Congress sent the Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’ to the President, who signed it into law.
There are three significant provisions that impact 2018, 2019, and 2020 income taxes and your use of the IC-DISC.
Net Operating Loss Carrybacks
The provisions enacted as part of the Tax Cuts and Jobs Act at the end of 2017 eliminated the ability to carry back net operating losses to obtain tax refunds. The CARES Act provides for a five-year net operating loss carryback for losses generated in years beginning after December 31, 2017 and before January 1, 2021.
Section 461(l) Delayed Effective Date
Section 461(l) limits the deductibility of losses for taxpayers other than corporations. The provisions, enacted as part of the Tax Cuts and Jobs Act at the end of 2017 limited the current deductibility of these losses to $500,000 for married filing jointly taxpayers ($250,000 for all others). The CARES Act delays the impact of this provision until taxable years beginning after 2020 for most taxpayers, however the provision was completely eliminated for excess farm losses.
Section 163(j) Interest Limitation
The provisions, enacted as part of the Tax Cuts and Jobs Act at the end of 2017, limited the deductibility of interest to 30 percent of modified taxable income. The CARES Act modifies this provision for tax years beginning in 2019 and 2020 and allows for the deductibility of interest to 50 percent of modified taxable income.
Some taxpayers limited their IC-DISC commission expense in 2018 and 2019 due to this loss limitation rule and or interest expense limitation rules. Redetermining the IC-DISC commission to increase it can (1) reduce your tax liability and result in cash tax refunds; (2) create larger losses that can be deducted immediately; and (3) result in net operating losses in 2018, 2019 and / or 2020 that can be carried back for five tax years.
Have a question? Contact Brian Schwam.