For this week’s in review, we are covering updates and news releases on the CARES act, newly released IRS guidance on certain tax-free corporate reorganizations, and a practitioners insight on how companies with losses in 2020 can maximize their relief under of the CARES Act.
IRS Tax Tip: Keep Economic Impact Payment Notice With Other Tax Records
On June 23, 2020, the IRS released an office tax tip on its website. The IRS is advising taxpayers who receive an Economic Impact Payment (i.e. an “stimulus check”) this year to keep with their records “Notice 1444, Your Economic Impact Payment”, which was mailed to recipients within 15 days after the payment. The notice provides information about the payment and is especially important for people to keep if you think the amount paid was wrong. When taxpayers file their 2020 tax return, they can refer to “Notice 1444” and claim any additional credits for which they may be eligible. Make sure to furnish the notice to your tax preparer at tax time to make sure you received the correct amount on your “stimulus check”, the IRS said.
See IRS Tax Tip 2020-74 (June 23, 2020)
AICPA Seeks Relief for Taxpayers Impacted by CARES Act Changes to Excess Business Losses
On June 22, 2020, the American Institute of Certified Public Accountants (AICPA) publicly released comments on the CARES Act changes to the IRS’s limitation on the use of “excess business losses”. Generally speaking, the limitation on “excess business losses” imposes a limitation on the deductible loss related to a trade or business in the taxable year in which the loss is incurred. Specifically, the loss form operating a business as a sole proprietorship or a pass-through entity (e.g. a single member LLC, partnership, S corporation), can only be offset against other income up to $250,000 for single filers and $500,000 for those filing married filing joint.
For example, assume a taxpayer earns $500,000 from one business, Business A. Assume that the same taxpayer invests all $500,000 into a second business, Business B. In the same year, Business B runs at a loss, and has a taxable loss of $300,000. Economically, the taxpayer earned $200,000 ($500,000 of income from Business A, minus $300,000 of losses from Business B). However, due to the limitation on “excess business losses”, the taxpayer is limited to deduction only $250,000 of their $300,000 of losses of Business B against the $500,000 of income from Business A. Thus, the taxpayer will have to calculate and pay taxes on $250,000.
The CARES Act changed the dates that the limitation is in effect to remove 2018 and 2019 from impacted tax years, allowing taxpayers to take advantage of potential excess business losses they sustained in those years.
This past week, the AICPA released comments recommending the US Treasury and the IRS provide taxpayers, who reported excess business losses for the 2018 tax year, with the opportunity to adjust their taxable income and “excess business loss” without amending their return. Amending returns can take many months for the IRS to review. This leaves taxpayers expecting refunds for months, when in reality they may have underpaid their estimated taxes. Given this, the comments suggest relief for underpayment of taxes.
IRS PLR: Corporate Reorganization Transaction Rulings Issued
This past week, the IRS issued 108 rulings relating to an international corporate reorganization in which the group parent (“Distributing Parent”) proposes to separate its three businesses (“A,” “B,” and “C”) through several rounds of stock distributions as well as plan acquisitions, share repurchases, and liquidations among multiple “Distributing,” “Controlled,” and affiliated entities and shareholders.
There are several take away from these rulings—
- No gain or loss will be recognized by relevant entities in the distributions qualifying tax free spin-offs and, to the extent Distributing Parent is treated as the initial obligor of business debt.
- The holding period for stock received will include that of the corporation’s stock for which it was exchanged, provided the latter stock is held as a capital asset on the date of the transaction.
- Contributions together with distributions in each round of distributions will be a treated as a separate tax free reorganization.
- The basis of transferred stock won’t change upon the moment of transfer, as applicable.
- The holding period for the recipient of distributed stock will include that of the previous owner.
- Sales or deemed sales of any fractional shares of entity in connection with the distributions won’t be treated as acquisitions that are a part of the proposed transaction.
- The transfer of assets by a foreign subsidiary or distributing entity to a new or controlled entity or foreign subsidiary won’t preclude certain check-the-box elections from otherwise qualifying as a tax free, complete liquidation.
To see the full PLR and takeaways for yourself, See IRS PLR 202026001
Practitioner Insight: Interaction of NOLs and the CARES Act—Getting the Most Out of the CARES Act Relief
As part of the CARES Act, the US Congress changed the limitation son the use of “net operating losses” arising in 2018, 2019, and 2020. Prior to the relief provided under the CARES Act, a net loss generated in a given tax year (i.e. an “net operating loss”) could be carried forward to be utilized to offsert income earned in a future tax year. The “net operating loss” could not be carried back to prior tax years. In addition to the carryforward of a “net operating loss”, the loss could only be used to offset up to 80% of the taxable income in the year the loss it utilized.
The CARES Act provided taxpayer with “net operating losses” in the 2018, 2019 and/or 2020 tax years relief. Specifically, a “net operating loss” generated in anyone of these years can be carried back to each of the 5-years preceding the year the loss was generated. In addition, the 80% taxable income limitation was lifted.
This change is very important when looked at in the context of the varying corporate tax rates prior to the passage of the Tax Cuts and Jobs Act (the “TCJA”) in 2017, and after its passage. One of the major provisions of the TCJA was to lower the corporate tax rate from 35% to 21%. The change became effective for the 2018 tax year and thereafter.
Accordingly, a net operating loss incurred by a domestic corporation in 2020 can be carried back to the years 2015–2019, with the loss first being carried to 2015. To the extent the loss is used in 2015, 2016, or 2017, the benefit generally would be 35% of the amount of the loss (i.e., the corporate tax rate for those years). If the loss carried back is also used in 2018 and 2019, the benefit generally would be 21% of the amount of the loss used in those years.
Thus, it provides a bigger benefit to carry the loss back to the years preceding the 2018 tax year due to the higher tax rate applicable for those years. If done, a larger tax benefit is derived from those losses carried back. Taxpayers with net operating losses from 2018, 2019 and 2020 should consider the following techniques to get the most “bang for their buck” when carrying back “net operating losses”—
- Accelerating losses in 2020;
- Deferring 2020 income to later years;
- If a domestic corporation is owns a “controlled foreign corporation” with income inclusions on “global intangible low taxed income” (GILTI), the corporation should limit or defer GILTI inclusions from the 2020 tax year.
If techniques or transactions are consummated in order to meet these objectives, it will allow an taxpayer with a “net operating loss” in 2020 to carryback the largest losses to the years with a 35% tax rate, instead of a 21% tax rate, beginning in 2018. If you would like to learn more about these potential strategies, and how to undertake them, book a consultation with our office to discus your issues.