Losses have been a big point of concern for business owners in 2020. As the coronavirus pandemic halted the economy, lawmakers have struggled to provide economic support. The Coronavirus Aid, Relief, and Economic Security (CARES) Act has been part of these ongoing efforts.
Recent developments in the CARES Act may help address excess losses through retroactive policies and amended tax returns. Here are some of the important details for business owners.
Deferring limits for excess business loss
When the Tax Cuts and Jobs Act (TCJA) was introduced in 2017, it allowed for net tax losses beyond $500,000 for joint filers or $250,000 for other covered taxpayers - both adjusted for inflation - to be handled as net operating loss (NOL) carryforwards during the following tax year. This policy covered individuals, estates, and trusts that directly own businesses, as well as partners in a partnership or S corporation shareholders.
These limits were intended to apply from the calendar year 2018-2025, but the CARES Act has postponed the limits; they will now apply to tax years between 2021 and 2025.
As a result, covered individuals can amended the following tax returns:
- Any previously filed 2018 tax return including a disallowed excess business loss to now permit it for the 2018 tax return
- Any previously filed 2019 tax returns including a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss to now permit the 2019 loss and/or eliminate the carryover
These excess business loss limits won’t apply to tax years beginning in 2020, which means that 2020 is an opportunity to start a business that might require significant up-front-deductible items, like capital items that can be 100% deducted through bonus depreciation. These expenses can offset the resulting net losses from business against investment income or income from employment.
Changes to the excess business loss limits
Under the CARES Act, corrections to the original TCJA excess business loss rules and will apply retroactively. Among the changes include a clarification that deductions, gross income, or gain attributable to employment won’t be accounted for when determining excess business loss. As a result, excess business losses can’t be used to shelter net taxable investment income or net taxable employment income. Startups generating excess business losses in 2021 should take note of this.
Businesses should also know that excess business loss is accounted for when factoring NOL carryover but isn’t automatically carried into the following year. Moreover, excess business losses don’t include deductions pertaining to NOL deductions or the qualified business income deduction that reduces income taxes for businesses.
Moreover, capital losses of non-corporations can’t compensate for ordinary income under the NOL rules:
- Capital loss deductions accounted for when determining excess business loss AND
- Capital gain that accounts for the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.
Not sure how the CARES Act will impact your business taxes? Smolin Lupin can help you stay current with tax policies and regulations so you don’t have to worry about tax compliance. Contact us today to schedule a chat.