CORPORATE TAX RELIEF
Overview
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides the following tax relief for businesses and non-profits.
Expanded Net Operating Losses
The CARES Act expands the use of net operating losses (NOLs) by modifying restrictions put in place by the Tax Cuts and Jobs Act of 2017 (TCJA) (P.L. 115-97). The TCJA limited net operating losses (NOLs) arising after 2017 to 80 percent of taxable income and eliminated the ability to carry NOLs back to prior taxable years.
NOL Carrybacks
The CARES Act modifies the treatment of NOL carrybacks so that in the case of taxable years beginning before 2021, taxpayers will be eligible to carry back NOLs to the prior five taxable years. Effectively, this delays the 80 percent taxable income limitation until 2021 and temporarily extends the carryback period from zero to five years. The provision also temporarily disregards NOL carrybacks for the section 965 transition tax. C corporations may elect to file for an accelerated refund to claim the carryback benefit.
NOL Carryforwards
The CARES Act modifies the treatment of NOL carryforwards so that in the case of taxable years beginning before 2021, taxpayers will be entitled to an NOL deduction equal to 100 percent of taxable income (rather than the 80 percent limitation in present law). In the case of taxable years beginning after 2021, taxpayers will be eligible for: (1) a 100 percent deduction of NOLs arising in tax years prior to 2018, and (2) a deduction limited to 80 percent of modified taxable income for NOLs arising in tax years after 2017.
Modification of Limitation on Losses for Taxpayers other than Corporations
The CARES Act retroactively turns off the excess active business loss limitation rule implemented with the TCJA by amending the provision to apply to tax years beginning after December 31, 2020 (rather than December 31, 2017). It also turns off active farming loss rules for tax years beginning after December 31, 2017, and before December 31, 2020.
An active business loss is defined as deductions in excess of income and gain attributable to a trade or business in which the taxpayer actively participates plus $250,000 ($500,000 for joint filers) (i.e. active business losses in excess of $250,000 ($500,000 for joint filers) were disallowed by the TCJA and treated as NOL carryforwards in the following tax year).
The CARES Act also includes technical corrections to the TCJA. The provision clarifies that excess business losses do not include any deduction under 172 or 199A or any deductions related to performing services as an employee. The provision also clarifies that, because capital losses cannot offset ordinary income under the NOL rules, capital loss deductions are not taken into account in computing the section 461(l) limitation, and that the amount of capital gain taken into account in calculating the section 461(l) limitation cannot exceed the lesser of capital gain net income from a trade or business or capital gain net income.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations
The TCJA repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years prior to 2021, at which time any remaining AMT credit may be claimed as fully refundable. The CARES Act allows corporations to claim 100 percent of AMT credits in 2019 as fully refundable and provides an election to accelerate claims to 2018, with eligibility for accelerated refunds.
Modification of Limitation on Business Interest
The TCJA generally limited the amount of business interest allowed as a deduction to 30 percent of adjusted taxable income (ATI). This provision generally allows businesses to elect to increase the interest limitation from 30 percent of ATI to 50 percent of ATI for 2019 and 2020, and allows businesses to elect to use 2019 ATI in calculating their 2020 limitation. A special rule for partnerships allows 50 percent of any excess business interest allocated to a partner in 2019 to be deductible in 2020 and not subject to the 50 percent (formerly 30 percent) ATI limitation. The remaining 50 percent of excess business interest from 2019 is subject to the ATI limitation. The 2019 ATI limitation remains at 30 percent of partnership ATI rather than 50 percent of ATI. The ATI limitation for 2020 is 50 percent of partnership ATI and partnerships may elect to use 2019 partnership ATI in calculating their 2020 limitation.
Qualified Improvement Property Technical Correction
This provision is a technical correction to the TCJA that would allow qualified improvement property such as the interior improvements of buildings to be (1) immediately expensed in the case of restaurant, retail, and most other property (classified as 15-year property), or (2) depreciated over 20 years in the case of a real property trade or business. Under the TCJA, qualified investment property was depreciated over 39 years.
Temporary Suspension of Alcohol Taxes on Undenatured Spirits for Hand Sanitizer
The CARES Act exempts from excise taxes undenatured spirits that distillers are using for the emergency production of hand sanitizer. Under present law, distilled spirits are generally subject to an excise tax of between $2.70 and $13.50 per proof gallon upon removal from the premises of a distilled spirits plant (DSP), however, denatured spirits for non-beverage use may be removed free of tax. Denaturing requires the spirits be mixed with an unappetizing or emetic ingredient to prevent improper or accidental ingestion.
Hand sanitizer is classified as an over-the-counter drug regulated by the Food and Drug Administration (FDA) under the Federal Food, Drug, and Cosmetic Act. FDA has issued guidance on March 14, 20, and 24, on the emergency production of hand sanitizer in connection with the COVID-19 outbreak, which taken together, provides that undenatured spirits may be produced by a DSP for use in the production of hand sanitizer, provided such spirits are later denatured before being used for hand sanitizer.
In the case that undenatured spirits are removed from a DSP and later denatured off-premises, these spirits may be subject to excise tax liability as a beverage alcohol product. This provision would exempt from tax these undenatured spirits that are removed from a DSP during 2020 and used for the production of hand sanitizer in compliance with all FDA guidance.
More Information
For more information, please check the IRS’s website at https://www.irs.gov/coronavirus.
