If you’re a business owner with more than $500,000 of excess business losses, the recently-passed Coronavirus Aid, Relief, and Economic Security Act (CARES) Act includes an unexpected tax giveaway you’ll want to know about.
The CARES Act is intended to provide financial support to businesses and families struggling to stay afloat, as well as additional funding for hospitals and state governments. Buried in the details, however, is a potentially-lucrative tax break for some business owners.
To provide some background, the Tax Cuts and Jobs Act of 2017 (TCJA) changed several provisions in the tax law. One of those was introducing the concept of excess business losses. Before the TCJA, business owners needed to overcome a few hurdles, like at-risk and passive activity loss rules, before reporting losses on their tax returns. If an owner is considered non-passive, business losses could offset other ordinary income, like wages and retirement withdrawals, and could create net operating losses (NOLs). The TCJA created another hurdle where non-passive owners needed to generate, in the aggregate, business income over a predetermined threshold ($250,000 for single owners, $500,000 for married filing jointly) to report NOLs. Any losses exceeding that threshold would be carried forward to future years.
The CARES Act, however, lifts that restriction for three years. The three-year period is for losses generated in 2020, 2019 or 2018. For example, taxpayers who had unused losses in 2018, 2019 or 2020 may be able to file amended returns, claim back those net operating losses, and get refunds on taxes that were already paid, providing much-needed liquidity to deal with the fallout from the pandemic.
This represents a huge opportunity for members of the proverbial 1%, with more than $500,000 in annual capital gains, or income from any non-business activity.
This provision of the CARES Act is not set to expire until January 1, 2026, so there is ample time to take advantage of this tax opportunity. Experts estimate that the cost of the change over the course of 10 years is approximately $170 billion.
You can read the 880-page CARES Act in its entirety here. Or you can skip ahead to page 202 to read Sec. 2304. Modification of Limitation on Losses for Taxpayers Other than Corporations. Or better yet, ask us for guidance.
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To discuss how the new tax law could open up new tax opportunities for you or your business, contact us here or call 800.899.4623.
