In a previous article, we wrote about federal aviation excise tax relief under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law by President Trump on March 27, 2020. The CARES Act, however, contains additional tax provisions that may potentially benefit the business aviation sector, including provisions related to excess business losses, net operating losses, and excess business interest expenses.
Excess Business Losses
The Tax Cuts and Jobs Act of 2017 (“TCJA”) created Section 461(l) (that’s a little “L”) of the Internal Revenue Code, which limited the deductibility of “excess business losses” for individuals and taxpayers other than corporations. Under this provision, an “excess business loss” exists when the taxpayer’s total deductions from all its trades or businesses exceeds the taxpayer’s gross income from all its trades or businesses by more than $250,000 ($500,000 for married taxpayers filing jointly). Effectively, only $250,000 (or $500,000) of excess business losses were allowed to be deducted against non-trade or business income in the year of loss; instead any excess business losses would have to be carried forward to future tax years and treated as a net operating loss (subject to rules and limitations under Section 172 of the Internal Revenue Code). This new provision was effective for tax years beginning January 1, 2018 or later.
The CARES Act has changed the effective date for these excess business loss limitations, delaying the provision’s effectiveness until January 1, 2021.
Non-corporate taxpayers that purchased aircraft for use in a trade or business in 2018 or 2019 may have had large depreciation deductions—possibly even a 100% bonus depreciation deduction—that may have resulted in excess business losses that could not be offset against non-trade or business income. The CARES Act delay of the effective date of Section 461(l) allows taxpayers to amend their 2018 tax return or amend or file their 2019 tax return without this limitation and offset the excess business loss against other income.
In addition, individuals and non-corporate taxpayers purchasing aircraft in 2020 for use in a trade or business will also not be subject to the excess business loss limitations. As such, this may provide a new incentive to purchase business aircraft in 2020.
Net Operating Losses
A “net operating loss” arises when a taxpayer’s allowed deductions in a current year exceed the taxpayer’s taxable income in such year. For the tax years beginning January 1, 2018 or later, the TCJA imposed significant limitations on the deductibility of net operating losses under Section 172 of the Internal Revenue Code. More specifically, the TCJA disallowed the carryback of net operating losses (previous law allowed carrybacks to the two immediately preceding tax years) and placed a limit on the amount of net operating losses that a taxpayer could take in a tax year, equal to 80% of the taxpayer’s pre-net operating loss deduction taxable income. The TCJA did, however, provide for the ability to carryforward net operating losses indefinitely (previous law limited carryforwards to the 20 immediately succeeding tax years).
The CARES Act has provided for a 5-year carryback of net operating losses for tax years beginning January 1, 2018 and ending December 31, 2020. So, any net operating losses for 2018, 2019 or 2020 calendar tax years can be carried back to any of the immediately preceding five calendar tax years. In addition, for any tax year beginning prior to January 1, 2021, the CARES Act has suspended the 80-percent income limit on the amount of net operating losses that a taxpayer can take in a tax year. As such, tax returns for many prior tax years may be amended by taxpayers accordingly.
For taxpayers purchasing aircraft for use in a trade or business, depreciation deductions (such as 100% bonus depreciation) that result in overall losses could result in the ability to amend previous years’ tax returns to obtain refunds of taxes paid. These changes in law will be especially beneficial to taxpayers that had a significant amount of taxable income in previous years without enough taxable income in the current year to offset bonus depreciation in a new aircraft.
Excess Business Interest Expenses
“Business interest expense” refers to any interest expense that is properly allocable to a trade or business. For tax years beginning after December 31, 2017, the TCJA imposed (under Section 163(j)) a limitation on deductions for business interest expense generally equal to the sum of the taxpayer’s business interest income for the taxable year plus 30% of taxpayer’s adjusted taxable income for the taxable year. Any excess interest could be carried forward and deducted in future tax years. This limitation did not apply to certain businesses, including those with gross receipts of $25,000,000 or less.
Under the CARES Act, for any tax years beginning after December 31, 2018 and before January 1, 2021, the 30% adjusted taxable income limitation in the business interest expense calculation set forth above has been increased to 50% of adjustable taxable income for the taxable year. Taxpayers can elect out of the increased limitation.
The CARES Act also provides taxpayers the right to use their 2019 adjusted taxable income in lieu of their 2020 adjusted taxable income for purposes of calculating their business interest expense limitation in 2020.
These changes pertaining to the deductibility of business interest expenses may prove beneficial to taxpayers that are financing aircraft because these taxpayers may be able to deduct business interest expenses that were disallowed under prior law.
NOTE: This information is an introduction to tax provisions in the CARES Act and is therefore general in nature. Please contact one of our experienced aviation attorneys directly to discuss your specific business/personal tax obligations.