The new Coronavirus Aid, Relief, and Economic Security (CARES) Act provides more flexibility for small businesses coping with the COVID-19 outbreak. Notably, it includes several provisions liberalizing rules for business write-offs.
Carry back NOLs. Prior to the Tax Cuts and Jobs Act (TCJA), a business could carry back a net operating loss (NOL) for two years before carrying it forward for up to 20 years. But the TCJA repealed the carryback provision, beginning in 2018, while allowing NOLs to be carried forward indefinitely based on a limit of 80% of taxable income. Now the CARES Act undoes these TCJA changes retroactive to 2018. As a result, a small business might file amended returns for the 2018 and 2019 tax years.
Offset taxable income. The CARES Act postpones another TCJA change for certain business owners that went into effect in 2018. Under the TCJA, an NOL could not be used to offset taxable income of a non-corporate taxpayer—including individuals, partners in partnerships and S corporation shareholders—above $250,000 for single filers and $500,000 for joint filers. But the CARES Act postpones this limit to 2021. Again, this change may encourage some taxpayers to file amended returns.
Avoid business interest cap. The TCJA imposed a new limitation on deductions for business interest expenses. Beginning in 2018, the deduction was generally limited to 30% of adjusted taxable income (ATI), although the law carved out an exception for a qualified small business with average gross receipts of $25 or million or less for the three prior tax years. Now the CARES Act provides some relief: It raises the cap on business interest deductions to 50% of ATI for 2019 and 2020. Note: A special election is required for the 2019 tax year.