Much of the headline focus on the $2.2 trillion stimulus bill signed by President Trump on Friday to help dampen the economic blow from the coronavirus is on the $500 billion in direct payments to households and almost $1 trillion in loans to businesses. But the bill also includes some easing of tax rules to help companies struggling to maximize cash.
Among the most useful changes is on the treatment of net operating losses (NOLs). Rules have been tightening in the last several years on companies’ use of net operating loss carrybacks to offset taxable income. Then came the big tax cut bill enacted three years ago, The Tax Cuts & Jobs Act, which eliminated carrybacks altogether and imposed a rule allowing companies to offset only 80% of taxable income with net operating losses. Helping pay for tax cut costs was part of the reason for scaling back carrybacks.
The stimulus bill eliminates much of this treatment.
Alexandra Minkovich, partner at business consulting firm Baker McKenzie, says the eased treatment on carrybacks is a much-needed reprieve for companies reeling from the business slowdown.
"In the current environment, where liquidity is crucial for the survival of many companies, the inability to carry losses back to prior years is a particularly important and painful change from prior law" that the stimulus will go some way to offsetting, she said in an analysis. "The bill relaxes some of these limitations."
- The bill removes the limit on the use of carryovers from years beginning before January 1, 2018.
- For net operating losses generated after December 31, 2017, although the 80% limitation remains, it's applied only to taxable income without taking into account certain deductions that would otherwise apply.
- Companies will be allowed to carry certain losses — those generated in taxable years 2018, 2019, and 2020 — back five years.
These changes, says Minkovich, are "an effort to provide some much-needed liquidity to struggling businesses."
Use of 35% tax rate
Another benefit of the changes to net operating loss treatment is the bill’s use of the 35% corporate tax rate that was eliminated in 2017 rather than the current 21% rate, says Dustin Stamper, managing director of consulting firm Grant Thorton.
"The ability to carry back current net operating losses to pre-[2017] years will offer a tremendous opportunity for corporations to use deductions and losses against a 35% corporate rate," he said in an analysis.
What’s more, the benefit of accelerating deductions from a future year into a year allowing the carrybacks won't necessarily end when things get back to normal. Rather, he says, it "could result in a permanent benefit due to the difference between the 21% rate and 35% rate."
Other tax provisions
The bill includes a number of other provisions CFOs will want to ask their tax specialists about. Among them:
- The taxable income threshold for the limit on the interest deduction is increased from 30% to 50% for tax years beginning in 2019 and 2020 and allows taxpayers to use 2019 taxable income to calculate the 2020 limit.
- Corporations can claim refunds for all remaining alternative minimum tax (AMT) credits in 2018 and 2019.
- Payment requirements for the 6.2% employer portion of Social Security taxes is suspended from the date of enactment through the end of 2020. Half the balance will be due by the end of 2021, and the other half will be due by the end of 2022.
- There’s a new refundable employee retention credit of up to $5,000. It’s for paying wages while business operations are suspended, or if gross receipts drop by 50%.
Details of the tax provisions and the broader stimulus bill, at almost 1,000 pages, won't be thoroughly analyzed for some time, but it's clear the intent of lawmakers was to make changes to the tax code to provide relief to businesses.
