Potential Business Tax Relief in COVID-19 Legislation

Posted by Dean Hinderliter

    

The Senate and the House have each released proposed legislation to be Phase 3 of the COVID-19 economic stimulus package. This legislation, although not yet enacted, proposes the following important tax provisions in an effort to assist businesses:

Temporary Repeal of 2017 Limitations on Net Operating Losses (NOLs) – The Tax Cuts and Jobs Act of 2017 (TCJA) prohibits the carryback of NOLs and allows only 80% of a taxpayer’s future taxable income to be offset by an NOL carryforward. Under the proposed legislation these limits are revised for NOLs in tax years beginning before January 1, 2021.

• Allow NOL Carrybacks – NOLs from taxable years beginning after December 31, 2017 and before January 1, 2021; i.e., 2018, 2019, and 2020 taxable years, can be carried back five years and carried forward indefinitely.
• Suspend the 80% Cap – The legislation temporarily suspends for tax years beginning before January 1, 2021 the 80% limitation on the amount of taxable income that can be offset by NOLs.
• Practical Impact – NOLs from 2018 and 2019 can be quickly carried back to earlier years generating cash refunds of taxes paid in the prior five years.

Modify Interest Deduction Limitation – The TCJA also limits business interest expense deductions to the sum of 30% of adjusted taxable income (calculated similarly to EBIDTA) plus business interest income. The Senate legislation would increase the limitation to 50% for taxable years beginning in 2019 and 2020. Another change allows the limitation for taxable years beginning in 2020 to be calculated with respect to adjusted taxable income from 2019. This provision benefits taxpayers whose 2019 income exceeds their 2020 income.

Caution – Although both the Senate and the House version of COVID Phase 3 legislation contain language addressing the NOL limitations, the House approach is more restrictive than the Senate version. The House bill also does not modify the interest deduction limitation. Accordingly, please be aware that the provisions of the COVID Phase 3 legislation are still being negotiated and the above-referenced provisions could change before any legislation is enacted. We will provide material updates as they are available.

If you have any questions, please contact the above author or the T&K tax attorney with whom you regularly work.