Objective:

The CARES Act modifies the loss deduction limitation for non-corporate taxpayers, allowing them to deduct 100% of losses in tax years 2018 through 2020.

Background:

The “2017 Tax Cuts and Jobs Act” (TCJA) added a limitation on an individual’s ability to deduct losses from a business.Under the new Section 461(l), the amount of “net business loss” an individual is allowed to deduct in a year to offset other sources of income is capped at $250,000, if single; and $500,000 if married filing jointly. Any excess loss is converted into a net operating loss that could be utilized in a future tax year.

Changes:

The CARES Act suspends the implementation of IRC Sec. 461(l) until tax years beginning after December 31, 2020, thus allowing non-corporate taxpayers to deduct excess business losses arising in 2018, 2019 and 2020.  

The CARES Act also makes a number of technical corrections to that code section retroactively as if included in TCJA.  One such amendment now excludes from the calculation of excess business losses “any deductions, gross income, or gains attributable to any trade or business of performing services as an employee”. In other words, wages will NOT be considered business income, and in many cases, this may result in significantly more loss being limited.

Example:

Assuming in 2018, Taxpayer A, who files married filing jointly, has dividend, interest and capital gain of $1,000,000 and loss from rental activity of $ 800,000. Under TCJA, A could only deduct $500,000 loss from the rental activity and pay taxes on $500,000.

The $300,000 disallowed loss from rental activity was carried over to 2019 and treated as Net operating losses. Under the CARES Act, A is allowed to deduct the entire $800,000 rental activity loss, and pay tax on $200,000.

Taxpayer A can amend his 2018 tax return and get a refund of the overpaid taxes.