Public Health Disaster

Rarely has so much been expected by so many from a single legislative act.

The C.A.R.E.S. Act[i] became law on March 27, 2020, approximately two and one-half months after the country confirmed its first case of the virus. During that short period, the number of confirmed cases has increased dramatically, especially in New York.

In order to contain the spread of the virus, public gatherings were canceled. Shortly thereafter, many states[ii] and municipalities ordered the closure of most businesses within their jurisdictions. In general, individuals were directed to remain in their homes so as to avoid close contact with one another and, thereby, prevent the further transmission of the virus.

Notwithstanding these measures, and despite the efforts of healthcare workers, many of the afflicted have lost their lives and, unfortunately, many more are certain to follow. Society, broadly defined, will feel these losses on many levels.[iii]

Then there is another loss.

Economic Disaster

In response to the coronavirus and the public health strategy that governments have adopted to fight it, the stock market has gone from a record high in mid-February, to the beginnings of a bull market in mid-March.[iv] Many individuals have looked on as a significant portion of their retirement savings vanished.

With few exceptions, factories, service businesses, retailers, restaurants, hotels, not-for-profits, schools, and others have been ordered by government to close their doors in order to protect their employees and the public at large. Among those remaining open are hospitals, food markets and pharmacies.

Last week, the New York Times reported that approximately 10 million jobs disappeared over a two-week period, the Federal Reserve chairman said that he expects a contraction in Gross Domestic Product in the second quarter, and the Fed’s St. Louis district projected that the country may see a 30 percent unemployment rate.

Those who can work remotely from home are doing so but, given the interconnectedness of so many businesses (globally and domestically), the general feeling of uneasiness within the business community, the drop in economic activity, and the ensuing drop in business and consumer confidence, one has to wonder how sustainable this work-from-home approach will be.[v]

The Federal Response[vi]

This state of affairs called for an aggressive move by the Federal government, and it finally came on March 27, 2020 when the president signed the Act.[vii]

The main thrust of the legislation is to get massive amounts of money into the hands of businesses and their employees[viii] The principal vehicle by which $349 billion[ix] of these funds will be disbursed to “small businesses” – generally speaking, a business with no more than 500 employees – is the Paycheck Protection Program (the “PPP”), which will be administered by the Small Business Administration.[x] This is a forgivable loan program predicated on the requirement that any borrowing business will, during the 8-week period following the origination of its loan, expend at least 75 percent of its loan proceeds[xi] on payroll costs;[xii] the remaining 25 percent may be applied toward rent, utilities, and the interest on certain pre-existing indebtedness of the business.[xiii]

For example, if an eligible small business receives a PPP loan on April 20, 2020, it will have to expend all of the proceeds by June 15, 2020,[xiv] with at least 75% of these applied to payroll costs and the balance to rent, utilities, interest on qualified indebtedness.

The PPP will support the continued existence of some closely held businesses that do not lay off their employees and do not cut their salaries, especially those businesses that had few reserves[xv] before they were suddenly shut down. But will it help these businesses to “reboot” after the health crisis passes? It remains to be seen, but I have my doubts.

Consider the following excerpt from a report issued by the New York State Comptroller in 2019, “Small Business in New York State: An Economic Snapshot” – it speaks for itself:

While an enterprise can be classified as a small business based upon its number of employees, its annual income or both, the U.S. Small Business Administration  (SBA) and this report primarily define a small business as one with fewer than 500 employees.

Over the last five years for which data are available, employment at New York’s small businesses rose by 9.2 percent, slightly faster than the national pace. Total payroll showed strong growth, rising to $212.6 billion in New York . . .  Among the more than 465,000 businesses in New York in 2016, 99 percent were small businesses. In addition, the State was home to over 1.7 million non-employer businesses, which largely comprise self-employed individuals.

Of the small businesses with paid employees in 2016, almost two-thirds had fewer than five employees, with over 81 percent having fewer than 10 employees, as shown in Figure 2. These 374,000 microbusinesses provided over 957,000 jobs with total payroll close to $43 billion.

Altogether, small businesses accounted for just over half of all private sector jobs in New York in 2016, providing over 4.1 million jobs. In addition, these businesses provided over $212 billion in payroll, nearly 40 percent of the total private sector payroll.

. . .

Small businesses account for the vast majority of firms in every industry sector in New York. In 2016, over 95 percent of all the firms in each industry sector were small businesses. Three of the 12 industry sectors account for almost half of all small businesses in New York. As defined by the U.S. Census Bureau, payroll includes all forms of compensation paid to all employees, such as salaries, wages, commissions, bonuses, vacation allowance, and sick leave pay.

. . .

The rest is simple math.[xvi]

Tax Relief? Maybe

Other parts of the Act, however, may assist certain businesses to obtain some badly needed cash relatively quickly, and to thereby mitigate the economic effects of the health crisis; for others, the benefit may come too late.

I am referring to the few business tax-related provisions in the legislation. These are not “new” tax benefits or incentives; rather, they represent the temporary relaxation of amendments enacted as part of the Tax Cuts and Jobs Act of 2017 (the “TCJA”)[xvii] – amendments that were intended to compensate for lost tax revenue attributable to the reduction of the Federal corporate income tax rate to a flat 21 percent.[xviii]

In sum, the intended effect of the Act’s tax provisions is to allow businesses that realized losses during prior years (before 2020) to convert those losses into refunds that will be payable (and usable) currently, and to permit business owners to use other losses to offset otherwise taxable income, thereby enabling those tax dollars to be applied elsewhere.


A taxpayer’s net operating loss (“NOL”) for a taxable year is equal to the amount by which a taxpayer’s business deductions exceed its gross income from the business for that year.[xix]

In general, prior to the TCJA, an NOL could carried back two years and carried forward 20 years to offset the taxpayer’s taxable income in such years.[xx] An NOL would offset taxable income in the order of the taxable years to which the NOL would be carried.[xxi]

In the case of a business that was coming out of a challenging period, the two-year carryback often provided a ready source of liquidity where the carryback years were profitable years for which income taxes were paid. By reducing the taxable income for those carryback years, the business could generate a refund of monies that it could then expend in its operations.

NOLs after the TCJA

The TCJA amended the Code so as to limit a taxpayer’s NOL deduction for a taxable year to 80 percent of the taxpayer’s taxable income for such year (determined without regard to the deduction).

Carryovers to other years were adjusted to take account of this limitation, and would be carried forward indefinitely.[xxii] The two-year carryback of NOLs was repealed.

These changes were effective for NOLs arising in taxable years beginning after December 31, 2017. For example, NOLs for taxable years ending on December 31, 2018, or on December 31, 2019 (for calendar year taxpayers) could not be carried back. The same applied for any taxable year beginning on or after February 1, 2018 and ending on or after January 31, 2019 (for fiscal year taxpayers); thus, in the case of an NOL realized during the taxable year starting June 1, 2019 and ending May 31, 2020, the NOL could not be carried back to an earlier year.

NOLs after the CARES Act

The Act allows a taxpayer that realizes an NOL during a taxable year beginning after December 31, 2017 and before January 1, 2021 to carry such NOL back to each of the five taxable years preceding the year of the loss.[xxiii]

Thus, a taxpayer that realized an NOL during a taxable year beginning in 2018 or in 2019 may carry those NOLs back five years, which may create an opportunity for a refund claim in 2020 with respect to an earlier year for which the taxpayer had an income tax liability.

Unfortunately for a taxpayer that suffers a loss during a taxable year that begins in 2020, the tax benefit attributable to the carryback of such loss will not be realized until the taxpayer files its return for that year, in 2021, which is still several months away. That is not to say that a refund at that time would not be welcomed – it’s just that the liquidity it may provide would likely be more helpful sooner rather than later.

The Act also repealed the “80 percent of taxable income” limitation for NOL carryovers arising in taxable years beginning before January 1, 2021.[xxiv]

Thus, an NOL realized in a taxable year beginning in 2018 that is carried to 2019 and 2020, and an NOL realized in a taxable year beginning in 2019 that is carried back to 2018 and forward to 2020, may be utilized without regard to the TCJA’s “80 percent limitation” – the NOLs may be used to offset all of the taxpayer’s taxable income.

Unfortunately for a taxpayer that suffers a NOL in a taxable year that begins in 2020, any tax benefit attributable to the carryback or carryforward of such loss will not be realized until the taxpayer files its return for that year, which is still several months away.

The 80 percent limitation is reinstated for taxable years beginning after December 31, 2020.

As indicated earlier, this change may create opportunities for refunds for those taxpayers who realized losses during the years indicated.

Non-Corporate Taxpayer Loss Limitations

The passive loss rules – which generally apply to individuals, estates and trusts – limit deductions from passive trade or business activities. A passive activity for this purpose is a trade or business activity in which the taxpayer owns an interest, but in which they do not materially participate. A taxpayer is treated as materially participating in an activity only if the taxpayer is involved in the operation of the activity on a basis that is regular, continuous, and substantial. Deductions attributable to passive activities, to the extent they exceed income from passive activities, generally may not be deducted against other income. Deductions that are suspended under these rules are carried forward and treated as deductions from passive activities in the next year. The suspended losses from a passive activity are allowed in full when a taxpayer makes a taxable disposition of their entire interest in the passive activity to an unrelated person.[xxv]

TCJA Excess Business Loss

Following the enactment of the TCJA, for taxable years beginning after December 31, 2017 and before January 1, 2026, the “excess business losses” of a taxpayer other than a corporation are not allowed for the taxable year. Instead, such losses are carried forward and treated as part of the taxpayer’s NOL carryforward in subsequent taxable years.[xxvi]

A taxpayer’s excess business loss for a taxable year – which is determined after the application of the passive loss rules – is the excess of the aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer, over the sum of aggregate gross income or gain of the taxpayer (whether or not related to a trade or business) plus a “threshold amount.” The threshold amount for a taxable year is $250,000 per taxpayer.[xxvii]

In the case of a partnership or an S corporation, the provision applies at the partner or shareholder level. Each partner’s distributive share and each S corporation shareholder’s pro rata share of items of income, gain, deduction, or loss of the partnership or S corporation are taken into account in applying the limitation under the provision for the taxable year of the partner or S corporation shareholder.

The provision was to be effective for taxable years beginning after December 31, 2017.

Excess Business Losses after the Act

The Act defers the effective date of the excess business loss rules.[xxviii] Specifically, the rules will apply only to taxable years beginning after December 31, 2020 and before January 1, 2026.

Consequently, an individual taxpayer who realizes a loss from an operating business in a taxable year beginning before January 1, 2021 – whether as a sole proprietor, as a partner in a partnership, or as a shareholder in an S corporation – and who runs the gauntlet of the basis,[xxix] at risk[xxx] and passive loss rules, will be allowed to apply such losses against their other income for such taxable year, including salary and investment income.

As in the case of NOLs described above, this change will afford some taxpayers an opportunity to claim a refund with respect to their taxable years beginning in 2018 and 2019, and to use the proceeds therefrom in their business.

Business Interest Deductions

Generally speaking, interest paid or accrued by a business is deductible in the computation of taxable income, subject to a number of limitations. In the case of a taxpayer other than a corporation, the deduction for interest on indebtedness that is allocable to property held for investment (“investment interest”) is limited to the taxpayer’s net investment income for the taxable year. Disallowed investment interest is carried forward to the next taxable year.

TCJA Interest Deduction Limitation

The TCJA limited a taxpayer’s deduction for business interest for a taxable year to an amount equal to the sum of (1) business interest income;[xxxi] and (2) 30 percent of the adjusted taxable income of the taxpayer for the taxable year. The amount of any business interest not allowed as a deduction for any taxable year is treated as business interest paid or accrued in the succeeding taxable year. Excess interest deductions are carried forward indefinitely, subject to certain restrictions.[xxxii]

For purposes of this limitation, “adjusted taxable income” generally means the taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss which is not properly allocable to a trade or business; certain other adjustments are also made.

The limitation does not apply to taxpayers with average annual gross receipts for the three-taxable year period ending with the prior taxable year that do not exceed $25 million. In addition, at the taxpayer’s election, any real property trade or business is not treated as such for purposes of the limitation, and therefore the limitation does not apply to such a trade or business.

This rule applies to taxable years beginning after December 31, 2017.

A More Relaxed Rule

In the case of any taxable year beginning in 2019 or 2020, the Act increases the limitation from 30 percent to 50 percent of adjusted taxable income.[xxxiii]

In this way, a taxpayer filing their income tax return for 2019 may take advantage of the increased limitation to further reduce their income tax liability and to retain the tax savings in the business.

In addition, for a taxable year beginning in 2020, the Act permits a taxpayer to use their 2019 adjusted taxable income for purposes of determining their “interest deduction limitation” for 2020. Thus, if the taxpayer’s 2019 adjusted taxable income is greater than that for 2020 – which may very well be the case given our circumstances today – the taxpayer may claim a greater interest deduction and, thereby, further reduce their income tax liability.

What Else?

In addition to the foregoing “amendments” to the TCJA, the Act adds a number of other provisions that are intended to improve the cash flow of many businesses that have been impacted by our strategy for containing the coronavirus. For example, the employee retention credit for qualifying employers,[xxxiv] and the deferred remittance over a two-year period of certain payroll taxes accrued during 2020 may help a number of businesses.[xxxv] Ironically, as the restaurant industry teeters on the brink, the Act retroactively amended the Code to treat “qualified improvement property”[xxxvi] as 15-year property for which bonus depreciation may be claimed – taxpayers affected by this change should file refund claims for 2018 or 2019, as the case may be.

What’s Next?

We have to wonder how a health crisis like the present one should cause as much harm as it has, as quickly as it has. Many businesses will fail that should not have failed. As a consequence, people will lose jobs they should not have not lost. The ripple effects are obvious, and I doubt they will be short-lived.

Those closely held businesses that survive – whether because they were “lean and mean” before the coronavirus-induced economic crisis, or had adequate reserves or other financing sources, or for some other reason, including plain luck – are still likely to have realized not insignificant losses. They are also likely to be in need of new capital.

I am not an economist. I have never served in government. I’m a tax attorney.[xxxvii] I recognize that tax legislation can be a powerful tool for promoting the achievement of long-term[xxxviii] economic and other goals that our society deems worthy. One such goal should be the security of business and, thereby, of jobs.

Why not use the Code to encourage a business to establish emergency reserves for salaries and other expenses for a prescribed period of time (say, between 30 and 60 days?), that may be accessed only in the event of a “crisis” as declared by the President or, where appropriate, by the governor of a State? For example, the business would retain as reserves in a segregated account a portion of those funds that would otherwise have been distributed to owners. In exchange, the business would receive a tax credit. Or provide that a business may claim a tax deduction for the creation of a reserve based on the amounts that would otherwise have been paid as executive compensation?[xxxix] These tax benefits may be coupled with the protection of such accounts from the claims of creditors. In addition, perhaps we can “reform” the purpose for captive insurance to serve as a kind of rainy day fund for these kinds of situations, to which the insureds – a community of businesses – would make tax deductible contributions.

I am sure there are many other possibilities for using the Code in this manner.


[i] The Coronavirus Aid, Relief and Economic Security Act (the “Act”); H.R.748 – 116th Congress (2019-2020).

[ii] Forty-two at last count.

[iii] Perhaps even as a disruption in whatever it is that binds us to one another as humans.

Of course, I am echoing Obi-Wan Kenobi: “I felt a great disturbance in the Force. As if millions of voices cried out in terror, and were suddenly silenced. I fear something terrible has happened.” Star Wars Episode IV: A New Hope.

[iv] There were a couple of record-setting drops in between – a true crash.

[v] Like so many others, I expect that the workplace and the way we work will undergo a major transformation once we have closed this chapter in our history.

[vi] The States have taken a beating. Reserves have disappeared, and surpluses have turned into deficits. As a result of the economic downturn, tax revenues are waning. Many state and local governments are reducing their workforce. They are requesting Federal assistance.

[vii] The legislation was introduced in the Senate in Mid-March, while the House was on recess. After a couple of failed attempts by the Senate leadership to bring the bill to a vote, Nancy Pelosi threatened that the House would offer its own, very different bill. After some typical Washington wrangling, the two parties announced on March 25 that they had come to an agreement. That same day, the Senate passed the Act by a vote of 96-0. The House, though still in recess, approved the legislation by voice vote the next day.

There was one surprise, however, when Rep. Massie of Kentucky tried to force a roll-call vote. John Kerry tweeted: “Congressman Massie has tested positive for being an asshole. He must be quarantined to prevent the spread of his massive stupidity.”

[viii] Including those who have been furloughed or fired.

[ix] This is nowhere near enough.

[x] In case you haven’t gotten up to speed, the loans will be made by private banks, and will be 100% guaranteed by the SBA, will not require collateral or personal guarantees, and will be non-recourse to the owners of the borrowing business. What’s more, the loan is forgivable provided the borrower expends the proceeds during an 8-week period for certain enumerated purposes; in fact, at least 75% must be applied to payroll costs. If forgiven, the loan will not be included in the borrower’s gross income as cancellation of indebtedness income.

SBA-approved banks were supposed to start accepting loan applications under the PPP on Friday, April 3. Unfortunately, several large banks – you may recall that the U.S. taxpayer bailed them out during the Great Recession – are still sitting on the sidelines.

[xi] In general, equal to the lower of (i) 250% of its payroll costs, and (ii) $10 million.

[xii] Including employee wages, salaries, retirement benefits, paid leave, health care, and other items.

[xiii] The PPP is clearly structured to help employees weather the virus-induced storm. It provides them with the funds needed to pay for food and shelter.

But it should be noted that not every business expends over 70% of its budget on the cost of labor – some service businesses may, but not a manufacturer or other capital intensive businesses. The former generally have relatively high margins, while the latter have relatively slim ones.

What’s more, an employee may be better off if they were laid off. The PPP provides for $600 per week to an employee who has lost their job as a result of the health crisis; this is in addition to whatever State benefits they are receiving. In many cases, the total will exceed what they make while gainfully employed.

Of course, in that case, the employer-business will not qualify for a loan under the PPP. (See the required certification, above.)

[xiv] Eight weeks later.

[xv] Query how many closely held businesses maintain “rainy day” funds? It is often the case that they do not enjoy years in which they realize substantial windfalls that may be set aside. The funds are, instead, used to repay loans from third parties and from the owners themselves. Then there is the advice they receive from their attorneys not to leave “excess” funds in the business where they may be reached by its creditors or other claimants. In the case of C corporations that have accumulated earnings in excess of the “reasonable needs of the business,” the accumulated earnings tax has to be considered – perhaps we need to rethink what that means.

See my Op Ed piece in The Empire Report

[xvi] Especially when you consider all the taxes payable by a New York business in respect of employee salary; for example, Social Security, Medicare, Federal Unemployment, NY State Unemployment, NY Re-employment, NY Disability Benefits and, in many cases, NY Metropolitan Commuter Transportation Mobility Tax. Phew!

[xvii] P.L. 115-97.

[xviii] This replaced a graduated rate regime with a maximum rate of 35 percent.

[xix] IRC Sec. 172(c).

[xx] IRC Sec. 172(b)(1)(A) before the TCJA. Different carryback periods applied with respect to NOLs arising in different circumstances. Extended carryback periods were allowed for NOLs attributable to specified liability losses and certain casualty and disaster losses. IRC Sec. 172(b)(1)(C) and (E).

[xxi] IRC 172(b)(2) before the TCJA.

[xxii] The 20-year carryforward period was eliminated.

[xxiii] Section 2303(b) of the Act. Thus, these changes have retroactive effect.

A slightly modified version of the 80% limitation remains in effect for taxable years beginning after 2020.

[xxiv] Section 2303(a) of the Act.

[xxv] IRC Sec. 469.

[xxvi] IRC Sec. 461(l).

[xxvii] Or twice the otherwise applicable threshold amount in the case of a joint return. The threshold amount is indexed for inflation.

[xxviii] Actually, it suspends it retroactively.

[xxix] IRC Sec. 704(d), Sec. 1366(d).

[xxx] IRC Sec. 465.

[xxxi] Business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Business interest income means the amount of interest includible in the gross income of the taxpayer for the taxable year which is properly allocable to a trade or business. Business interest does not include investment interest, and business interest income does not include investment income.

[xxxii] IRC Sec. 163(j).

[xxxiii] Sec. 2306 of the Act.

[xxxiv] Section 2301 of the Act. This amounts to a $5,000 credit per employee. Of course, a business that participates in the PPP is not entitled to the claim.

[xxxv] Section 2302(d)(3) of the Act.

[xxxvi] Section 2307 of the Act. Basically, improvements to a nonresidential building which are placed in service after the building. IRC Sec. 168(e)(3)(E).

[xxxvii] Dr. McCoy anyone? “I’m a doctor, not an engineer.” There were many variations on this line throughout the Star Trek series.

[xxxviii] This should be stressed. Tax policy has to take a long-term view in order to be effective.

[xxxix] Perhaps we can allow the business to borrow a limited amount from its account for short periods (like a bridge)?