Tag Archives: CARES Act

CARES Act eases rules for business losses

In 2017, the Tax Cuts and Jobs Act (TCJA) provided that net tax losses from businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. This new rule eliminated the ability for a business owner with a loss to carry back the loss to a prior year, thus delaying any tax benefit.

Earlier this year, the CARES Act liberalized this rule by retroactively postponing the limits, so they now apply to tax years beginning in calendar years 2021 through 2025. This means the $500,000 limitation (or $250,000 for single taxpayers) on excess business losses for non-corporate taxpayers does not apply until Jan. 1, 2021. As a result, affected taxpayers may be able to fully deduct business losses arising in 2018, 2019 and 2020. The CARES Act also eliminated the TCJA rule that limited a loss to 80% of taxable income. Companies are now permitted to fully offset their taxable income in such taxable years with NOL carryforwards without regard to the year in which such NOL arose. NOLs from taxable years beginning after Dec. 31, 2017, that are carried forward to taxable years beginning after Dec. 31, 2020, will be subject to the 80% limitation that was enacted as part of TCJA.

In summary, the CARES Act reinstates loss carrybacks for NOLs arising in 2018, 2019 and 2020 (taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021) to the five taxable years preceding the taxable year in which the loss arose. Taxpayers generally have 120 days after March 27, 2020, the date of enactment of the CARES Act, to either carry back their 2018 NOLs or relinquish the carryback period and carry such amounts forward.

Economic impact payments: How will they affect your 2020 return?

As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the IRS made economic impact payments (EIPs) to certain taxpayers. The eligibility for and the amount of an EIP generally depended on the taxpayer’s 2019 federal income tax return. If one wasn’t filed at the time of eligibility, the IRS used the taxpayer’s 2018 federal income tax return. If you received an EIP, the IRS mailed a Notice 1444 to your last known address. That form shows the amount of your EIP. Keep this notice with your tax records.

The EIP is considered an advance credit against your 2020 tax. You are not required to include the payment in taxable income on your 2020 tax return or pay income tax on the payment. When you file your 2020 federal income tax return next year, the EIP will not reduce your refund or increase the amount of tax you owe.

If the EIP was based on your 2018 tax return and your circumstances changed in 2019, you may claim any additional credit for which you are eligible on your 2020 return. This may occur, for example, if you had a child or if your income was lower in 2019. Conversely, if your payment was based on your 2018 return and circumstances changed so that you would have received a smaller amount based on your 2019 return, you are not required to repay the excess or reduce your 2020 refund.