Under the TCJA passed in December 2017, NOL carrybacks were no longer permitted for years beginning after December 31, 2017. However, due to the Coronavirus pandemic (COVID-19) and the resulting negative impact on small business liquidity, a rule change was made to temporarily help alleviate this situation.

Rule Change:

Taxpayers may now use a five-year carryback for net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).

The CARES Act also temporarily removes the 80% of taxable income limitation. Therefore taxpayers may utilize NOLs to offset 100 percent of taxable income in tax years 2018, 2019, and 2020.  After 2020, and NOL deduction will be limited to 80 percent of taxable income.

The IRS provided guidance that:

• Extends the deadline for filing tentative refund claims for NOLs arising in 2018 tax years.
• Allows late elections for waiving the carryback period for NOLs arising in 2018 tax years.
• Expedites refund claims that are faxed.
• Provides guidance for fiscal-year taxpayers with a 2017/2018 NOL year.

Deadline Extended for Filing Refund Claims for 2018 NOLs

To claim a refund of taxes for an NOL carryback, taxpayers file a single tentative refund claim that covers all carryback years, or an amended return for each carryback year.

• Individuals file a tentative refund claim on Form 1045, Application for Tentative Refund.
• Corporations use Form 1139, Corporation Application for Tentative Refund.

Filing Form 1045 or Form 1139 requires the IRS to process the refund request within 90 days. These forms eliminate the burden of filing multiple amended returns to account for each carryback year if the NOL is not fully absorbed in the first carryback year.

Filing Deadlines for Forms 1045 and 1139

An application for tentative refund is generally due no later than the last day of the tax year following the tax year in which the NOL arose.

By the time the CARES Act was enacted on March 27, 2020, this deadline had expired for:

• the 2018 tax year in the case of calendar year taxpayers, and
• tax years that ended before March 27, 2019, for fiscal-year taxpayers,.

Consequently, the IRS, extended the deadline for six months for NOLs that arose in a tax year that began during 2018 and ended on or before June 30, 2019. Therefore, calendar year taxpayers have until June 30, 2020 to file a tentative refund claim for the 2018 tax year.

Taxpayers taking advantage of the six-month extension should write the following on the top of their Form 1045 or Form 1139.:

• “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment”

You Can FAX Your Form 1045 or 1139

The IRS requests, but does not require, taxpayers to FAX tentative refund applications filed after April 16, 2020.

The IRS may not be able to process mailed applications within the statutorily prescribed 90-day period because many IRS personnel are working at home and processing centers are closed or understaffed. However, the IRS is trying to process FAXED refund requests within the 90-day period.

Where to Fax:

• Individuals should fax Form 1045 to 844-249-6237
• Corporations should fax Form 1139 to 844-249-6236.

Amended returns should NOT be FAXED along with the refund claim because the IRS cannot process a FAXED refund claim for taxes shown on an amended return for a carryback year until the amended return is first processed.

The IRS will process FAXED refund claims in the order they are received. These procedures remain in effect until further notice.

Late Waivers of 2018 and 2019

Generally, a taxpayer must file an election to waive an NOL carryback period by the due date, including extensions, of the income tax return for the year in which the NOL arose (Code Sec. 172(b)(3)). However, the IRS allows taxpayers to file late waivers for NOLs arising in tax years beginning in 2018 or 2019. The election must be made by the due date, including extensions, for filing the income tax return for the first tax year ending after March 27, 2020.

Special Rules for Fiscal Year 2017/2018 NOLs

The CARES Act includes a technical correction clarifying that the elimination of the carryback period originally enacted by the Tax Cuts and Jobs Act applies to NOLs arising in tax years beginning after 2017 and not to tax years ending after 2017.

As a result of this change, taxpayers with an NOL that arose in the 2017/2018 fiscal year may now carry back these losses under the rules that applied before the Tax Cuts and Jobs Act. The carryback period for these NOLs is generally two years.

The CARES Act also includes a specific provision extending the deadline for filing refund applications for the 2017/2018 NOL year on Form 1045 or Form 1139. Taxpayers with a 2017/2018 NOL may file their tentative refund claim no later than July 27, 2020. Waivers of the carryback period must also be filed on an amended return or a Form 1045 or Form 1139 no later than July 27, 2020.

Other NOL Items of Note

In addition to the five-year carryback period and clarification of the carryback rules for 2017/2018 NOLs, the CARES Act:

• Delays, until tax years beginning after 2020, a rule in the Tax Cuts Act that allows an NOL arising in a tax year beginning after 2017 to only offset 80% of taxable income in a carryback or carryforward year
• Clarifies that 80% of taxable income is computed by reducing taxable income by pre-2018 NOLs and the deductions claimed under IRC §199A for qualified business income from a pass-through entity or sole proprietorship and IRC §250 for foreign-derived intangible income for global intangible low-taxed income
• Delays until tax years beginning after 2020, IRC §461(l), which treats excess business loss deductions of individuals as an NOL carryover
• Allows taxpayers to elect to exclude from the five-year carryback period any carryback year in which a repatriation tax is imposed under IRC §965

Conclusion:

The five-year carryback will help to add some needed cash into the bank accounts of many businesses. But keep in mind, this relief is temporary. NOLs arising in tax years beginning after 2020 do not have a carryback period, with the exception of a two-year carryback for farming losses. An unlimited carryforward period continues to apply to all post-2017 NOLs.

The CARES Act and the SECURE Act have created changes in 2020 for retirement plans.

Required Minimum Distributions (RMDs):

Under the SECURE Act, the beginning age for taking Required Minimum Distributions (RMDs) rises from 70½ to 72. Keep in mind, this change only applies to account owners who turned 70½ after 2019.

The CARES Act allows seniors to skip their RMDs in 2020 without penalty

IRA Contributions:

The SECURE Act allows owners of traditional IRAs to make contributions past the age of 70½ starting in 2020.

In addition, people having a baby or adopting a child can now take payouts from IRAs and 401(k)s of up to $5,000 without having to pay the 10% fine for pre-age-59½ withdrawals.

Graduate and Post-doctoral Students:

Starting in 2020, fellowships, stipends or similar payments to graduate or post-doctoral students will be treated as compensation for purposes of making IRA contributions. This change is designed to help qualifying students start saving earlier for retirement because prior to this change, contributions to a retirement account generally may not exceed your compensation.

Inherited IRA and Workplace Retirement Accounts:

The rules for withdrawing money from inherited IRAs and workplace retirement accounts have been tightened via the SECURE Act. The funds in many accounts now need to be fully within 10 years of the death of the IRA owner or 401(k) participant. However, exceptions allow payouts over the beneficiary's life expectancy for surviving spouses, those who are disabled or chronically ill, minor children until they reach 18 and beneficiaries who are not more than 10 years younger than the account owner. (Inherited accounts of individuals who died before 2020 are NOT affected by this change.)

• Married Filing Jointly: $24,800
• Single: $12,400
• Married filing separately: $12,400
• Head-of-household: $18,650
• Additional Standard Deduction:
  • Age 65 or older or blind:
    • Married-per spouse, filing jointly or separately:
      • For taxable years beginning in 2020, the additional standard deduction amount under § 63(f) for the aged or the blind is $1,300 ($2,600 for age and blindness).
    • The additional standard deduction amount is increased to $1,650 if the individual is also unmarried and not a surviving spouse.

Tax rates on long-term capital gains and qualified dividends for 2020:

• The 0% rate applies if taxable income is:
  • $1 through $80,000 for married filing jointly and Qualifying Widow(ers)
  • $1 through $40,000 for single filers
  • $1 through $53,600 for head-of-household filers
  • $1 through $40,000 for married filing seaparately
• The 15% rate applies if taxable income is:
  • $80,001 through $496,600 for married filing jointly and Qualifying Widow(ers)
  • $40,001 through $441,450 for single filers
  • $53,601 through $469,050 for head-of-household filers
  • $40,001 thorough $248,300 for married filing seaparately
• The 20% rate applies if taxable income is:
  • $496,601 and over for married filing jointly and Qualifying Widow(ers)
  • $441,451 and over for single filers
  • $469,051 and over for head-of-household filers
  • $248,301 and over for married filing seaparatel
• Collectibles gain-maximum rate: 28%
• Unrecaptured Section 1250 gain on depreciated real estate-maximum rate: 25%
• 3.8% surtax on net investment income for 2020:
  • A 3.8 percent Net Investment Income Tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.
  • Individual: the NIIT is 3.8 percent on the lesser of:
    • the net investment income, or
    • the excess of modified adjusted gross income over the following threshold amounts:
      • $250,000 for married filing jointly or qualifying widow(er)
      • $125,000 for married filing separately
      • $200,000 in all other cases
  • Estate or trust: NIIT is 3.8 percent on the lesser of:
• (A) the undistributed net investment income, or
• (B) the excess (if any) of:
  • the adjusted gross income over the dollar amount at which the highest tax bracket begins for an estate or trust for the tax year. (For estates and trusts, the 2020 threshold is $12,950).

Definition of Net Investment Income and Modified Adjusted Gross Income:

In general, net investment income for purpose of this 3.8% tax, includes, but isn't limited to:

• interest, dividends, certain annuities, royalties, and rents (unless derived in a trade or business in which the NIIT doesn't apply),
• income derived in a trade or business which is a passive activity or trading in financial instruments or commodities, and
• net gains from the disposition of property (to the extent taken into account in computing taxable income), other than property held in a trade or business to which NIIT doesn't apply.

The NIIT applies to income from a trade or business that is (1) a passive activity, as determined under § 469, of the taxpayer; or (2) trading in financial instruments or commodities, as determined under § 475(e)(2).

The NIIT does NOT apply to certain types of income that taxpayers can exclude for regular income tax purposes such as tax-exempt state or municipal bond interest, Veterans Administration benefits, or gain from the sale of a principal residence on that portion that's excluded for income tax purposes.

Modified adjusted gross income (MAGI):

For purposes of the 3.8% Net Investment Income Tax, MAGI is generally defined as adjusted gross income (AGI) for regular income tax purposes increased by the foreign earned income exclusion (but also adjusted for certain deductions related to the foreign earned income).

For individual taxpayers who haven't excluded any foreign earned income, their MAGI is generally the same as their regular AGI.

Increase in deduction for charitable donations for 2020 under the CARES Act. This is an above-the-line deduction. This means, you get this deduction even if you don't itemized deductions on Schedule A.

The 60%-of-AGI limit on deductions for cash donations by people who itemize is suspended (gifts to donor-advised funds and private nonoperating foundations are excluded).

Nonitemizers can also deduct up to $300 of charitable cash contributions.

A number of expired or expiring tax breaks were revived late last year, including the deductions for:

• Mortgage insurance premiums
• College tuition
• The $2-million exclusion for forgiven mortgage debt
• The credit for certain energy-saving improvements to your home.

Tip: These tax breaks also apply to 2018l. If you qualified for any of them in 2018, consider filing an amended 2018 return to claim a refund.

The Families First Coronavirus Response Act includes tax relief for self-employed people who can't work because of the coronavirus. Many employers are required to provide paid sick and family leave for workers affected by the virus.

Tax credits against the self-employment tax are allowed for self-employed people who can't work for a reason that would entitle them to coronavirus-related sick or family leave if he or she were an employee. (Employers also get tax credits to help them pay for the paid leave they are required to give their employees.)

The CARES Act allows employers to pay down up to $5,250 in employees' college loans in 2020. The payments are excluded from the employees' wages for federal tax purposes. The $5,250 cap applies to both student loan repayment benefits and other educational assistance, such as tuition, fees, and books offered by an employer under current law.

For 2020, the adoption credit can be claimed up to $14,300 of qualified expenses ($14,080 for 2019). The full credit is available for a special-needs adoption, even if it costs less. The credit begins to phase out for filers with modified AGIs over $214,520 and is eliminated at $254,520 ($211,160 and $251,160, respectively, for 2019). The exclusion for company-paid adoption and is increased from $14,080 to $14,300 for 2020.

The lifetime estate and gift tax exemption for 2020 increases from $11.4 million to $11.58 million—$23.16 million for couples ($22.8 million for 2019) if portability is elected by timely filing Form 706 after the death of the first-to-die spouse.

The estate tax rate remains steady at 40%

The 2017 tax reform law of the "kiddie tax" has been repealed.

Prior to 2018, children age 18 or younger (under 24 if a student) were taxed on unearned income in excess of a certain amount at their tax rate or their parents' rate, whichever was higher.

The tax reform law changed the rules to tax unearned income at the ordinary income rates and capital gains rates that apply for trusts. This resulted in higher tax for many filers, including military families with survivor benefits. So Congress repealed the kiddie tax change, and the pre-2018 rules apply again for 2020. (Taxpayers can elect to apply the pre-2018 rules to 2018 and 2019 returns as well.)

Lifetime Learning Credit Phase Out:

The 2020 lifetime learning credit phases out at higher modified adjusted gross Income (MAGI) amounts:

• AGI range for married couples: $118,000 to $138,000 ($116,000 to $136,000 for 2019).
• AGI range for singles: $59,000 to $69,000 ($58,000 to $68,000 for 2019).

EE Bonds Used For Education:

The savings bonds must be redeemed to help pay for tuition and fees for college, graduate school or vocational school for the taxpayer, spouse or dependent.

The income caps are also higher in 2020 for tax-free EE bonds used for education.

• The exclusion starts phasing out above $123,550 of modified AGI for couples and ends at modified AGI of $153,550 ($151,600 for 2019).
• The exclusion starts phasing out above $82,350 for others ($121,600 and $81,100 for 2019) and ends at $97,350 ($96,100 for 2019).

There are two expansions to 529 college savings plans starting in 2020.

1. Funds can be used to pay for fees, books, supplies and equipment for certain apprenticeship programs.
2. Up to $10,000 in total (not annually) can be withdrawn to pay off student loans.

U.S. taxpayers working abroad get a larger income exclusion in 2020, from $105,900 in for 2019 to $107,600 for 2020. (Taxpayers claim the foreign earned income exclusion on Form 2555).

The cap on employer-provided tax-free parking increases to $270/month up from $265/month.

The 2020 exclusion for mass transit passes and commuter vans remains the same amount.

Employees covered by health flexible savings plans can defer up to $2,750 in 2020 ($2,700 in 2019).

The residential solar credit reduced to 26% for 2020 (30% in 2019). It drops again to 22% in 2021 and ends after 2021. The same applies to tax breaks for geothermal heat pumps, residential wind turbines and fuel cell property.

• 2020 Social Security annual wage base: $137,700 for 2020 (up $4,800 from 2019).
• The Social Security tax rate for employer/employee remains the same, 6.2% for each.
• The Medicare tax rate form employer/employee remains the same, 1.45% for each. Medicare tax applies to all compensation from the first dollar with no cap.

Medicare Surtax:

• Employees must also pay the 0.9% Medicare surtax on wages and self-employment income over $200,000 for singles and $250,000 for married couples.
• The surtax does NOT apply to employers
• The CARES Act lets employers defer payment of the Social Security taxes they owe on wages paid from March 27 through December 31, 2020. Self-employed people can defer 50% of their self-employment tax.
• Employers affected by the coronavirus can also claim a new payroll tax credit for 2020 if they retain and continue to pay their workers.
• The nanny tax threshold goes up to $2,200 in 2020 (up $100 from 2019).

Form W-4:

Form W-4 was revamped starting in 2020.

Because personal exemptions stay at zero until 2026 and employees no longer claim withholding allowances on the W-4, the IRS revised the form to focus on filing status, number of dependents, filers with multiple jobs, estimated tax breaks and other income you plan to report on your 1040.

The IRS doesn't require all employees to submit a new W-4 form for 2020 to their employer. Only employees hired after 2019 and employees who want to adjust their post-2019 income tax withholding must fill out the new form.

The standard mileage rates for 2020 are:

1. Business mileage: to 57.5 cents per mile (down from 58 cents per mile in 2019)
2. Moving and medical mileage (applies to military): 17 cents per mile (down from 20 cents per mile in 2019.
3. Charitable mileage: 14 cents per mile (no change because it's fixed by law).

The 2020 threshold for deducting medical expenses on Schedule A is 7.5% of AGI.

The limits on deducting long-term-care premiums are higher in 2020:

• 71 or older: can deduct up to $5,430 per person ($5,270 for 2019).
• 61 to 70: can deduct up to $4,350 ($4,220 for 2019).
• 51 to 60: can deduct up to $1,630 ($1,580 for 2019).
• 41 to 50: can deduct up to $810 ($790 for 2019).
• 40 and younger: can deduct up to $430 ($420 for 2019).

AMT exemptions increased for 2020.

• From $111,700 to $113,400 for married couples
• From $71,700 to $72,900 for single filers and heads of household.

The phaseout range for the exemptions start at higher income levels:

• $1,036,800 for married couples ($1,020,600 for 2019)
• $518,400 for singles and household heads ( $510,300 for 2019).

The 28% AMT tax rate kicks in higher in 2020, above $197,900 of alternative minimum taxable income. The rate applied to AMTI over $194,800 for 2019.

A key dollar threshold on the 20% deduction for pass-through income was increased for 2020.

• Self-employed people and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes in excess of $326,600 for joint filers and $163,300 for others ($321,400 and $160,700, respectively, for 2019).

The fine for filing late returns is higher for returns with post-2019 due dates. The minimum penalty for returns filed 60 or more days after the due date is now the lesser of $435 (up from $215) or 100% of the required tax shown on the return.

2020 annual cap on deductible contributions to health savings accounts (HSAs):

• Self-only coverage:: $3,550
• Family coverage: $7,100
• If you’re 55 or older by Dec. 31 you can put in an extra $1,000.
• Qualifying insurance policies must limit out-of-pocket costs in 2020 to $13,800 for family health plans ($13,500 in 2019) and $6,900 for people with individual coverage ($6,750 in 2019).
• Minimum policy deductibles increase in 2020 to $2,800 for families and $1,400 for individuals.

The IRS also announced that anyone with a high-deductible health plan that covers medical expenses related to COVID-19 before plan deductibles have been met can still contribute to an HSA. This includes coverage for the panel of diagnostic testing for influenza A and B, norovirus and other coronaviruses, and respiratory syncytial virus, and any items or services required by law to be covered with zero cost sharing. t also included telehealth and other remote care services.

In addition, beginning in 2020, funds from HSAs, health flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs) can be used to buy over-the-counter medicines without the need of a doctor's prescription, as well as menstrual care products.

Employees can also make mid-year changes to their health and dependent care FSAs in 2020, if their employer modifies its FSA plan.

Employers can allow employees to:

• Sign-up or revoke an election to contribute to a health or dependent care FSA for 2020; or
• Increase or decrease the amount contributed in 2020 to a health or dependent care FSA.

Employers also have the option of increasing the carryover amount for 2020 FSAs from $500 to $550. However, this doesn't apply to amounts carried over from 2019 to 2020.

The carryover amount will be adjusted for inflation.

The IRS is also letting employers extend the FSA grace period to incur health or dependent care expenses for the previous year to the end of the 2020.For example, if an employer sponsored a 2019 FSA with a grace period ending on March 15, 2020, it could amend its FSA plan to let workers apply unused 2019 FSA funds to pay for qualifying expenses incurred through December 31, 2020.

However,an employee who had unused amounts from a 2019 health FSA and who is allowed an extension to the end of 2020 to incur expenses generally will not be allowed to contribute to an HSA during the extended period.