In-Depth: A Tax Practitioner's Guide to the CARES Act. (Client Letter Included)

(Parker Tax Publishing March 31, 2020)

On Wednesday March 25, the Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion economic relief package featuring extensive tax provisions. On Friday, March 27, the House also overwhelmingly approved the legislation, which President Trump signed the same day. This article includes an in-depth discussion of the tax provisions in the CARES Act, a brief summary of its non-tax provisions, and links to sample client letters. Pub. L. 116-136 (3/27/2020).

PRACTICE AID: For a CLIENT LETTER explaining the CARE Act's key tax provisions, CLICK HERE .

The CARES Act is the third emergency funding package relating to the coronavirus (COVID-19) pandemic, with the first being Pub. L. 116-123, Coronavirus Preparedness and Response Supplemental Appropriations Act, and the second being Pub. L. 116-127, The Families First Coronavirus Response Act (Families First Act), which also included extensive tax provisions. For an in-depth report on the Families First Act, see the March 26, 2020 issue of Parker's Federal Tax Bulletin (PTFB 2020-03-26).

I. EXECUTIVE SUMMARY

Non-Tax Provisions

Although the CARES Act makes extensive use of the federal tax code to deliver relief from the massive economic fallout due to the COVID-19 pandemic, much of the relief is provided by the following non-tax measures: (1) expands eligibility for unemployment insurance, extends coverage by 13 weeks, and provides individuals with $600/week of federal assistance on top of their state benefits; (2) creates a $349 billion small business "payroll protection" loan program with provisions for converting qualifying loans to grants; (3) establishes a $500 billion fund for distressed businesses, to be administered largely at the discretion of the Treasury Secretary; and (4) provides $150 billion in direct aid to state and local governments and another $130 billion to hospitals and other entities within the healthcare system.

Individual Tax Provisions

For individual taxpayers, the CARES Act -

(1) Provides 2020 recovery rebates of up to $1,200 for single and head-of-household taxpayers and $2,400 for joint filers which begin phasing out at adjusted gross income of $75,000 (single), $112,500 (head of household), and $150,000 (joint returns). Taxpayers with children will receive an additional $500 per child. Rebates will be issued based on 2019 income tax returns, or 2018 returns for individuals who haven't yet filed in 2019.

(2) Waives the 10% early withdrawal penalty for coronavirus-related distributions from retirement plans and provides the option of recontributing the funds for up to three years after such distributions are made.

(3) Temporarily waives the required minimum distribution rules for 2020 for defined contribution plans, including an eligible deferred compensation plan, and individual retirement plans.

(4) Allows an above the line deduction of up to $300 for charitable contributions and relaxes the limitations on deductible charitable contributions for taxpayers who itemize.

(5) Modifies the limitations on individual and corporate charitable contributions made during 2020 and increases the limit on contributions of food inventory.

(6) Excludes from income certain student loan debt repaid by an individual's employer for repayments made after March 27, 2020, and before 2021.

Business Tax Provisions

For business taxpayers, the CARES Act -

(1) Provides an employee retention credit against applicable employment taxes of 50% of wages for employers subject to closure due to COVID-19.

(2) Extends the time for paying employer payroll taxes.

(3) Temporarily repeals the taxable income limitation for net operating losses and allows a five-year carryback for losses incurred after 2017 and before 2021.

(4) Eliminates the limitation on excess farm losses for years after 2017 and before 2026.

(5) Modifies the credit for prior year minimum tax liability of corporations by reducing the limitation on the amount of the credit that is refundable.

(6) Modifies the limitation on deductions for business interest by increasing the amount of taxable income which limits the deduction from 30% to 50%.

(7) Fixes the technical glitch in the Tax Cuts and Jobs Act which prevented qualified improvement property from qualifying as 15-year depreciation property and bonus depreciation property.

(8) Provides a temporary exception from excise taxes for alcohol used to produce hand sanitizer.

An in-depth discussion of the CARE Act's key tax provisions follows.

II. INDIVIDUAL TAX PROVISIONS

Recovery Rebates (a.k.a., Stimulus Payments)

Recovery Rebate Credit Amount. Section 2201 of the CARES Act adds new Code Sec. 6428, which provides that individuals are entitled to a credit ("recovery rebate credit") against their income tax for the first tax year beginning in 2020 equal to -

(1) $1,200 ($2,400 in the case of a joint return); plus

(2) an amount equal to the product of $500 multiplied by the number of qualifying children.

A qualifying child is defined as one who meets the criteria of Code Sec. 24(c) (i.e., the "qualifying child" definition for the child tax credit, which excludes children who attain age 17 by the end of the tax year).

AGI Phaseout. The amount of the recovery rebate credit is reduced (but not below zero) by 5 percent of the amount by which the taxpayer's adjusted gross income exceeds (1) $150,000 in the case of a joint return, (2) $112,500 in the case of a head of household, and (3) $75,000 in the case of a taxpayer not described in (1) or (2).

EXAMPLE: Bill, a single taxpayer with no qualifying children, has adjusted gross income of $85,000. Bill's recovery rebate credit is $700 [$1,200 - $500 (($85,000 - $75,000) x 5%)].

Eligible Individual Defined. An eligible individual is any individual other than (1) any nonresident alien individual, (2) any individual with respect to whom a dependency deduction under Code Sec. 151 is allowable to another taxpayer for a tax year beginning in the calendar year in which the individual's tax year begins, and (3) an estate or trust.

OBSERVATION: Because individuals who are eligible to be claimed as dependents are specifically excluded, most college students will not qualify for a recovery rebate credit. The fact that the amount of the dependency deduction is zero in 2020 has no bearing on this outcome.

Advance Refund Payments. Each individual who was an eligible individual for such individual's first tax year beginning in 2019 is treated as having made a payment against their income tax for such tax year in an amount equal to the advance refund amount for such tax year. The advance refund amount is the amount that would have been allowed as a credit under this provision for such tax year if this refund provision had applied to such tax year. The Secretary of the Treasury has been directed to issue payments for advance refund amounts as rapidly as possible.

OBSERVATION: Predictions by members of Congress and the Administration that recovery rebate checks would be mailed within weeks may prove overly optimistic. The last time the federal government sent stimulus checks to taxpayers on a large scale basis - during the 2008 financial crisis - most of the checks were not mailed until 3-4 months after President Bush signed the authorizing legislation. Nonetheless, taxpayers who have direct deposit information on file with the IRS from past refund requests are likely to receive their payments far more quickly than those who don't.

The CARES Act provides that no advance refunds will be made after December 31, 2020.

In the case of a refund or credit made or allowed with respect to a joint return, half of such refund or credit is treated as having been made or allowed to each individual filing such return.

If an individual has not filed a tax return for 2019, the Treasury Secretary may instead use the individual's 2018 tax year information in determining the amount of the advance refund. If the individual has not filed a tax return for 2018, the Treasury Secretary may use information with respect to such individual for calendar year 2019 provided in (1) Form SSA-1099, Social Security Benefit Statement, or (2) Form RRB-1099, Social Security Equivalent Benefit Statement.

OBSERVATION: Because recovery rebate credits under Code Sec. 6428(a) are calculated on a taxpayer's 2020 tax return, based on a taxpayer's 2020 AGI and filing status, and the advance refunds of the credit received by taxpayers under Code Sec. 6428(f) are based on either 2018 or 2019 tax information, there will be numerous situations in which the amounts will differ. Because of the taxpayer-friendly way in which Code Sec. 6428 was drafted, it appears that taxpayers who receive an advance refund (based on their 2018 or 2019 tax information) greater than their recovery rebate credit amount (based on their 2020 AGI and filing status) will be allowed to keep the excess. Code Sec. 6428 does not include any provision for recapturing excess advance refund amounts or requiring taxpayers to recognize such amounts as income. On the other hand, taxpayers whose advance refunds are less than the recovery rebate credit amount will receive a credit for the difference when they file their 2020 return.

EXAMPLE: Susan, who has one qualifying child and files as a head of household, receives an advance refund of $1,700 ($1,200 + $500) based on her 2018 income tax return on which she reported AGI of $100,000 (an amount below the $112,500 phaseout threshold for heads of household). On her 2020 return, Susan reports AGI of $125,000, resulting in a tentative recovery rebate credit of $1,075 [$1,700 - ($125,000 - $112,500) x 5%]. Susan's recovery rebate credit on her 2020 return is reduced to zero to reflect her advance refund. Because the rebate cannot be reduced below zero under Code Sec. 6428(e)(1), she isn't required to pay back the $625 ($1,700 - $1,075) difference between the advance refund and the recovery rebate credit indicated by her 2020 AGI and filing status.

EXAMPLE: Assume the same facts as the previous example, except that the AGI amounts are reversed ($125,000 in 2018 and $100,000 in 2020). In this scenario, Susan's advance refund would be $1,075 [$1,700 - ($125,000 - $112,500) x 5%] and her recovery rebate credit (before being reduced by the advance refund amount) is $1,700. Susan will claim a recovery rebate credit of $625 on her 2020 return ($1,700 - $1,075 advance refund).

Additional Rules. Not later than 15 days after the date on which the rebate is distributed to an eligible taxpayer, a notice will be sent by mail to such taxpayer's last known address, indicating the method by which such payment was made, the amount of such payment, and a phone number for the appropriate point of contact at the IRS to report any failure to receive such payment.

No rebate is allowed to an eligible individual who does not include on the return for the applicable tax year such individual's valid identification number and the valid identification number of such individual's spouse and any qualifying children. The term "valid identification number" means a social security number or, in the case of a child who is adopted or placed for adoption, the adoption taxpayer identification number of such child. This rule does not apply where at least one spouse was a member of the Armed Forces of the United States at any time during the tax year and at least one spouse's return has a valid identification number.

In addition, no interest is allowed on any overpayment attributable to this rebate. Also, the rebate is not subject to reduction or offset pursuant to (1) 31 U.S.C. Section 3716 or 31 U.S.C. Section 3720A, or (2) Code Sec. 6402(d), (e), or (f). Nor is the rebate reduced or offset by other assessed federal taxes that would otherwise be subject to levy or collection.

Retirement Plans: Special Rules for Coronavirus-Related Distributions

Section 2202 of the CARES Act provides that the 10-percent penalty tax under Code Sec. 72(t) for early retirement plan withdrawals does not apply to any coronavirus-related distribution. The aggregate amount of distributions received by an individual which may be treated as coronavirus-related distributions for any tax year cannot exceed $100,000.

Definition. The term "coronavirus-related distribution" means any distribution from an eligible retirement plan made: (1) on or after January 1, 2020, and before December 31, 2020, (2) to an individual -

(i) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

(ii) whose spouse or dependent is diagnosed with such virus or disease by such a test; or

(iii) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

The administrator of an eligible retirement plan may rely on an employee's certification that the employee satisfies these conditions in determining whether any distribution is a coronavirus-related distribution.

Repayment of Distribution. Any individual who receives a coronavirus-related distribution may, at any time during the three-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under Code Secs. 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), as the case may be.

If such contribution is made with respect to a coronavirus-related distribution from an eligible retirement plan other than an individual retirement plan, then the taxpayer is, to the extent of the amount of the contribution, treated as having received the coronavirus-related distribution in an eligible rollover distribution (as defined in Code Sec. 402(c)(4)) and as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.

If such contribution is made with respect to a coronavirus-related distribution from an individual retirement plan (as defined by Code Sec. 7701(a)(37)) then, to the extent of the amount of the contribution, the coronavirus-related distribution is treated as a distribution described in Code Sec. 408(d)(3) and as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.

Inclusion of Distribution in Income. In the case of any coronavirus-related distribution, unless the taxpayer elects otherwise, any amount required to be included in gross income for such tax year will be so included ratably over the three-tax-year period beginning with such tax year. In such a case, rules similar to the rules of Code Sec. 408A(d)(3)(E) apply. A coronavirus-related distribution is treated as meeting plan distribution requirements of Code Secs. 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A), as well as the requirements of 5 U.S.C. Section 8433(h)(1).

Special rules also provide that the coronavirus-related distributions will not be treated as eligible rollover distributions and thus such distributions will be exempt from the trustee to trustee transfer and withholding rules under Code Sec. 401(a)(31), Code Sec. 402(f), and Code Sec. 3405. The provision also increases the $50,000 limit on loans from a qualified employer plan that are not treated as a distribution to $100,000 and extends the due date for repayment of such loans by one year.

Additional Retirement Plan Relief: Temporary Waiver of Required Minimum Distribution Rules

Section 2203 of the CARES Act temporarily waives the minimum required distribution rules for 2020 for (1) a defined contribution plan described in Code Sec. 403(a) or Code Sec. 403(b), (2) a defined contribution plan which is an eligible deferred compensation plan described in Code Sec. 457(b) but only if such plan is maintained by an employer described in Code Sec. 457(e)(1)(A), or (3) an individual retirement plan. The waiver applies to any distribution which is required to be made in calendar year 2020 by reason of (1) a required beginning date occurring in 2020, and (2) such distribution not having been made before January 1, 2020.

For purposes of this waiver -

(1) the required beginning date with respect to any individual is determined without regard to this provision for purposes of applying this rule for calendar years after 2020; and

(2) if the five-year rule in Code Sec. 401(a)(9)(B) applies, the five-year period will be determined without regard to calendar year 2020.

In addition, if all or any portion of a distribution during 2020 is treated as an eligible rollover distribution but would not be so treated if the minimum distribution requirements under Code Sec. 401(a)(9) had applied during 2020, the distribution is not treated as an eligible rollover distribution for purposes of Code Sec. 401(a)(31) (regarding the direct transfer of eligible rollover distributions) or Code Sec. 3405(c) (regarding the requirement to withhold 20 percent tax on the distribution) or Code Sec. 402(f) (regarding the provision of a written explanation to recipients of distributions eligible for rollover treatment).

Expanded Deductibility for Charitable Contributions

Limited Above-the-Line Deduction. Section 2204 of the CARES Act amends Code Sec. 62(a) to provide that, for tax years beginning in 2020, a charitable contribution of up to $300 may be deducted as an above-the-line deduction.

Relaxed Limits for Itemizers. Section 2205 of the CARES Act modifies the limitation on charitable contributions made during 2020. In the case of an individual, any qualified contribution is allowed as a deduction to the extent that the aggregate of such contributions does not exceed the excess of the taxpayer's contribution base over the amount of all other charitable contributions allowed. Any excess contribution is eligible for the five-year carryover described in Code Sec. 170(b)(1)(G)(ii). In the case of a corporation, any qualified contribution is allowed as a deduction to the extent that the aggregate of such contributions does not exceed the excess of 25 percent of the corporation's taxable income over the amount of all other charitable contributions allowed. Any excess contribution is eligible for a five-year carryover subject to the limitations described in Code Sec. 170(d)(2).

The term "qualified contribution" is defined as a contribution paid in cash during 2020 to an organization described in Code Sec. 170(b)(1)(A) and the taxpayer has elected the application of this provision with respect to the contribution. It does not include a contribution to a Code Sec. 509(a)(3) organization or a contribution to the establishment of a new, or maintenance of an existing, donor advised fund. In the case of a partnership or S corporation, the election is made separately by each partner or shareholder.

In addition, the limitation on contributions of food inventory is increased from 15 percent to 25 percent of net income (in the case of a taxpayer other than a C corporation) or taxable income (in the case of a C corporation).

Exclusion of Certain Employer Payments of Student Loans

Section 2206 of the CARES Act amends Code Sec. 127(c)(1) to provide an exclusion from income for payments of interest or principal made by an employer on any qualified education loan (as defined in Code Sec. 221(d)(1)), incurred by an employee for the education of the employee.

The amendment applies to payments made after March 27, 2020, and before January 1, 2021.

III. BUSINESS TAX PROVISIONS

Payroll Tax Credit for Employers Subject to Closure Due to COVID-19

Section 2301 of the CARES Act provides eligible employers a credit against applicable employment taxes for each calendar quarter equal to 50 percent of the qualified wages with respect to each employee of the employer for the calendar quarter (i.e., the employee retention credit). The employee retention credit applies to wages paid after March 12, 2020, and before January 1, 2021.

Per-Employee Limit on Qualified Wages. The amount of qualified wages with respect to any employee which may be taken into account for purposes of determining the credit by the eligible employer for all calendar quarters is limited to $10,000. The credit allowed with respect to any calendar quarter may not exceed the "applicable employment taxes," which is defined as -

(1) the taxes imposed under Code Sec. 3111(a), and

(2) so much of the taxes imposed under Code Sec. 3221(a) as are attributable to the rate in effect under Code Sec. 3111(a).

Reduction for Other Credits. The credit amount is reduced by the amount of any credits allowed under Code Sec. 3111(e) (credit for employment of qualified veterans) and Code Sec. 3111(f) (credit for research expenditures of qualified small business), as well as the payroll tax credits for paid sick and paid family and medical leave provided in Sections 7001 and 7003 of the Families First Coronavirus Response Act (Families First Act).

Refundability. Any excess credit amount is treated as an overpayment that will be refunded under Code Secs. 6402(a) and 6413(b). For purposes of 31 U.S.C. Section 1324 (refund of internal revenue collections), any refundable amount due to the employer will be treated in the same manner as a refund due from a credit allowed under Code Sec. 3111(e) and Code Sec. 3111(f) and Sections 7001 and 7003 of the Families First Act.

"Eligible Employer" Defined. An "eligible employer" is any employer that was carrying on a trade or business during calendar year 2020, and whose operation is fully or partially suspended during the calendar quarter due to orders by a government authority due to COVID-19 (i.e., a government-ordered suspension), or for which the calendar quarter is within a period of "significant decline in gross receipts." A period of significant decline in gross receipts means a period beginning with the first calendar quarter beginning after December 31, 2019, for which gross receipts (as defined in Code Sec. 448(c)) for the calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year, and ending with the first calendar quarter in which gross receipts are greater than 80 percent of the gross receipts for the same calendar quarter in the prior year. An eligible employer includes an organization which is described in Code Sec. 501(c) and exempt from tax under Code Sec. 501(a), if the organization was carrying a trade or business during calendar year 2020 and is subject to a government-ordered suspension due to COVID-19.

"Qualified Wages" Defined. The term "qualified wages" is defined differently depending on the size of the employer. If an eligible employer had an average of more than 100 full-time employees during 2019, qualified wages means wages paid with respect to which an employee is not providing services due to a government-ordered suspension or a period of significant decline in gross receipts, but not in excess of the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period. For eligible employers with an average of 100 or fewer full-time employees in 2019, qualified wages means wages paid with respect to an employee during any period of a government-ordered suspension or during a quarter that is within a period of significant decline in gross receipts. Qualified wages does not include any wages taken into account for purposes of the payroll tax credits provided in Sections 7001 or 7003 of the Families First Act.

Qualified wages also include the amount of the eligible employer's qualified health plan expenses that are properly allocable to such wages. Qualified health plan expenses means amounts paid or incurred by the eligible employer to provide and maintain a group health plan (as defined in Code Sec. 5000(b)(1)), but only to the extent that such amounts are excluded from the gross income of employees under Code Sec. 106(a). For these purposes, qualified health plan expenses are allocated to qualified wages in such manner as the Secretary of the Treasury may prescribe. Except as otherwise provided by the Secretary of the Treasury, an allocation will be treated as properly made if it is made on the basis of being pro rata among employees and pro rata on the basis of periods of coverage (relative to the periods to which such wages relate).

For purposes of determining the employee retention credit, an employee is not included for any period with respect to any employer if the employer is allowed a work opportunity credit under Code Sec. 51 with respect to the employee for that period. In addition, any wages taken into account in determining the employee retention credit are not taken into account for purposes of determining the employer credit for paid family and medical leave under Code Sec. 45S. Further, no deduction is allowed for the amount of wages equal to the credit. The employee retention credit is treated as a credit described in Code Sec. 3511(d)(2) (relating to the treatment of credits in the case of third party payors). If an eligible employer receives a small business interruption loan under Section 1102 of the CARES Act, the employer is not eligible for the employee retention credit.

Additional Rules. Any penalty under Code Sec. 6656 for a failure to make a deposit of any applicable employment taxes will be waived if the Secretary of the Treasury determines that the failure was due to the reasonable anticipation of the employee retention credit.

In addition, the Secretary of the Treasury is directed to issue such forms, instructions, regulations, and guidance as are necessary (1) to allow the advance payment of the employee retention credit, (2) to provide for the reconciliation of the advance payment with the amount advanced at the time of filing the tax return for the applicable calendar quarter or tax year, (3) to provide for the recapture of the credit if the credit is allowed to a taxpayer which receives a small business interruption loan during a subsequent quarter, (4) with respect to the application of the credit to third party payors (including professional employer organizations, certified professional employer organizations, or agents under Code Sec. 3504), including regulations or guidance allowing such payors to submit documentation necessary to substantiate the eligible employer status of employers that use such payors, and (5) for the determination of the credit in the case of any employer which was not carrying on a trade or business for all or part of the same calendar quarter in the prior year.

Delay of Payment of Employer Payroll Taxes

Under Section 2302 of the CARES Act, the payment by an employer of applicable employment taxes is delayed during the period beginning on March 27, 2020, and ending before January 1, 2021 (i.e., the payroll tax deferral period). Applicable employment taxes include: (1) the taxes imposed under Code Sec. 3111(a), (2) so much of the taxes imposed under Code Sec. 3211(a) as are attributable to the rate in effect under Code Sec. 3111(a), and (3) so much of the taxes imposed under Code Sec. 3221(a) of as are attributable to the rate in effect under Code Sec. 3111(a).

Notwithstanding Code Sec. 6302, an employer will be treated as having timely made all deposits of applicable employment taxes that would otherwise be required during the payroll tax deferral period if all such deposits are made not later than the "applicable date," which is defined as -

(1) December 31, 2021, with respect to 50 percent of the amounts due; and

(2) December 31, 2022, with respect to the remaining amounts.

Self-employed Taxpayers. In addition, for self-employed taxpayers, the payment for 50 percent of the taxes imposed under Code Sec. 1401(a) for the payroll tax deferral period is not due before the applicable date. For purposes of applying the penalty for failure to pay estimated income taxes under Code Sec. 6654 to any tax year which includes any part of the payroll tax deferral period, 50 percent of the taxes imposed under Code Sec. 1401(a) for the payroll tax deferral period will not be treated as taxes to which Code Sec. 6654 applies.

The delay in payment for applicable employment taxes does not apply to any taxpayer that has had indebtedness forgiven under Section 1106 of the CARES Act with respect to a loan under Section 7(a)(36) of the Small Business Act (15 U.S.C. Section 636(a)), as added by Section 1102 of the CARES Act, or indebtedness forgiven under Section 1109 of the CARES Act.

For purposes of Code Sec. 3504 (relating to acts that may be performed by agents), in the case of any person designated under that provision (and any regulations or other IRS guidance) to perform acts otherwise required to be performed by an employer, if the employer directs the designated person to defer payment of any applicable employment taxes during the payroll tax deferral period under this provision, the employer is solely liable for the payment of the applicable employment taxes before the applicable date for any wages paid by the designated person on behalf of the employer during that period.

For purposes of Code Sec. 3511, in the case of a certified professional employer organization (CPEO) (as defined in Code Sec. 7705(a)) that has entered into a service contract described in Code Sec. 7705(e)(2) with a customer, if the customer directs the CPEO to defer payment of any applicable employment taxes during the payroll tax deferral period under this provision, the customer is, notwithstanding Code Sec. 3511(a) and (c), solely liable for the payment of the applicable employment taxes before the applicable date for any wages paid by the CPEO to any work site employee performing services for the customer during that period.

Relaxed Rules for Deducting Net Operating Losses

Section 2303 of the CARES Act temporarily repeals the taxable income limitation for the net operating loss (NOL) deduction under Code Sec. 172 and modifies the rules relating to carrybacks. The provision allows, for a tax year beginning before January 1, 2021, a deduction equal to the aggregate of the net operating loss carryovers to such year plus the NOL carrybacks to such year. For tax years beginning after December 31, 2020, the provision allows a deduction for the sum of the aggregate amount of NOLs arising in tax years beginning before January 1, 2018, carried to such tax year plus the lesser of (1) the aggregate amount of NOLs arising in tax years beginning after December 31, 2017, carried to such year, or (2) 80 percent of the excess (if any) of taxable income computed without regard to the deductions under Code Sec. 172, Code Sec. 199A, and Code Sec. 250 over the aggregate amount of NOLs arising in tax years beginning before January 1, 2018, carried to such year.

Deductions for NOLs incurred in 2018, 2019, and 2020. With respect to net operating loss carryback, the provision creates a special rule for NOLs arising in 2018, 2019, and 2020. In general, for any NOL arising in a tax year beginning after December 31, 2017 and before January 1, 2021, such loss is an NOL carryback to each of the five tax years preceding the tax year of such loss and the provisions limiting the carrybacks of farming losses in Code Sec. 172(b)(1)(B) and certain insurance losses in Code Sec. 172(b)(1)(C)(i) do not apply. Special rules are provided for real estate investment trusts.

If the five-year carryback period with respect to any NOL of a taxpayer arising in 2018, 2019, and 2020 includes one or more tax years in which an amount is includible in gross income by reason of Code Sec. 965(a), the taxpayer may, in lieu of the election otherwise available, elect to exclude all such tax years from such carryback period.

Technical Corrections Relating to TCJA. Finally, technical corrections are also provided with respect to changes to the NOL rules made by the Tax Cuts and Jobs Act of 2017 (TCJA). These corrections provide that the NOL loss limitation rule applies to tax years beginning after December 31, 2017, as well as to tax years beginning on or before that date to which NOLs arising in tax years beginning after that date are carried. In addition, the TCJA amendments to the rules for carryovers and carrybacks apply to NOLs arising in tax years beginning (rather than ending) after December 31, 2017.

The effective date for the NOL limitation changes apply to tax years beginning after December 31, 2017, and to tax years beginning on or before December 31, 2017, to which NOLs arising in tax years beginning after December 31, 2017, are carried. With respect to the changes to the carryover and carryback provisions, such changes apply to NOLs arising in tax years beginning after December 31, 2017, and tax years beginning before, on, or after such date to which such NOLs are carried. The technical corrections are effective as if included in TCJA. In the case of an NOL arising in a tax year beginning before January 1, 2018, and ending after December 31, 2017, an application under Code Sec. 6411(a) with respect to the carryback of such NOL will not fail to be treated as timely filed if filed not later than the date which is 120 days after the date of the enactment (i.e., March 27, 2020), and an election to (i) forgo any carryback of such NOL, (ii) reduce any period to which such NOL may be carried back, or (iii) revoke any election made under Code Sec. 172(b) to forgo any carryback of NOL, will not fail to be treated as timely made if made not later than the date which is 120 days after March 27, 2020.

Modification of Limitation on Losses for Taxpayers Other Than Corporations

Section 2304 of the CARES Act modifies the excess business loss limitation of Code Sec. 461(l), which was enacted as part of TCJA. The modification provides that, in the case of a taxpayer other than a corporation, for any tax year beginning after December 31, 2017, and before January 1, 2026, Code Sec. 461(j), relating to the deduction limitation on excess farm losses of certain taxpayers, does not apply. Further, excess business losses, previously disallowed for tax years beginning after December 31, 2017, and before January 1, 2026, are now allowed for tax years beginning after 2017 and before January 1, 2021.

Technical Corrections Relating to TCJA. In addition, technical amendments were made to Code Sec. 461(l). In determining what constitutes an excess business loss, deductions for losses from sales or exchanges of capital assets are not taken into account in determining the amount under Code Sec. 461(l)(3)(A)(i) and the amount of gains from sales or exchanges of capital assets taken into account in calculating gains under Code Sec. 461(l)(3)(A)(ii) must not exceed the lesser of the capital gain net income determined by taking into account only gains and losses attributable to a trade or business, or the capital gain net income.

The technical amendments apply as if they were included in TCJA. The other amendments apply to tax years beginning after 2017.

Enhanced Refundability of Credit for Prior Year Minimum Tax Liability of Corporations

Section 2305 of the CARES Act modifies the rules for the minimum tax credit for alternative minimum tax (AMT) incurred by a corporation in a prior tax year. Under the provision, the limitation in Code Sec. 53(c) does not apply to a corporation's 2020 and 2021 tax years and the AMT refundable credit amount is 100 percent, rather than 50 percent, of the amount determined under Code Sec. 53(e)(2) for tax years beginning in 2019. In addition, Code Sec. 53(e) is amended to allow a taxpayer to elect to take the entire refundable credit amount in 2018. A taxpayer may apply for a tentative refund of any amount for which a refund is due by reason of this new election and, within 90 days, the IRS is required to review the application, determine the amount of the overpayment, and apply, credit, or refund the overpayment.

These amendments apply to tax years beginning after December 31, 2017.

Increase in Taxable Income Limitation on Business Interest to 50 Percent

Section 2306 of the CARES Act amends Code Sec. 163(j) by adding special rules relating to the business interest limitation. For tax years beginning in 2019 or 2020, 50 percent of the taxpayer's adjusted taxable income, rather than 30 percent, is used to determine the business interest limitation. A taxpayer generally may elect, in the time and manner prescribed by the IRS not to have this provision apply to any tax year.

A special rule is provided for partnerships. Under this special rule, the increase to 50 percent of adjusted taxable income in determining the business interest limitation does not apply to a partnership for 2019. However, unless a partner elects otherwise, if any excess business interest of a partnership for any tax year beginning in 2019 is allocated to a partner, 50 percent of the excess business interest is treated as business interest which is paid or accrued by the partner in the partner's first tax year beginning in 2020 and which is not subject to the limits in Code Sec. 163(j)(1), and 50 percent of the excess business interest is subject to the limitations in Code Sec. 163(j)(4)(B)(ii) in the same manner as any other excess business interest.

An election is also provided which allows a taxpayer to substitute its adjusted taxable income for its last tax year beginning in 2019 for its adjusted taxable income for 2020 in calculating the business interest limitation for 2020.

"Retail Glitch" Fix: Technical Amendments for Qualified Improvement Property

Section 2307 of the CARES Act fixes the notorious "retail glitch" in the TCJA, effective as of the date of enactment of the TCJA (December 20, 2017). Due to a drafting error in TCJA, the 15-year recovery periods that were available for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property placed in service before 2018, no longer existed for such property placed in service after 2017. Instead, the depreciation period was 39 years. The legislation fixes this mistake so that such property now has a 15-year depreciation life and meets the bonus depreciation criteria specified in Code Sec. 168(k)(2)(A). The change is effective as if it were included in the TCJA provision to which it relates.

EXAMPLE: John owns a restaurant with several dining rooms and, in March of 2018, he had a bar constructed in one of the dining rooms. The bar was placed in service on July 1, 2018. John paid $200,000 for the bar to be built. Because the construction of the bar constituted an improvement to nonresidential real property already placed in service, John had to depreciate the $200,000 improvement over a 39-year recovery period, based on the rules in effect at that time. John used the mid-month convention and, according to the depreciation tables in IRS Pub. 946, the first year depreciation rate is 1.177%. Thus, his depreciation deduction for 2018 was $2,354 ($200,000 x 1.177%). As a result of the change in the CARES Act, John can file an amended return and, by using bonus depreciation, take a deduction for the entire $200,000, rather than just the $2,354.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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