FEATURE
CARES ACT
PROVIDES TAX BENEFITS AND INCENTIVES TO BOTH BUSINESSES AND INDIVIDUALS TO EASE THE ECONOMIC IMPACT OF COVID-19
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By Tim Thomasson, Don Carpenter, Jennie Beyer, Sarah Cornish and Katherine Gunter
n just a matter of weeks, U.S economic performance turned from a historic period of expansion to one of the sharpest declines since the Great Depression. But as Americans were becoming familiar with terms like “shelter-inplace” and “essential business services,” the U.S. Congress moved at record speed to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act that President Trump signed into law on March 27, 2020. This $2 trillion relief package contains an array of provisions such as small business loans and enhanced unemployment assistance. But the focus of this article is the tax provisions within the Act that provide financial assistance focused on liquidity to both businesses and individuals.
Corporations See 2017 Tax Changes Temporarily Altered
The Tax Cuts and Jobs Act of 2017 (TCJA) introduced sweeping changes to the corporate tax system. In exchange for a lower corporate tax rate, significant limitations were placed on the ability of corporations to utilize net operating losses (NOLs) and interest expense. And while the TCJA repealed the alternative minimum tax for corporations, any existing minimum tax credit carryforward was refundable over a four-year period from 2018 through 2021. The CARES Act temporarily alters these limitations on NOLs and interest expense, and accelerates the recovery of any minimum tax credit carryforward. The provisions should provide additional liquidity to corporations that are struggling to retain employees, pay creditors and protect investors.
Additional Opportunities to Utilize NOLs
The TCJA eliminated any carryback of NOLs in exchange for allowing an indefinite carryforward period. In addition, under the carryforward provisions, the NOL could only offset 80% of taxable income in any future year. The CARES Act provides two opportunities for corporations (and other taxpayers) to utilize a NOL.
22 Texas Society of CPAs
First, NOLs for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021 (2018 – 2020 for calendar year corporations) can now be carried back five years. The indefinite carryforward period remains unchanged. This carryback period is considerably more generous than even the pre-TCJA two-year carryback provision. Although not widely applicable, the CARES Act prohibits NOL carryback to any tax year when the taxpayer was a real estate investment trust (REIT) and any losses from tax years when the taxpayer is a REIT are not eligible for carrybacks. The carryback provision offers two obvious advantages: 1. ) Acceleration of the tax refund for utilization of tax losses arising in 2018 through 2020. 2.) Increase in the amount of refund as the carryback will offset income taxed at prior corporate rates of 35% rather than future rates of 21%. This second advantage will likely have a financial statement benefit, as well. Less obvious may be the implications of a carryback on the prior years’ returns. For example, elimination or reduction of an earlier year’s taxable income could reduce foreign tax credits that may otherwise expire or alter other tax benefits like the domestic production activities deduction. Consideration should also be given to the limitations placed on carrybacks from merger and acquisition transactions. For these reasons, for each loss year, taxpayers are allowed to make an irrevocable election to
