Tax changes under the CARES Act
On March 27, 2020, President Donald Trump signed into law a $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 CARES Act. This act includes a modification to the Internal Revenue Code (IRC) which was modified to provide economic relief to the people and businesses impacted by the COVID-19 worldwide pandemic.
IRC 172(a) – NOL Changes
Temporarily, the CARES Act is suspending the current 80% taxable income limitation on the net operating loss (NOL) that businesses use to offset taxable income for the years beginning after December 31, 2017, and ending January 1, 2021. With these changes, below is a list of items that Taxpayers may elect:
- NOL’s that occurred between December 31, 2017, and before January 1, 2021, can be carried back five years.
- IRC Section 965 can be excluded from the five year NOL carryback period. The NOL cannot be used to reduce any previous IRC Section 965 transition tax that was already incurred.
- NOL’s can be carried forward if the Taxpayer decides against carrying them back.
Temporary changes to IRC Section 163(j) limitation
The CARES act allows taxpayers to increase the 30% limitation of adjustable taxable income (ATI) limitation on business interest expense from 30% to 50% of ATI for the tax years beginning in 2019 or 2020. Taxpayers may elect out of this option in 2019 and apply it in 2020. Partnerships in 2019 must use 30% of ATI limitations and in 2020 that will increase to 50%. This will automatically occur unless the partnership elects to substitute the 2019 ATI for 2020 ATI.
In conclusion, the modification to the NOL carryback rules can have a beneficial implication on the cash benefit to Taxpayers that can utilize their NOLs.