CARES Act Impact on Federal Income Tax Deductions
Client Alert
On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus bill passed by Congress. Our previous alert discussed CARES Act provisions that will benefit general aviation. However, the bill also contains several provisions impacting federal income tax deductions. Below are some provisions that may prove particularly helpful to business aircraft owners and operators:
- Modifications to the Use of Business Losses:
- The 2017 Tax Cuts and Jobs Act (TCJA) created limits on the ability for taxpayers to use Net Operating Losses (NOLs). The TCJA eliminated the ability of taxpayers to “carry back” losses to offset income taxes from prior years, and in general limited the “carry forward” use of NOLs to 80% of a taxpayer’s current-year taxable income. The CARES Act allows taxpayers to carry back NOLs from 2018, 2019, and 2020 tax years up to five years. The CARES Act also temporarily allows NOLs to offset up to 100% of current-year taxable income, by removing the limitation that prevents taxpayers from offsetting in excess of 80% of a taxpayer’s current taxable income. Aircraft owners often generate net operating losses in connection with the use and depreciation of their aircraft, so the ability to further utilize these losses could prove helpful to reducing an aircraft owner’s otherwise taxable income.
- The CARES Act also modifies the excess business loss limitation applicable to noncorporate taxpayers, which limited the ability to offset business losses against other income to $250,000 ($500,000 for married taxpayers filing jointly), by temporarily allowing those business losses to offset up to 100% of other taxable income for the taxpayer’s 2018, 2019, and 2020 tax years. Since aircraft owners often have income from many different sources, this modification may be helpful in allowing aircraft-related losses to be used as an offset against the taxpayer’s income from other sources without the limits in the TCJA.
- Modifications to Limitations on Business Interest Expense Deductions: The amount of business interest expenses that a taxpayer is allowed to deduct is generally limited to 30% of the taxpayer’s adjusted taxable income. The CARES Act increases this limit to 50% for 2019 and 2020 tax years. Aircraft owners frequently finance the purchase of their aircraft, so this provision could allow those owners to deduct additional business interest expenses that would have been nondeductible under the prior rules.
The tax provisions discussed above are complex in application and often require a holistic look at a taxpayer’s particular facts and circumstances to determine their potential benefit.
Please do not hesitate to contact a member of our Business Aviation team with questions regarding the CARES Act as it relates to your business needs and decisions.