Senate Unanimously Passes Phase 3 COVID-19 Bill

Late last night, the Senate unanimously passed the Phase 3 COVID-19 Bill (“Final Bill”). The Final Bill is 880 pages long and is largely based on the last Senate bill that was circulated last week. The Final Bill now moves to the House where it is expected to be passed tomorrow. The following highlights many of the tax provisions in the Final Bill.

NOL Carrybacks and Excess Business Losses

The Final Bill modifies the rules governing net operating losses (NOLs) for 2018, 2019, and 2020 taxable years by:

• Generally allowing for the carryback of the NOLs from those years for 5 taxable years and
• Removing for those years the 80% taxable income limitation on the deduction of NOLs that was added as part of TCJA.

The Final Bill also relaxes the rules governing excess business losses of noncorporate taxpayers for taxable years beginning after December 31, 2017 but before December 31, 2020 so that pass-through entities and sole proprietors are not limited in their use of trade-or-business losses to offset their nonbusiness income.

AMT Refundable Credit

The Final Bill provides that the AMT minimum tax credit is 50% refundable in 2018 and 50% refundable in 2019. The Original Proposal provided that the entire amount of the credit was refundable in 2018, requiring taxpayers to file an amended 2018 tax return to claim the refund. The change to spread the refund period over 2018 and 2019 makes it so taxpayers do not need to file an amended 2018 return in order to obtain the refund.

However, taxpayers can elect to claim the full amount of the refundable credit in 2018. If such an election is made, then Revised Bill provides that such claim for refund is not subject to review by the Joint Committee of Taxation prior to issuance of the refund.

Modifications to Limitation on Interest Expense Deduction

As part of TCJA, Congress limited a taxpayer’s deduction for business interest expense to the sum of: (1) the taxpayer’s business interest income, (2) 30% of the taxpayer’s adjusted taxable income (i.e., taxable income computed with certain adjustments) and (3) floor plan financing interest (section 163(j) limitation). The Final Bill proposes to modify the section 163(j) limitation for taxpayers other than partnerships as follows:

• For taxable years beginning in 2019 or 2020, taxpayers can calculate the amount of interest they can deduct based on 50% of their adjusted taxable income (instead of 30%), unless they elect not to, and
• For taxable years beginning in 2020, taxpayers can generally elect to use their 2019 adjusted taxable income to calculate the interest deduction limit.

For partnerships, the Final Bill provides:

• For 2019, partners that were allocated excess business interest expense from a partnership (business interest expense that exceeded the partnership’s section 163(j) limitation) can deduct 50% of that amount in 2020 without any limitation, unless they elect not to do so, and
• For 2020, similar to non-partnership taxpayers, a partnership can elect to use its 2019 ATI in place of its actual 2020 ATI (prorated if the 2020 taxable year is a short taxable year).

Retail Glitch Correction

As part of TCJA, the ability to depreciate an improvement to an interior portion of a building which is nonresidential real property, made after building was first placed in service (i.e., qualified improvement property or QIPs), was modified so that it had a useful life of 40 years and was therefore ineligible for the additional first year depreciation deduction (section 168(k)). The Final Bill corrects this so that QIP is now eligible for the section 168(k) deduction…

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