Business Tax Provisions in the CARES Act

April 9, 2020

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”) to support individuals and businesses affected by COVID-19 pandemic was signed into law on March 27, 2020. This Client Alert summarizes the various tax provisions in the CARES Act. Please note that there may be additional legislation from Congress addressing COVID‑19, which could introduce further tax law changes.

For additional Chapman Insights addressing legal and regulatory developments related to the COVID-19 crisis, please visit our COVID-19 Legal and Regulatory Developments webpage.

Interest Disallowance

Taxpayers generally are permitted to deduct interest expense allocable to a trade or business, but generally only to the extent of the sum of the taxpayer’s business interest income and 30% of the taxpayer’s adjusted taxable income (“ATI”) for the year. ATI, which is comparable to EBITDA, generally means the taxable income of the taxpayer computed without regard to (i) business interest income or expense; (ii) income, gains, deductions, or losses not allocable to a trade or business; (iii) NOLs; and (iv) for taxable years beginning before 2022, deductions allowed for depreciation, amortization, or depletion.

In the case of a partnership, the interest expense limitation is applied first at the partnership level. Any net interest expense of the partnership that is disallowed will be allocated to its partners. This disallowed interest expense can only be used by a partner in a subsequent taxable year for which 30% of the partnership’s ATI exceeds its net interest expense; for such years, the previously disallowed interest expense can be used to offset the partner’s allocable share of the partnership’s excess ATI.

Pursuant to the CARES Act, the general ATI limitation on the deductibility of net interest expense described above is increased from 30% to 50% of the taxpayer’s ATI for taxable years beginning in 2019 or 2020.  Where the relevant taxpayer is a partnership, this increase only applies to taxable years beginning in 2020. With respect to any interest expense disallowed at the partnership level for the taxable year beginning in 2019, however, a partner in such partnership can deduct 50% of such disallowed interest expense in 2020 without regard to the limitations on deduction of business interest (with respect to a partner in a partnership or otherwise), and 50% of such disallowed interest expense will be subject to the general limitations on excess business expense.

Taxpayers can elect out of each of the above rules. In addition, taxpayers can affirmatively elect to calculate their interest expense limitation for taxable years beginning in 2020 using their ATI from the 2019 taxable year. This election, which would permit taxpayers to claim additional interest expense deductions in 2020, would benefit taxpayers whose ATI was lower in 2020 due to the economic downturn caused by the COVID‑19 pandemic (although the election is available regardless of the reason for any decline in ATI).

Disallowed Losses

The CARES Act temporarily reinstates certain rules regarding taxpayer losses that were repealed by the Tax Cuts and Jobs Act in 2017:

Other Notable Tax Provisions

In addition to the above changes, the CARES Act:

A version of this Client Alert was republished by the Journal of Taxation of Financial Products in July 2020. 

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