The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, contains a wide range of emergency tax relief and other targeted aid to businesses and individuals whose economic well-being has been damaged or threatened by the coronavirus pandemic. In this episode recorded on April 14, Chris Hesse, CPA, the AICPA Tax Executive Committee chair, will analyze how the act’s provisions allowing carryback of net operating losses for 2018 through 2020 interact with other new provisions. He’ll also assess businesses’ early experience applying for loans through the act’s new Paycheck Protection Program. And Chris will reflect how, on this eve of what would have been the 2020 tax filing deadline but for the IRS’s postponement of the due date for 90 days, this has been a tax season like none other.
Editor’s note: A few hours after this podcast was recorded, the Small Business Administration issued an interim final rule with additional eligibility criteria for the Paycheck Protection Program addressing participation in the program by partnerships and partners, sole proprietors, and other individuals with self-employment income.
What you’ll learn from this episode:
- How many income tax returns for 2019 and 2018 will need to be revised or amended, in sometimes surprising ways.
- How the CARES Act’s provisions involving net operating loss carrybacks, excess business loss limitations, and bonus depreciation of qualified improvement property might interact with one another.
- Areas of uncertainty in applying for the Act’s Paycheck Protection Program — not the least of which is the future tax treatment of loan forgiveness.
- What’s in store for the remainder of 2020’s now longer tax season.
Play the episode below or read the edited transcript:
To comment on this podcast or to suggest an idea for another podcast, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com.
Paul Bonner: Hello, and welcome to the Journal of Accountancy podcast. Today, we’ll hear from Chris Hesse, CPA, about a few of the many tax law changes enacted recently in response to the coronavirus pandemic, to help taxpayers regain their footing and to get the U.S. economy restarted. I’m Paul Bonner, a senior editor at the JofA.
We’ll focus on businesses’ ability to carry back net operating losses for 2018 through 2020 and removal of the excess business loss limitation. And we’ll reflect on the Small Business Administration’s new Paycheck Protection Program and its tax implications.
As chair of the AICPA’s Tax Executive Committee, Chris has been on the front lines of advocating for these and other relief measures before the IRS and Treasury and Congress. He’s also a tax principal in the National Tax Office of CliftonLarsonAllen in Kennewick, Wash.
Thank you, Chris, so much for joining us. We’re here to talk about the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act, and the provisions of interest to practitioners and taxpayers everywhere. Thank you, Chris for joining us.
Chris Hesse: Thanks for inviting me, Paul. it’s a pleasure to once again join in the podcast and see if we can get some word out of clarification to our members.
Bonner: Yes, and I want to thank you on behalf of all members everywhere for your work with the Tax Executive Committee of the AICPA leading the way in advocacy on behalf of practitioners and members with the Treasury and IRS, and we’ve seen, certainly, some benefits from that already.
Hesse: Certainly, the advocacy team has been nonstop since the middle of March when the indications were that we needed more time in order to file tax returns, and Treasury and the IRS heard that, and we’ve had these three different releases from the Internal Revenue Service initially giving us a deadline on payments. And then we said we also need a deadline on the filing of the forms, and four days later we got the change allowing for the postponing of the due date for the filing of the forms and the payments.
But there’s still a considerable amount of confusion coming out of that because of some language that the Treasury used in the notice. And then finally, this last week we had the complete postponement of the due dates and payments for an expanded number of forms and an expanded number of taxes, adding the estate tax in on the postponement. So I think we can finally breathe and relax a little bit, with some understanding that all of the income tax and the gift tax and the estate tax have now been delayed until that July 15 date.
Bonner: It’s certainly of value I’m sure to the many tax preparers who otherwise, on this eve of April 15, would be tearing their hair out, I’m sure.
Hesse: We could not have possibly handled the extensions that we would need to have calculated with a reasonable estimate of the amount of tax due, together with the effort that has been expended by all of the CPAs across the country in working with their clients on this Paycheck Protection Program, the PPP loans, through the SBA. And all of the work of the tax preparers that has been shifted over to assisting and working with the clients on filing for the PPP loans.
We were already working, as we have since 1986, on over 100% capacity in trying to get work done through tax season, and adding the PPP loans on top of that just couldn’t have been done, in conjunction with the less efficient work environment that we’re all facing with the sheltering in place and working from home, and not as efficient of an environment that we’re in. So again, kudos to the advocacy team for working with the IRS and giving us this extension — I don’t like to use the word “extension” because it’s not really an extension, it’s a change in the due date — and I think that has implications for statute issues and when we understand that the due date has been postponed, many things move along with that change to where we don’t have the rules on extensions, we have the rules on what’s the original due date to follow, and if we understand it that way it helps in understanding what forms need to be prepared and what tasks need to be done by, now, July 15 rather than April 15.
Bonner: Right, and it’s not as though practitioners are going to be twiddling their thumbs till July 15, is it? Besides the Paycheck Protection Program you mentioned, in applications and assisting with those, there are amended returns, I imagine, for many taxpayers, business taxpayers, to take advantage of one provision in the CARES Act in particular, and that is the ability to carry back net operating losses up to five years — well, it is five years, not up to five years — and that’s going to be a lot of work of refiguring 2019 taxes and filing amended returns, isn’t it?
Hesse: Yes, some early returns for 2019 had already gone in, of course, and there was no need to attach, if somebody wanted to, there was no reason to attach a waiver of their net operating loss, because other than farms and certain insurance companies, there wasn’t an opportunity to carry back a net operating loss. But 2018 is the bigger concern. Now that the door has been opened on 2018, we have two other changes that came in as a result of the CARES Act affecting 2018. The taxpayer may have already had a loss for 2018. And as you identified, that loss can now be carried back five years. That’s the default rule: It has to be carried back five years unless the taxpayer attaches an election to waive or forgo the carryback period. All of those elections normally have to be made with the tax return. 2018 returns have already been filed, but of course, the CARES Act allows for the change in making the election; the election can be made if they want to forgo that carryback. But as you mentioned, if you don’t waive the carryback, it has to go back five years and then run though the calculations as to how much of the net operating loss is absorbed, and then it carries to four years, and three years back, etc.
But the net operating loss may not be that which was reported on the 2018 return because a taxpayer may have had a limitation, they may have had an excess business loss, which maybe because of that they didn’t have a net operating loss, but the CARES Act also said this excess business loss, in Sec. 461(l) of the Code, is delayed, so they retroactively eliminated the excess business loss calculation. Those taxpayers who were subject to that, had an excess business loss, now they might have on their 2018 tax return a net operating loss where they didn’t have one originally.
And yet another change is the qualified improvement property, which because of the glitch in the Tax Cuts and Jobs Act didn’t qualify for bonus depreciation and now it does retroactively qualify for bonus depreciation. And that also may toss the taxpayer into a net operating loss situation for 2018. So as you said, we have an amended return, probably, that we need to prepare for 2018. And then that opens the door, if there’s a net operating loss, to a net operating loss carryback five years back to 2013 and the opportunity then for the quick carryback and separate notice from the IRS. I’ll pause there for a moment; there’s a lot to digest out of that.
Bonner: There is, and that quick carryback of losses I think has been promised by the IRS that they would quickly process those, as I understand it, but some have questioned whether they’d actually be able to, administratively; they’re having their own stay-at-home orders. And because those forms that are principally used for that can be filed only on paper, what happened there for Form 1139, Corporation Application for Tentative Refund, and Form 1045, Application for Tentative Refund? Some good old-fashioned tech, which the IRS is so good at, came to the rescue, didn’t it?
Hesse: Yes, as IRS mentioned, it was yesterday, I think, Monday the 13th, sent out a news release. Understanding that the service centers, as you said, have their own stay-at-home orders and very few people actually processing within the Internal Revenue Service, so how do you accomplish what the law requires, to provide this quick carryback, if no one’s there to open the mail? And as you are alluding to, the IRS sent out a news release saying, yes, we can fax now our Forms 1045 and 1139 to the service center, and this is available even if the taxpayer had already submitted a paper form.
But there are limitations on this, too. The IRS doesn’t want the fax machines to be overloaded, and the form submission is limited to 100 pages. There’s five years of involvement there, with alternative minimum tax calculations for individuals; we typically put in, well, we’re required to submit with the form, here are the other forms in the tax return that had changed as a result of this carryback. It may exceed 100 pages, and then you don’t qualify. The fax line will be open, according to the IRS, on Friday the 17th. I don’t know what time Friday on the 17th, but be that as it may, I think we can expect that fax line will be very busy on Friday the 17th as taxpayers get in line for filing their quick carryback claims.
Bonner: They’d better have some heavy-duty machines there, I suppose.
Hesse: As you say, a little bit older technology and some relief, because typically, the IRS likes to see wet signatures, not photocopied signatures, on forms, but in this time of the pandemic there are a lot of changes that are being made and allowances that are being made to accommodate the filing so that the refunds can be processed and issued to put some money back into the hands of the taxpayers quicker than otherwise might have been available.
Bonner: For a federal bureaucracy, that’s fairly flexible, I’d have to say. But you know, that begs the question, Chris, why aren’t these forms e-filable anyway?
Hesse: I really don’t know. It is a quick carryback. Technically, it’s not a refund claim, because the IRS issues the checks out to the taxpayers and then later processes a claim. But I’m sure there’s a legal reason, or it’s probably a processing reason as to all of the interconnections with the several years’ worth of returns that are affected. As to why that isn’t in an electronic form, I really don’t know.
Bonner: Well, that barely scratches the surface of the CARES Act provisions, but I think those net operating loss provisions are going to be some of the most salient for many taxpayers. Could we shift for a bit here to the PPP, the Paycheck Protection Program, because I know there’s been lots of interest among small businesses in qualifying for these loans, which are forgivable; they have many qualities that make them attractive. What’s your perspective on this?
Hesse: Well, the CARES Act, as you say, brought forward this Paycheck Protection Program, and it’s not in the Internal Revenue Code. And just from reading the provision, of course, this was passed very quickly, it was written very quickly, it was passed very quickly. No committee hearings and no stakeholder involvement to vet out the various provisions, because, typically, bills in Congress could take several months as they have hearings and take testimony as to the exact wording as to what this means. Now the Paycheck Protection Program didn’t have that opportunity, so I don’t think it’s written by people who have experience in writing tax law, and, from appearances it has references to the Internal Revenue Code in the statute but not very clear as to what some of the provisions mean, as to, here’s the amount of the loan that’s available, take your average payroll over the prior 12 months. Well, what prior 12 months? And some references in the Small Business Administration that says look at calendar 2019; other references say the 12 months prior to the application of the loan, well, is that 12 calendar months, or is it counting back from today? If I applied today, on April 14, do I look at April 15, of 2019, through April 14 of 2020? Not very clear. It might make a difference. Might have a seasonal business. What’s a seasonal business? That’s not really defined in the statute, so you’re left with SBA regulations to tell us what a seasonal business might be. What’s payroll costs? Is it gross payroll, or is it net payroll? What taxes do we subtract out of it, if any? What do we add to it in the way of health insurance premiums? How do we calculate this for a self-employed person? We still don’t know today as to how a self-employed person with no payroll calculates their payroll costs based upon their own self-employment income [see editor’s note above]. A partner in a partnership: Does the partner apply individually, or is that partner’s self-employment income part of the partnership’s submission? All of these questions.
I’ll give the Small Business Administration and Internal Revenue Service and Treasury kudos for getting out information in record speed. But, of course, the entire purpose of the PPP is to get money into the hands of businesses in record speed so that they can stay afloat while commerce has pretty much been shut down within the United States. I’ve thrown a lot of stuff out there; that’s just touching on the application; it doesn’t even touch on the forgiveness side or the spending side of the loan.
Bonner: There are permitted purposes for spending, one of which I think is for payroll, right?
Hesse: That is what seems to be the purpose here; you borrow the money based upon your payroll costs, and then you spend the money based upon a combination of payroll costs, utilities, rent, the agreements that were in place earlier, mortgage interest expense, and other interest expense qualifies for the payments coming out of the loan. And then if you have spent the money on the defined amounts of payroll costs, rent, utilities, and mortgage interest, then some or all of the PPP loan may be forgiven.
And as you identify, what the SBA is saying is, we want 75% of the money to be spent on payroll because that’s the purpose of the program. But, of course, that 75% provision isn’t in the statute; that seems to be the SBA taking some liberty in putting a restriction on the spending in order to qualify for the forgiveness that isn’t in the statute. So it’s questioned, and how will that affect how the Internal Revenue Service interprets the provision, as to whether it will recognize the forgiveness as not taxable? How many battles are we going to have in a couple of years as the borrowers then question or litigate whether they should have been forgiven?
In essence, it’s structured as a loan program. I think the government was attempting to identify what agency in government has the ability of issuing loans, and yet the magnitude of this program versus what the SBA’s annual lending has been — it’s orders of magnitude greater.
So it’s doing a yeoman’s job of accepting applications. I don’t know whether there’s a different agency in the government that could have done it faster or better. So kudos to them, but we still have a lot of unknowns here, and different banks have interpreted the rules differently; there’s not coordination as to what the rules are; and whether there’s going to be sufficient funds. Congress is debating whether and when to release additional funds for the program.
Again, many unknowns that I’m sure will take some years of litigation in the courts to figure out whether in the end how much money needs to be paid back, again, structured as a loan program but really designed to act as a government grant to the extent of the forgiveness of the debt.
Bonner: Well, yes, there are many things that remain to be seen with that, aren’t there? Just in the few minutes — we’re just about out of time — we have, we might just reflect on this eve of April 15 and how different it is! What would you say to all those tax preparers out there?
Hesse: As you say, here we are, April 14; typically, we would be winding down. In my experience, the firms that I’ve been with, we’d be winding down and not preparing any more returns today because of the time that it takes to process returns, and getting them reviewed and getting the clients in, working on extensions.
There’s not that urgency today. This is my 41st tax season, and it’s an entirely different feel because I don’t feel that tax season is ending tomorrow. It has for the last 41 years ended tomorrow, but it’s not going to be ending tomorrow now. And, frankly, I always did look forward to April 15 because we could breathe a sigh of relief, but we no longer have this deadline tomorrow, and our new deadline is July 15. But I really don’t want to be spending the next three months with the same type of workload that we typically put out during what we have always viewed as tax season, and I hope we’re not out there on July 13, July 14, rushing around. But I hope that these three months give us some time that we can actually continue working and processing through the preparation and review of the tax returns for our clients so that we don’t rush up against this hard deadline, that we can actually ease into the deadline.
Bonner: We can wish for a remainder of tax season, even though it’s now elongated, to be suffused with a little more clarity than seems apparent at the moment, right?
Hesse: Yes, and again, we’ve said there’s been a lot of changes, and it seems like everything is coming out piecemeal, but we all need to step back and recognize that this is an unprecedented time, and the Internal Revenue Service has done a yeoman’s job. The amount of guidance that the IRS has released here over the last three weeks as they listened to the stakeholders, to the AICPA, to the concerns of the tax preparation community and the taxpayers, that we appreciate the allowances that have been granted in allowing us to work through this unprecedented time and that some of the things that we’ve learned over the last 40 years as we prepare tax returns, some of those rules, they don’t apply this year. I suppose part of the concern is, well, which rules don’t apply and which still do apply? We probably won’t ever know the final answer, all of the answers to that question, but we’ll do the best we can and continue proceeding down the road to the July 15 date as our due date for 2020 rather than our April 15 due date.
Bonner: Right. Chris, thank you so much, and I pray the best for the remaining tax season, long may it be, for you and for everyone else.
Hesse: Yes, well stay safe, everyone. Keep calm and carry on.