Tips for untangling CARES Act tax quandaries

The global pandemic has offered many lessons in impermanence, including how parts of the tax reform legislation that seemed monumental upon its passage two and a half years ago have been temporarily rolled back to provide badly needed relief.

To help CPAs manage the resulting fluctuations for their tax clients, longtime tax educator and immediate past chair of the AICPA Tax Executive Committee Annette Nellen, Esq., CPA, CGMA, will present “Tax Planning Considerations of Temporary TCJA Dismantling” on July 23 as part of ENGAGE 2020, which is being held live online this year.

Nellen’s presentation is a session within the Tax Strategies for the High-Income Individual focus of ENGAGE, which is sponsored by the AICPA and the Chartered Institute of Management Accountants (CIMA) and is one of the largest accounting and finance conferences in North America. CPAs can learn more and register at aicpaengage.com.

Congress’s modifications of the legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, rolled back some TCJA provisions that had limited deductions, balancing other TCJA measures that brought down tax rates, eased tax accounting, and provided relief for businesses and individuals in other ways.

“I’m looking at how some of the COVID legislation has, what I call, undone some of the Tax Cuts and Jobs Act,” Nellen said in an interview.

Nellen, a professor at San José State University and director of its Master of Science in Taxation program, will focus mostly on the postponements and temporary changes to some TCJA business provisions made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. These include the shifts in treatment of net operating losses (NOLs) (Sec. 172(b)); temporary removal of the limitation on excess business losses of noncorporate taxpayers (Sec. 461(l)); acceleration for corporate taxpayers of alternative minimum tax (AMT) credits (Sec. 53(e)); and a technical correction to the TCJA changing the recovery period for qualified improvement property, which will allow bonus depreciation to be taken on that property (Sec. 168(e)(3)(E)).

Under the TCJA, NOLs in tax years in and after 2018 could not be carried back. Under the CARES Act, NOLs in 2018, 2019, and 2020 can be carried back five years. Also, the CARES Act temporarily removed the TCJA’s limitation on NOL deductions to 80% of taxable income.

Forward into the past

“They were changed as if they weren’t going into effect until the future,” Nellen said of NOLs and excess business losses, “even though, of course, taxpayers already filed 2018 returns that were applying those items. So, they’ll need to amend 2018 returns. And, of course, when you start amending prior years’ returns, that could free up other things.”

“I’m guessing a lot of taxpayers and practitioners are still waiting to see if the tax software has been updated to help them to do this,” Nellen said. The software companies, in turn, are still probably waiting for the IRS to issue guidance on resolving conflicts and complications of amending returns, she added, mentioning the implications for C corporations of the NOL carryback provisions on AMT minimum tax credits and AMT NOLs, which the IRS had addressed only a few days earlier in nonbinding frequently asked questions on its website.

The talk will also likely encompass other provisions of the CARES Act and, to a lesser extent, the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, items unrelated to the TCJA but notable for their many unsettled tax treatments. These include forgiveness of Payroll Protection Program (PPP) loans, payroll tax deferrals, and the employee retention credit.

From a practice perspective, Nellen plans to remind CPAs about employers’ need to document the many parameters of the PPP loan forgiveness requirements, as well as the requirements for the FFCRA’s sick leave and family leave credits and the employee retention credit. And, under the CARES Act, payment of half of eligible payroll taxes can be deferred until the end of 2021 and the other half until 2022. Will employers remember those due dates? Will they even still be in business then? CPA tax advisers to those employers — or even in some cases CPAs providing payroll services to those employers — would do well to recommend or devise some foolproof tracking method, Nellen said.

Virtues of going virtual

Nellen has already participated in some conferences and classes from her home in California. In mid-March, she was a co-presenter to an audience in the California Society of CPAs.

In some ways, online interaction with an audience is more direct and versatile than in-person, she said. Online, the presenter (and attendees) can see names and faces in little screen boxes, while from a conference hall’s spotlighted podium, “you can’t see anyone’s face that well.” And even in-person conferences nowadays generally have attendees submit questions anonymously via an app. Moreover, online sessions more easily allow breakout discussion groups. Similarly, Nellen said that at San José State University, she has found online lectures and follow-up sessions to be conducive to student interaction in projects and study groups.

This ability for even introverts to address a large group from their computer screens more comfortably than in a conference hall could enrich the session as a learning experience, Nellen said, especially since many conflicts of the partial TCJA rollback with other provisions will likely be discovered only as CPAs encounter them in their practices.

Scouting for traps

One direct effect of the public health crisis and stay-at-home orders Nellen plans to cover that practitioners might have lost sight of is the effect of employee headcount changes on the Sec. 4980H penalty enacted in 2010 by the Patient Protection and Affordable Care Act, P.L. 111-148, assessed on employers that fail to offer their full-time employees an opportunity to enroll in minimum essential coverage. The IRS and Congress have offered only minimal COVID-19-related relief or guidance on that requirement to date. She has tried to anticipate other such provisions by which taxpayers might feel ambushed.

Still, “I certainly haven’t discovered all the traps in the recent law changes and how they interact with other tax rules,” Nellen admitted. But locating and sharing them is what an AICPA conference — in-person or virtual — does best, she added.

“Hopefully, at ENGAGE, this will cause people attending to say, ‘Oh, yeah, I’ve got another one,’” Nellen said. “And I’m hoping they’ll share it with the other attendees. Because we’re all in this together.”

The AICPA and CIMA’s most comprehensive conference, ENGAGE 2020, is all-digital this year. Join us online July 20–24 for keynotes and sessions on accounting and auditing, tax, technology, leadership, personal financial planning, and more. Several sessions will cover the impact of COVID-19 and related legislation affecting clients, practice management, and the profession at large.

— Paul Bonner (Paul.Bonner@aicpa-cima.com) is a JofA senior editor.