Top CARES Act-Related Tax Planning Tips for Year-End

The CARES Act provided small businesses with immediate and targeted financial relief in the form of forgivable PPP loans and payroll tax deferral. It also included several tax breaks that can help the bottom line in 2020. Business owners should be meeting with their accountants right now to determine their eligibility for the following tax breaks:

Use current losses against past income for immediate refunds. If your business experienced net operating losses in tax years 2018, 2019, and 2020, they can be carried back five years for refunds against prior taxes. Better yet, the losses can offset income at the higher tax rates in place before the Tax Cuts and Jobs Act (TCJA). The quickest way to receive a refund is by filing a tentative refund claim for the 2019 tax year by the end of 2020. If filing a refund claim for 2020 losses, you will need first to file your income taxes.

Retroactive refund for bonus depreciation. The CARES Act fixed a glitch with bonus depreciation that expands its application to a much broader category of qualified improvement property (QIP). It used to apply primarily to improvements with retail businesses and restaurants. It now applies to almost any improvement to the interior of a leased or owned building for business purposes. Because the fix is retroactive, businesses can fully deduct qualified improvements going back to Jan. 1, 2018, which offers the potential for immediate refunds. For businesses that filed before the law changed in 2018 or 2019, they can either amend their returns to apply bonus depreciation in those years or reflect the additional retroactive deduction entirely in 2020, which may require an accounting method change.

Claim quick disaster loss refunds. Separate from the CARES Act, President Trump signed a COVID-19 disaster declaration, designating all 50 states, the District of Columbian, and five territories as disaster areas. This allows any U.S. business to claim certain losses attributable to COVID-19 on a prior-year tax return. That means a business could claim a disaster loss that occurred in 2020 or a 2019 amended return, which would generate an immediate refund. To qualify, the loss of inventory or the closure of offices, stores, or plants must be attributable to or caused by COVID-19.

Accelerate Alternative Minimum Tax refunds. Under the TCJA, the Alternative Minimum Tax (AMT) was repealed, and it allowed companies to claim all unused AMT credits from tax years starting in 2018, 2019, 2020, and 2021. The CARES Act accelerates that timeline, allowing companies to claim all remaining credits in either 2018 or 2019. For a quick refund, companies need to file a tentative refund claim on Form 1139 by Dec.31, 2020.

Temporary suspension of business loss deduction cap. The Tax Cuts and Jobs Act (TCJA) of 2017 established a cap on business loss deductibility, limiting non-corporate entities to $500,000 for joint filers and $250,000 for single filers. The CARES Act temporarily suspends the cap on business loss deductions.

Temporarily reinstates net operating loss carrybacks. The TCJA also eliminated the two-year carryback for Net Operating Losses (NOL) while extending the carry forward from 20 years to indefinitely. The CARES Act temporarily reinstates the NOL carryback and extends for up to five years for losses incurred from 2018 through 2020.

Interest deduction expanded. The TCJA limited business interest deductibility to 30% of adjusted taxable income (ATI), with excess interest carried forward. The CARES Act increases the cap to 50% of ATI for years 2019 and 2020.

Charitable gifts deductions expanded. The CARES Act increases the charitable deduction cap for corporations from 10% of ATI to 25%. It also increases the deduction cap for food inventory contributions made in 2020 from 15% to 25%.