encourage you) to take this disease seriously." Much of what she said could not be heard above Republican shouts.

Numerous high-ranking Republicans called Massie in an attempt to persuade him to let the voice vote proceed, according to a top House GOP aide. They included House Minority Leader Kevin McCarthy, R-Calif., and Rep. Mark Meadows, R-N.C., whom Trump has chosen as his new chief of staff. The aide spoke on the condition of anonymity to describe private conversations.

Democratic leaders urged lawmakers who are “willing and able” to come to the Capitol to do so. And members of both parties were clearly upset with Massie.

“Heading to Washington to vote on pandemic legislation. Because of one Member of Congress refusing to allow emergency action entire Congress must be called back to vote in House,” Rep. Peter King, R-N.Y., wrote on Twitter. “Risk of infection and risk of legislation being delayed. Disgraceful. Irresponsible.”

South Dakota GOP Rep. Dusty Johnson posted a selfie of himself and three other lawmakers from the upper Midwest traveling to Washington on an otherwise empty plane.

Friday's House session followed an extraordinary 96-0 Senate vote late Wednesday. The bill's relief can hardly come soon enough.

Federal Reserve Chairman Jerome Powell said Thursday the economy “may well be in recession” already, and the government reported a shocking 3.3 million burst of weekly jobless claims, more than four times the previous record. The U.S. death toll from the virus rose to 1,300.

It is unlikely to be the end of the federal response. House Speaker Nancy Pelosi said issues like more generous food stamp payments, aid to state and local governments and family leave may be revisited in subsequent legislation.

The legislation will give $1,200 direct payments to individuals and make way for a flood of subsidized loans, grants and tax breaks to businesses facing extinction in an economic shutdown caused as Americans self-isolate by the tens of millions. It dwarfs prior Washington efforts to take on economic crises and natural disasters, such as the 2008 Wall Street bailout and President Barack Obama’s first-year economic recovery act.

But key elements are untested, such as grants to small businesses to keep workers on payroll and complex lending programs to larger businesses.

Policymakers worry that bureaucracies like the Small Business Administration may become overwhelmed, and conservatives fear that a new, generous unemployment benefit will dissuade jobless people from returning to the workforce. A new $500 billion subsidized lending program for larger businesses is unproven as well.

The bill finances a response with a price tag that equals half the size of the entire $4 trillion-plus annual federal budget. The $2.2 trillion estimate is the White House's best guess of the spending it contains.

The legislation would provide one-time direct payments to Americans of $1,200 per adult making up to $75,000 a year and $2,400 to a married couple making up to $150,000, with $500 payments per child.

Unemployment insurance would be made far more generous, with $600 per week tacked onto regular state jobless payments through the end of July. States and local governments would receive $150 billion in supplemental funding to help them provide basic and emergency services during the crisis.

The legislation also establishes a $454 billion program for guaranteed, subsidized loans to larger industries in hopes of leveraging up to $4.5 trillion in lending to distressed businesses, states, and municipalities. All would be up to the Treasury Department’s discretion, though businesses controlled by Trump or immediate family members and by members of Congress would be ineligible.

There was also $150 billion devoted to the health care system, including $100 billion for grants to hospitals and other health care providers buckling under the strain of COVID-19 caseloads.

Republicans successfully pressed for an employee retention tax credit that's estimated to provide $50 billion to companies that retain employees on payroll and cover 50% of workers' paycheck up to $10,000. Companies would also be able to defer payment of the 6.2% Social Security payroll tax. A huge tax break for interest costs and operating losses limited by the 2017 tax overhaul was restored at a $200 billion cost in a boon for the real estate sector.

An additional $45 billion would fund additional relief through the Federal Emergency Management Agency for local response efforts and community services.

Most people who contract the new coronavirus have mild or moderate symptoms, such as fever and cough that clear up in two to three weeks. For some, especially older adults and people with existing health problems, it can cause more severe illness, including pneumonia, or death.

Congress Reaches Agreement On A Coronavirus Relief Package: Tax Aspects Of The CARES Act

A nation desperate for any reason for optimism got just that on Wednesday evening, with word that

Congress had finally agreed upon a stimulus package designed to reverse the devastating impact of the

COVID-19 pandemic.

In addition to providing a large cash infusion to hospitals and broader access to COVID-19 testing to

individuals, the Coronavirus Aid, Relief, and Economic Security (CARES) Act aims to boost the economy

with over $2 trillion in relief, ranging from individual rebates and small business loans to increased

unemployment benefits and a wide variety of tax breaks.

Individual Stimulus Payments

The headliner of the CARES Act is the individual stimulus payment, or as it’s officially titled, the “2020

recovery rebate for individuals.” Whatever you choose to call it, it means that the government will

immediately begin cutting checks directly to individual taxpayers, putting nearly $507 billion in cash into

the hands of most adult Americans, and ideally, right back into the struggling economy. The CARES Act

does this via the tax law by adding new Section 6428 to the Internal Revenue Code, but the final version

of the bill has some subtle, and not so subtle, changes from the prior proposal. All things considered,

however, the final stimulus package is much more generous and simple to compute. Here’s how it will

work:

The IRS is going to take a look at your 2019 tax return. Fear not, if your 2019 return has not yet been

filed, the Service will grab your 2018 return instead. And even better: if you haven’t filed a return for

EITHER year, the IRS will determine your check amount based on your Form SSA-1099, Social Security

Benefit Statement.

Once the IRS has either your 2019 return, 2018 return, or Social Security statement, it’s going to cut you

a check for $1,200 (if single/$2,400 if married filing jointly) PLUS $500 for each child under the age of 17.

Unlike the initial version of the bill, the payment is in no way limited to your tax liability or dependent on

you having earned a minimum amount of “qualifying income.”

Example. A is a single taxpayer. On A’s 2019 tax return, A had gross income of $50,000 and an income

tax liability of $1,000. Despite the fact that A’s tax liability for 2019 A was only $1,000, A is entitled to

receive a check for $1,200.

Example. B is a single taxpayer who has not yet filed a 2019 return. In 2018, he had income of $10,000.

As a result, he did not file a tax return because his income was less than the $12,000 standard deduction.

The IRS will access B’s Social Security statement for 2018, and issue a check to B for $1,200.

Example. H & W are married with three children. On their 2019 tax return, they reported taxable income

of $60,000 and had a tax liability of $5,000 before withholding and credits fully eliminated the liability

and gave rise to a $3,000 refund. Nevertheless, H & W will receive a check for $3,900 from the

government as part of 2020 stimulus payment.

Not everyone gets a check, however. You’ll need to have provided a valid social security number for

yourself, your spouse and any qualifying children on your tax returns, and those who are claimed as a

dependent on another’s tax return also won’t be receiving a payment.

Finally, those on the higher end of the income scale will be shut out of the program because the

payment phases out once your “adjusted gross income (AGI)” —think: total income minus a handful of

deductions —exceeds $75,000 (if single, $150,000 if married). Once over those thresholds, you’ll lose $5

of your payment for every $100 your AGI exceeds those thresholds. So..

· If you are single with no kids and would be due a payment of $1,200, it will be wiped out

completely if your AGI exceeded $99,000 (($99,000 - $75,000) * 5% = $1,200).

· If you are married with no kids and are due a payment of $2,400, it will be gone if your AGI

exceeded $198,000 (($198,000-$150,000)*5% = $2,400).

· If you’ve got kids, then obviously, it will take more income before all of the payment is wiped

out. For example, a married couple with two children who is eligible for the maximum payment

of $3,400 wouldn’t lose all of their payment until AGI exceeded $218,000.

The payments will be made between now and December 31, 2020 —in many cases, it will be paid

electronically if you have provided direct deposit information to the IRS on your 2018 or 2019 tax

returns —but it’s important to understand that any payment you receive acts as an advance payment of

a credit you will compute AGAIN on your 2020 tax return.

What that means is that when 2021 rolls around and you prepare your 2020 tax return, you’ll have to

recompute the amount you’re owed based on 2020 data. Now, a lot of things may be different in 2020

when compared to 2019 or 2018: you may have more income or less tax liability or fewer kids under age

17...you get the idea. In any event, you’ll have to compute the payment owed to you based on 2020

data, and compare it to the advance payment you actually received. If the advance payment was less

than what you are owed in 2020—for example, you were phased out in 2019 but not 2020 or you had

another child —the excess will be treated as a credit that reduces your 2020 tax liability.

If the advance payment is GREATER than what you’re owed on your 2020 tax return, however, the

question becomes: what then? The CARES Act does not explicitly require income recognition for any

excess, as was required by its counterpart in the House. Nor is there a mechanism for a taxpayer to

repay any excess advance payment. Thus it is entirely possible a taxpayer could, for example, receive an

advance payment in 2020 based on 2019 or 2018 income, only to find themselves ABOVE the phase out

threshold in 2020, giving rise to no credit on the 2020 return, and yet still not have to repay the excess

amount to the IRS.

Small Business Loans

In a move designed to keep small businesses afloat, the CARES Act provides that businesses with fewer

than 500 employees —including sole proprietors and nonprofits—will have access to nearly $350

billion in loans under Section 7 of the Small Business Act during the “covered period,” which runs from

February 15, 2020 through June 30, 2020. The loans, which are referred to as “paycheck protection

loans” and are fully guaranteed by the federal government through December 31, 2020 (returning to an

85% guarantee for loans greater than $150,000 after that date), are generally limited to the LESSER OF:

· the average total “payroll costs” for the 1 year period ending on the date the loan was made (an

alternative calculation is available for seasonal employers) multiplied by 2.5,

· $10 million.

Payroll costs, in turn, are the sum of the following:

· wages, commissions, salary, or similar compensation to an employee or independent contractor,

· payment of a cash tip or equivalent,

· payment for vacation, parental, family, medical or sick leave,

· allowance for dismissal or separation,

· payment for group health care benefits, including premiums,

· payment of any retirement benefits, and

· payment of state or local tax assessed on the compensation of employees,

Payroll costs do not include, however:

· the compensation of any individual employee in excess of an annual salary of $100,000,

· payroll taxes,

· any compensation of an employee whose principal place of residence is outside the U.S., or

· any qualified sick leave or family medical leave for which a credit is allowed under the new

Coronavirus Relief Act passed last week.

Example. Rob’s Car Wash applies for a paycheck protection loan on May 1, 2020. The business had $1

million in payroll costs for the period May 1, 2019 through May 1, 2020. Rob’s Car Wash is entitled to a

fully guaranteed federal loan —assuming it’s made before December 31, 2020 —equal to the LESSER OF:

· $2.5 million ($1 million of payroll costs * 2.5), or

· $10 million.

The loans will have a maximum maturity of 10 years and an interest rate not to exceed 4%. Proceeds

may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service

requirements. The standard fees imposed under Section 7 of the Small Business Act are waived, and no

personal guarantee is required by the business owner.

An additional provision in the CARES Act provides for possible deferment of repayment of the loans for a

period of at least six months, but not to exceed a year.

Loan Forgiveness of Paycheck Protection Loans

A separate section of the CARES Act calls for a portion of the aforementioned paycheck protection loans

to be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made

by the borrower during the 8-week period beginning on the date of the loan:

· payroll costs (as defined above)

· mortgage interest,

· rent,

· certain utility payments.

To seek forgiveness, a borrower must submit to the lender an application that includes documentation

verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or

utility payments.

Example. Continuing the previous example with Rob’s Car Wash, in the first 8 weeks after the business

borrows the $2.5 million, the business pays $250,000 in payroll costs, mortgage interest, and utility

payments. Rob’s Car Wash is eligible to have $250,000 of the $2.5 million loan forgiven. The forgiveness

will not create taxable income. In addition, because of the deferment rules in the CARES Act, any

payments due on the $2.25 million of remaining loan will not be due for six months.

There is a provision, however, that reduces the amount that may be forgiven if the employer either:

· Reduces its workforce during the 8-week covered period when compared to other periods in

either 2019 or 2020, or

· Reduces the salary or wages paid to an employee who had earned more than $100,000 in

annualized salary by more than 25% during the covered period.

This reduction can be avoided, however, if the employer rehires or increases the employee’s pay within

an allotted time period.

Emergency Government Disaster Loan

The CARES Act also expands access to Economic Injury Disaster Loans under Section 7(b) of the Small

Business Act to include not only businesses with fewer than 500 employees, but also sole proprietors

and ESOPs. For any loan made under this program before December 31, 2020, no personal guarantee

will be required on loans below $200,000. Even better, under Section 1112 of the Act, the

government will pay the principal and interest on a paycheck protection loan for the first six months for

which payments are due. This government subsidy does NOT apply to the paycheck protection loans

discussed above.

In addition, the Act creates a new Emergency Grant to allow a business that has applied for a disaster

loan to get an immediate advance of up to $10,000. The advance can be used to maintain payroll, and is

not required to be repaid, even if the borrower’s request for a 7(b) loan is denied.

Tax Provisions in the CARES Act

Qualified Improvement Property Fix

As part of the 2017 Tax Cuts and Jobs Act, Congress intended to (greatly) speed up the depreciation on

“qualified improvement property” (QIP); generally defined as any improvement made to the interior

portion of a nonresidential building any time after the building was placed in service. The depreciable

life of QIP was to be reduced from 39 to 15 years, and with 100% bonus depreciation being available for

all assets with a life of 20 years or less, a taxpayer who, say, spent $3 million in 2018 renovating their

chain of restaurants should have been entitled to an immediate $3 million tax deduction.

I say “should have been entitled to,” because when they got around to drafting the statutory language,

Congress forgot to give QIP a 15 year life. As a result, the life remained 39 years, and thus the property

was not eligible for 100% bonus depreciation. As a result, that taxpayer who spent that $3 million

cleaning up their Arby’s empire? Instead of a $3 million deduction, they got stuck depreciating the $3

million over nearly four decades.

The CARES Act provides a much-needed technical correction to the QIP problem by giving it its intended

15 year life, while making the change retroactive to January 1, 2018. Thus, taxpayers should be entitled

to file amended returns to reap the benefits of accelerated depreciation in 2018 and 2019

Example. The client above claimed only $75,000 of depreciation related to the $3 million of

improvements made to their Arby’s chain in 2018. Client may file an amended return to take an

additional deduction of $2.925 million in 2018, and under rules discussed below, any net operating loss

generated by the additional depreciation may be carried back for up to five years to recover taxes

previously paid.

Special Rules for Using Retirement Funds for Coronavirus Costs

If you take money out of a qualified retirement plan before age 59 1/2, you not only pay income tax on

the distribution, but Section 72(t) generally imposes a 10% penalty as well. There are several exceptions

to the penalty, of course, and the CARES Act adds a new one, allowing a taxpayer to take a “coronavirusrelated

distribution” of up to $100,000 in the year 2020 free from penalty.

A “coronavirus-related distribution” is a distribution made during 2020:

· To an individual who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,

· whose spouse or dependent is diagnosed with one of the two diseases, or

· who experiences adverse financial consequences as a result of being quarantined, furloughed or

laid off or having work hours reduced, or being unable to work due to lack of child care.

While the distribution escapes the 10% penalty, it doesn’t escape the income tax. The Act, however,

allows the taxpayer to spread the income over a 3-year period beginning with 2020. The taxpayer also

has the choice to avoid any income recognition by repaying the distribution to the retirement plan

within three years of receiving it.

In addition, the amount an individual may borrow from his or her retirement plan is increased from

$50,000 to $100,000 for the 180-day period beginning after the enactment of the Act.

Of course, it’s always best to leave your retirement plan alone, but desperate times call for desperate

measures. Should you need to withdraw in 2020, this new provision will soften the blow.

For those required to withdraw a “required minimum distribution” from their retirement plan in 2020,

the CARES Act temporary waives the requirement for this year only.

Changes to Charitable Contributions

Charitable contributions are itemized deductions; when combined with items like mortgage interest,

real estate taxes and medical expenses, if the sum of itemized deductions exceeds the “standard

deduction” —$12,400 for a single taxpayer; $24,800 for married filing jointly in 2019 —the taxpayer

gets a benefit from charitable contributions. If they don’t, they don’t.

The TCJA nearly doubled the standard deduction, while at the same time, limited or eliminated many

itemized deductions. As a result, in 2018 only 8% of taxpayers itemized. To accommodate for this new

reality, the CARES Act allows an individual to make a cash contribution of up to $300 made to certain

qualifying charities and deduct the contribution “above-the-line” in computing adjusted gross income.

Thus, the taxpayer receives the deduction in addition to the standard deduction. This above-the-line

deduction is here for 2020 and beyond, but is available only to a taxpayer who does not itemize their

deductions.

Example. A does not itemize his deductions, but makes a $250 cash payment to a public charity in 2020.

A may claim the $250 deduction in computing his adjusted gross income. The deduction is in addition to

A’s standard deduction.

Example. B itemizes her deductions and makes a $250 cash payment to a public charity. B may deduct

the payment as a charitable contribution on her Schedule A as an itemized deduction, but may not claim

the deduction as an above-the-line deduction.

For those who DO itemize, the new law temporarily lifts the limits on charitable giving for 2020. After

passage of the TCJA, cash contributions to public charities are generally limited to 60% of a taxpayer’s

adjusted gross income (AGI). The CARES Act allows such contributions to be deducted up to 100% of AGI

for 2020, with any excess contributions available to be carried over to the next five years. For corporate

donors, the limit would increase from 10% of adjusted taxable income to 25%.

Exclusion from Income of Employer Payment of Employee Student Loan Debt

As a general rule, if someone pays a debt on your behalf, you have taxable income (See Old Colony Trust,

if you’re so inclined). As part of the CARES Act, an employer can pay up to $5,250 in 2020 of an

employee’s student loan obligation on a tax-free basis. Note, however, that this provision modifies

existing Section 127, which permits an employer to pay up to $5,250 of an employee’s qualified

educational expenses —say, getting a Masters in Taxation —with the payment being tax-free to the

employee.

This is now a combined limit; thus, an employer could pay $3,000 towards an employee’s Master’s

degree and another $4,000 of the same employee’s student loan payments in 2020, but the maximum

amount that will be tax-free to the employee is $5,250.

To the extent an employee’s student loan is paid on a tax-free basis under new Section 127 by his or her

employer, the employee cannot deduct the interest on the student loan under Section 221.

Employee Retention Credit

New to the final version of the CARES Act is a one-year only credit against the employer’s 6.2% share of

Social Security payroll taxes for any business that is forced to suspend or close its operations due to

COVID-19, but that continues to pay its employees during the shut-down. It works like so...

A business is eligible for the credit in one of two ways:

1. The operation of the business was fully or partially suspended during any calendar quarter during

2020 due to orders from an appropriate government authority resulting from COVID-19, or

2. The business remained open, but during any quarter in 2020, gross receipts for that quarter were

less than 50% of what they were for the same quarter in 2019. The business will then be entitled to a

credit for each quarter, until the business has a quarter where it’s recovered sufficiently that its receipts

exceed 80% of what they were for the same quarter in the previous year.

For each eligible quarter, the business will receive a credit against its 6.2% share of Social Security

payroll taxes equal to 50% of the “qualified wages” paid to EACH employee for that quarter, ending on

December 31, 2020.

The business’s qualified wages depend on its size; if there were more than 100 employees during 2019,

the qualified wages are limited ONLY to those wages that were paid by the employer during the quarter

for the period of time the business was shut down.

If there were less than 100 employees for 2019, however, qualified wages include not only those paid to

employees during a shut-down, but also wages paid for each quarter that the business has suffered a

sharp decline in year-over-year receipts, as described in #2 above.

In both cases, qualified wages include any “qualified health plan expenses” allocable to the wages, such

as amounts paid to maintain a group health plan. In either case, however, the amount of qualified wages

for EACH employee for ALL quarters may not exceed $10,000.

As you might expect, any wages taken into account in determining the new payroll tax credit for family

medical leave or sick leave as part of the Coronavirus Relief Act may not be taken into account in

determining qualified wages for the employee retention credit.

The credit is refundable if it exceeds the business’s liability for payroll taxes, a likely outcome given the

two new payroll tax credits mentioned immediately above that were created as part of the Coronavirus

Relief Act late last week.

Finally, if an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act as

detailed above in this article, no employee retention credit will be available

Delay of Payment of Employer Payroll Tax and Self-Employment Tax

In addition to the various new payroll tax credits created by the Coronavirus Relief Act and the CARES

Act, the new law would again seek to alleviate the burden on employers struggling to make payroll by

allowing the employer’s share of the 6.2% Social Security tax that would otherwise be due from the date

of enactment through December 31, 2020, to be paid on December 31, 2021 (50%) and December 31,

2022 (50%).

Similarly, a self-employed taxpayer can defer paying 50% of his or her self-employment tax that would

be due from the date of enactment through the end of 2020 until the end of 2021 (25%) and 2022

(25%).

If you’re scoring at home, this means an employer that incurs its 6.2% share of Social Security tax in

2020 may 1) defer payment of that tax until 2021 and 2020, but 2) receive an immediate credit against

those yet-to-be paid payroll taxes via the sum of the emergency medical leave credit, sick leave credit,

and new employee retention credit. While this will greatly increase the cash available to small

businesses in the coming months, I am not nearly bright enough to understand how it will all come

together in practice on 2020 income and payroll tax filings.

Also note, this deferral is not available to any business that takes out a payroll protection loan forgiven

as discussed earlier in this article.

Changes to the Net Operating Loss Rules

Prior to 2018, net operating losses of a business or individual could be carried back two years and

forward 20, and when carried forward, they could offset 100% of taxable income. The TCJA altered

these rules, disallowing all carrybacks related to post-2017 losses, providing for an indefinite

carryforward period, and limiting the use of post-2017 losses when carried forward to 80% of taxable

income.

This, clearly, was unfortunate timing. Rare will be the business that doesn’t run at a loss in 2020; as a

result, Congress temporarily reversed the TCJA changes:

· Losses from 2018, 2019 and 2020, will be permitted to be carried back for up to five years. As

was previously the case, a taxpayer will be permitted to forgo the carryback, and instead carry

the loss forward.

· Losses carried TO 2019 and 2020 will be permitted to offset 100% of taxable income, as opposed

to 80% under the TCJA.

Example. In 2015 and 2016, X Co. broke even. In 2017, X Co. reported taxable income of $1 million and

paid federal income tax of $350,000. In 2018, X Co. reported taxable income of $2 million and paid tax of

$420,000. In 2020, X Co. recognizes a net operating loss of $3 million. X Co. may carry $1 million of the

loss back to 2017 and recover the taxes paid (subject to the alternative minimum tax), and then carry

the remaining $2 million loss to 2018 and recover that $420,000 as well.

Temporary (and Retroactive) Removal of Section 461(l):

As part of the TCJA, Congress added a fourth (yes, fourth) limitation on an individual’s ability to use

losses from a business. New Section 461(l) provides that the amount of “net business loss” an individual

may use in a year to offset other sources of income is capped at $250,000 (if single; $500,000 if married

filing jointly). Any excess loss is converted into a net operating loss, which as we discussed above, was —

prior to the passage of the CARES Act —subject to more stringent utilization rules than prior to the

TCJA.

The latest legislation, however, puts a temporary halt on Section 461(l); not only for 2020, but

retroactive to January 1, 2018. As a result, taxpayer who found a loss limited by the provision in 2018 or

2019 can file an amended return to claim a refund.

It’s not ALL good news with regard to Section 461(l), however. The CARES Act clarifies that when the

provision kicks back in for 2020 and beyond, wages will NOT be considered business income. This will, in

many cases, result in significantly more loss being limited.

Changes to the Interest Limitation Rules

The TCJA amounted to (at least) a $1.5 trillion tax cut over ten years. On the domestic side of things,

there were only three significant revenue raisers —the NOL changes, Section 461(l), and new Section

163(j) —and the CARES Act largely reverses all three.

With respect to the final change, as part of the TCJA, new Section 163(j) limited a business’s ability to

deduct its interest expense to 30% of “adjusted taxable income,” with any excess interest expense

carried forward. The CARES Act would increase that limit to 50% of adjusted taxable income for 2019

and 2020, and perhaps more importantly given that most businesses will not HAVE taxable income in

2020, the business can elect to use its 2019 adjusted taxable income in computing its 2020 limitation.

Thus, if a business had ATI of $10 million in 2019 but a negative ATI in 2020, it could elect to deduct $5

million of interest expense in 2020 (50% of $10 million), generate a bigger loss, and then use the

favorable new net operating loss provisions to carry back the loss to 2019 and recover taxes paid in that

year.

 

A partnership does not get to use the 50% limit of ATI for 2019. Instead, any interest disallowed at the

partnership level is passed out to the partners, and is suspended at the partner level under the normal

rules. In 2020, however, 50% of the suspended interest “frees up,” and will be fully deductible, while the

other 50% will remain suspended until the partnership allocates excess taxable income or excess

interest income to the partner (or the partnership is no longer subject to Section 163(j).

Conclusion

Coming on the heels of an extended tax filing deadline and last week’s Coronavirus Relief Act, the CARES

Act is the third step of what promises to be many taken by Congress to help the country recover.

Rumblings have already begun regarding a 4th and 5th relief package. In addition to the much needed

changes being made to hospital resources and medical coverage, the small business and tax aspects of

the CARES Act will put immediate cash in the hands of individuals and business owners, while continuing

to provide relief into the future in the form of benefits that will be realized upon the filing of 2020 tax

returns.

Written by Tony Nitti

-KNX 1070 NEWS contributed to this