Important Tax Update: Changes to NOLs, Charitable Donations, & Stimulus Check
Changes to Net Operating Losses (NOLs)
Under the TCJA of 2017, NOLs incurred after 2017 could only be carried forward, and could only offset 80% of taxable income in the year they were utilized.
The CARES Act temporarily removes the taxable income limitation to allow an NOL carry forward to fully offset income for tax years beginning before 2021. For tax years beginning after 2021, taxpayers will be able to take: (1) a 100% deduction of NOLs arising in tax years prior to 2018, and (2) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.
In addition, the Act provides that NOLs arising in a tax year beginning after Dec. 31, 2017, and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss.
If a taxpayer had an inclusion of income under the Section 965 transition tax in any of the carryback years, the NOL deduction cannot offset such income. However, an election can be made to exclude from the carryback any year to which the Section 965 inclusion applied.
Example: Larry and Cheryl Knoll had taxable income of $100,000 for each of the years 2013-2015. They incurred a net operating loss of $300,000 in 2018 and had taxable income of $200,000 in 2019.
Prior to the changes made by the CARES Act, they could only carry the loss forward to 2019, and offset only 80%, or $160,000 of taxable income. Under the CARES Act, they can carry the loss back to 2013-2015, and it will be fully utilized to offset all income in those years, resulting in an immediate refund of the taxes paid.
IRS has issued procedures that allow taxpayers to elect to waive the carryback for years beginning in 2018 – 2020.
Emergencies bring out the best in humanity, and many people are making or planning to make, charitable contributions to agencies active in fighting the coronavirus pandemic. The CARES Act expands the charitable contribution deduction, so not only is the after-tax cost to donors lessened, but the expanded deduction may even encourage more donations.
For taxpayers claiming the standard deduction, the CARES Act allows an above-the-line charitable deduction (i.e., taken to calculate adjusted gross income) capped at $300. This applies only to cash donations, not to property donations. Taxpayers are still entitled to their full standard deduction to calculate taxable income.
For taxpayers itemizing their deductions, cash contributions made directly to charitable organizations (i.e., not to a supporting organization or a donor-advised fund) are not limited to 60% of the individual’s contribution base (adjusted gross income computed without regard to any net operating loss carryback).
Furthermore, contributions of property such as securities are subject to the existing limitations.
Taxpayers will have to make an election on their 2020 tax return to apply this provision. A member of a partnership or S corporation must individually make the election.
The CARES Act contains a provision for the distribution of economic impact payments to qualifying individuals. These payments are an advance of a refundable 2020 tax credit.
What amount will I receive?
The payments will be $1,200 for single filers and $2,400 for married couples filing jointly. Filers will receive an additional $500 for each qualifying dependent who is under the age of 17.
Am I eligible?
- Single filers with an adjusted gross income up to $75,000 ($150,000 for married couples filing jointly) qualify for full payment. Eligibility phases out by $5 for every $100 above this amount. Payment will, therefore, be fully phased out for single filers with an adjusted gross income of $99,000 ($198,000 for married couples filing jointly).
- The IRS will use the adjusted gross income reported on your 2019 tax return to determine eligibility. If you have not filed your 2019 tax return, the IRS will use the adjusted gross income reported on your 2018 tax return.
Example: A married couple filing jointly with an adjusted gross income of $145,000 and two qualifying dependents should receive a credit of $3,400 ($2,400 for a married couple filing jointly plus $500 per qualifying child).
How will the payment be sent to me?
The IRS plans to begin distributing payments in the next few weeks. If you requested direct deposit of a tax refund on your last filed return, the IRS will automatically deposit payment into the same account. A web-based portal is being developed by the IRS for other individuals to provide their banking information to expedite payment. Taxpayers who do not receive direct deposit of payment will be mailed a check.
If you would like additional information please contact your Gettry Marcus Advisor or Robert Thee, the author of this article.