Coronavirus Aid, Relief, and Economic Security (CARES) Act tax provisions.

Right now, your highest priority continues to be the health of those you love and yourself.

You may have read an article that I recently published that summarized the Coronavirus Aid, Relief, and Economic Security (CARES) Act tax provisions.

That article included a brief discussion of the CARES Act’s deferral of and changes to the limit on excess business losses.

Here is more about the deferral and changes.

Deferral of the excess business loss limits.

The Tax Cuts and Jobs Act (the 2017 Tax Law) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss carryforwards in the following tax year.
The covered taxpayers are individuals (or estates or trusts) that own businesses directly or as partners in a partnership or shareholders in an S corporation.

The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the 2017 Tax Law to apply to tax years beginning in calendar years 2018 through 2025.

But the CARES Act retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.

The postponement means that you can amend your prior years returns.

Here is what to look for on your individual tax returns.
1. Any filed 2018 returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
2. Any filed 2019 returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

If you filed any such return(s), you need to consider filing an amended tax return as soon as possible.
Note also that the excess business loss limits don’t apply to tax years that begin in 2020.

Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits.

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 Tax Law.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to performing services as an employee are not considered in calculating an excess business loss.

This means that excess business losses cannot shelter either net taxable investment income or net taxable employment income.
Be aware of that if you are planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is considered in determining any net operating loss (NOL) carryover but is not automatically carried forward to the next year.

And a generally beneficial change states that excess business losses do not include any deduction under Code Sec. 172 (NOL deduction) or Code Sec. 199A (the qualified business income deduction that effectively reduces income taxes on many businesses).

And because capital losses of non-corporations cannot offset ordinary income under the NOL rules,
1. Capital loss deductions are not considered in computing the excess business loss, and
2. The amount of capital gain considered in computing the loss cannot exceed the lesser of capital gain net income from a trade or business or capital gain net income.

I will be pleased to answer any questions you might have about the above information or any other matters, related to COVID-19 or not.

I continue to wish all of you the absolute best in a difficult time.

Stay safe…!

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About William Murphy

William F. Murphy is the owner of Murphy Financial Group, P.C. The firm emphasizes in providing tax consulting and financial planning services to corporations, professional practices and individuals. He also provides consultation services on tax and financial planning issues to various news and publishing organizations on current tax law changes occurring within federal and state government. He is also the author of the “Murphy Minute” that is syndicated through various news organizations. Mr. Murphy is also associated with the law firm of Mallor Grodner LLP. The firm has offices in both Indianapolis and Bloomington Indiana. He assists in providing tax, valuation and financial analysis services focusing in the areas of Family law and business tax planning. https://www.linkedin.com/in/william-f-murphy-cpa-pfs-abv-cff-cgma-b38aa713/.