April 2020

How Traders Should Mine the CARES Act For Tax Relief & Aid

April 10, 2020 | By: Robert A. Green, CPA | Read it on

The CARES Act provides tax relief and economic aid to employees, independent contractors, sole proprietors, and other types of small businesses. However, traders don’t fit into usual small-business categories, so there are issues in applying for some CARES aid.

Traders eligible for trader tax status (TTS) operating in an S-Corp might be able to receive state and federal unemployment benefits. TTS S-Corps might not qualify for a forgivable loan under the Small Business Administration Paycheck Protection Program because trading is a “speculative business.” TTS traders structured as sole proprietors, partnerships, or S-Corps might be eligible for five-year NOL carrybacks, relaxed retirement plan distributions, and recovery rebates.

A trader’s capital gains and Section 475 ordinary income are different from wages, earned income, and self-employment income (SEI) required for many of the business-related benefits under CARES. TTS sole proprietors report business expenses on Schedule C, but trading gains and losses go on other tax forms, including Schedule D (capital gains and losses) or Form 4797 (Section 475 ordinary gain or loss). In the eyes of government agencies, trading generates investment income derived from the sale of capital assets; it’s not a usual small business with revenue.

State and federal unemployment benefits
CARES provides Federal Pandemic Unemployment Compensation (FPUC). The Department of Labor says, “states will administer an additional $600 weekly payment to certain eligible individuals who are receiving other benefits.” CARES also gives states the option of extending unemployment compensation to independent contractors and other workers who are ordinarily ineligible for unemployment benefits. (See Unemployment Insurance Relief During COVID-19 Outbreak, which lists contact information for state unemployment insurance offices.)

TTS S-Corps pay officer compensation to the owner/trader to arrange deductions for owner health insurance premiums and/or a high-deductible retirement plan contribution. Few TTS S-Corps hire outside employees, although some employ a spouse or an adult child.

Many of these TTS S-Corps paid state unemployment insurance (SUI) on officer wages, and if terminated or furloughed, these employees might be eligible to collect SUI and FPUC. SUI premiums are a minor cost in most states. In New York state, the 2020 wage base per employee is limited to $11,600. The NYSUI premium for a new business is 3.2%, which is $371 on the wage base amount. Employers can claim exemption from paying SUI on officer/owner compensation in most states.

TTS sole proprietor and partnership traders will likely face challenges applying for SUI and FPUC because they didn’t pay for SUI premiums. They also don’t have self-employment income as sole proprietors and partners. Most TTS traders worked from a home office and continued to trade throughout the coronavirus crisis. An employer or client has not terminated or furloughed them during the crisis. If you think you might be eligible for SUI and FPUC, apply at your state unemployment office.

SBA Paycheck Protection Program (PPP)
According to the AICPA’s SBA issues details for Paycheck Protection Program loans, “The CARES Act established the PPP as a new 7(a) loan option overseen by the Treasury Department and backed by the SBA [Small Business Administration], which is authorized to provide a 100% guarantee to lenders on loans issued under the program. The full principal amount of the loans may qualify for loan forgiveness if the borrower maintains or rehires staff and maintains compensation levels. However, not more than 25% of the loan forgiveness amount may be attributable to nonpayroll costs. Independent contractors and self-employed individuals can apply for PPP loans beginning April 10. Under the PPP, the maximum loan amount is the lesser of $10 million or an amount calculated using a payroll-based formula specified in the CARES Act. Note: You can access free loan calculators on the AICPA’s PPP resource page.” (See the SBA Paycheck Protection Program.)

Most payroll service providers can provide the payroll documentation needed for this program. (For example, Paychex emailed its clients several COVID-19 resources and tools.)

You may only include payroll to employees in the monthly payroll tax base; the SBA does not allow independent contractors in the calculation. (See https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf and https://taxfoundation.org/sba-paycheck-protection-program-cares-act/)

Most TTS sole proprietors and TTS partnerships don’t hire outside employees. The IRS doesn’t permit sole proprietors or partnerships to pay salaries to owners. Therefore, most TTS sole proprietors and partnerships don’t have a monthly payroll cost required for an SBA PPP loan application. TTS S-Corps might pay officer compensation to the owner, usually in Q4, when there is the transparency of trading profits for the year.

However, the SBA likely considers a TTS trading business to be a “speculative business,” which is not eligible for an SBA loan. The list of speculative businesses includes “dealing in stocks, bonds, commodity futures, and other financial instruments.” (See SBA SOP 50 10 5(B).)

Recovery rebates
Taxpayers under a threshold for adjusted gross income (AGI) are eligible for an advance tax refund of a 2020 tax credit. There’s a reduction of the payment in a phase-out range above the threshold. So the IRS can pay the direct deposit to a taxpayer’s bank account or mail a check faster, it looks to the taxpayer’s 2018 or 2019 tax return filing. (For social security recipients who don’t file a tax return, the IRS looks at their SSA Form 1099.) Treasury promised to provide a Website to enter direct deposit information if the prior-year tax return did not provide that information.

Retirement plan distributions
Taxpayers negatively impacted by COVID-19 can take a withdrawal from an IRA or qualified retirement plan of up to a maximum of $100,000 in 2020 and be exempt from the 10% excise tax on “early withdrawals.” The taxpayer has the option of returning (rolling over) the funds within three years or paying income taxes on the 2020 distribution over three years. CARES also suspended required minimum distributions for 2020. (Update May 4, 2020: IRS Website Coronavirus-related relief for retirement plans and IRAs questions and answers.)

Net operating losses
The 2017 Tax Cuts and Jobs Act repealed NOL carrybacks and applied NOL carryforwards up to 80% of the following year’s taxable income, but CARES temporarily suspended this. It allows five-year carrybacks for NOLs in 2018, 2019, and 2020 and/or 100% application of NOL carryforwards against subsequent year’s taxable income.

Traders should consider getting started on 2018 and 2019 NOL carrybacks for quick tax refunds right away.

Section 475 traders generate ordinary losses, which comprises NOLs, whereas capital losses do not contribute to NOLs. CARES does not allow taxpayers to file a retroactive 475 election for 2018 and 2019. On April 9, 2020, the IRS postponed the 2020 Section 475 election deadline for individuals from April 15 to July 15, 2020. (See live updates on CARES Act Allows 5-Year NOL Carrybacks For Immediate Tax Refunds and Massive Market Losses? Elect 475 For Enormous Tax Savings.)

Excess business losses
CARES suspended TCJA’s excess business loss (EBL) limitation for 2018, 2019, and 2020. That change might lead to a reduction of tax liability in those years and also increase NOL carrybacks. The EBL threshold for 2018 was $500,000 for married and $250,000 for other taxpayers. Amounts over the EBL limitation were NOL carryforwards under TCJA.

CARES is new legislation, and tax professionals have many questions that the Treasury Department and the IRS will likely answer soon. Stay tuned to our blog post to see how CARES and related virus legislation impacts TTS traders. Also, see CARES Act tax provisions aim to stabilize pandemic-ravaged economy.

If you need our help with CARES tax relief, contact us soon. For CARES payroll-related aid, contact your payroll service provider. For unemployment insurance benefits, contact your state unemployment insurance office.

CPAs Darren Neuschwander and Adam Manning contributed to this blog post.


CARES Act Allows 5-Year NOL Carrybacks For Immediate Tax Refunds

April 9, 2020 | By: Robert A. Green, CPA | Read it on

Live Updates:

April 13: IRS Provides NOL Guidance and Deadline Extension:  Rev. Proc. 2020-24 issues guidance on IRC Sec. 172(b)(1), amended by Sec. 2303 of the CARES Act, which requires taxpayers to carry back NOLs arising in tax years beginning in 2018, 2019, and 2020 to the five preceding tax years, unless the taxpayer elects to waive or reduce the carryback period.” (Checkpoint.)

April 9: 
IRS provides guidance under the CARES Act to taxpayers with net operating losses. IR-2020-67, April 9, 2020 — “The Internal Revenue Service today issued guidance providing tax relief under the CARES Act for taxpayers with net operating losses. Recently the IRS issued tax relief for partnerships filing amended returns.”

The six-month extension of time for filing NOL forms: In Notice 2020-26 (PDF), “the IRS grants a six-month extension of time to file Form 1045 or Form 1139, as applicable, with respect to the carryback of a net operating loss that arose in any taxable year that began during the calendar year 2018 and that ended on or before June 30, 2019.  Individuals, trusts, and estates would file Form 1045 (PDF), and corporations would file Form 1139 (PDF).” (The IRS is temporarily allowing taxpayers to fax in these forms.)

Good news: TTS traders have until June 30, 2020, to file a 2018 Form 1045 for a 2018 NOL. They should get moving on these NOL carrybacks ASAP. Otherwise, they need Form 1040X which takes longer to process by the IRS.

March 28: On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This bill includes significant economic aid and tax relief provisions. Some tax relief applies retroactively to 2018, 2019, and 2020. Today, I focus on NOL carrybacks.

If you have a net operating loss (NOL) from business activities in 2018, 2019, and 2020, you should consider filing NOL carryback claims going back five years. 

Active traders who are eligible for trader tax status (TTS) are considered businesses with NOLs. A TTS trader might have significant trading expenses or Section 475 ordinary losses comprising an NOL. 

CARES temporarily suspends tax-loss limitations from the Tax Cuts and Jobs Act (TCJA) for 2018, 2019, and 2020. TCJA had repealed two-year NOL carrybacks, only allowing NOL carryforwards limited to 80% of the subsequent year’s taxable income. As you may remember, TCJA introduced the excess business loss (EBL) limitation, where aggregate business losses over an EBL threshold ($500,000 for married and $250,000 for other taxpayers for 2018) were considered an NOL carryforward. 

CARES lifts these TCJA limitations and allows taxpayers to recalculate 2018 and 2019 NOLs and file refund claims going back five years for immediate tax relief. Taxpayers will be able to carryback 2020 NOLs five years, too, but not until they file 2020 tax returns in 2021. 

TTS traders with Section 475 ordinary losses and those without 475 but who have significant NOLs from expenses (i.e., borrow fees on short-selling) should consider NOL carrybacks, too. 

Here’s an example

Joe Smith, a TTS trader with Section 475, filed a 2018 income tax return showing a $400,000 NOL. Joe’s NOL came from trading expenses ($50,000) and Section 475 trading losses ($350,000); he had no other income or loss.

Under TCJA, Joe’s only option is an NOL carryforward; therefore, his draft 2019 tax return has a low income, utilizing a small portion of his NOL. Joe has more trading losses and expenses YTD for 2020, so he is holding a deferred tax asset. Joe is thrilled that CARES opens the door to NOL carrybacks because he had substantial taxable income from other activities in years previous to 2018. 

We await IRS and state guidance on CARES to indicate precisely how Joe and his tax preparer should proceed with NOL recalculation and carryback returns. We have questions:

  1. Must taxpayers with EBL limitations amend 2018 tax returns to remove EBL and recalculate NOLs? Is CARES retroactive application to 2018 and 2019 an optional or mandatory requirement? Some taxpayers might prefer to leave things the way they are under TCJA.
  2. CARES allows taxpayers to carryback NOLs from 2018, 2019, and 2020 five years. Usually, tax years close after three years, so how will this work for 2018 NOL five-year carrybacks? For example, 2016 income tax returns filed by April 15, 2017, might close three years after by April 15, 2020. Is that postponed to July 15, 2020, with the IRS relief? Can a taxpayer go back five years before 2018? 
  3. The usual tax deadline for filing a 2018 Form 1045 (Application for Tentative Refund) for NOL carrybacks was Dec. 31, 2019. Will this deadline be extended? (We prefer using this form since the IRS must address the form within 90 days.) Alternatively, taxpayers may use Form 1040X (Amended U.S. Individual Income Tax Return) for each NOL carryback year, which often takes the IRS six months or more to address and pay the refunds. Will the form be expedited during this unprecedented time? There are other procedural questions beyond the scope of this blog post.
  4. Which states will conform with CARES on these tax changes, especially NOL carryback refund claims? During the Great Recession of 2008 and 2009, stimulus tax legislation allowed generous NOL carrybacks. However, some states decoupled from federal law on those changes. For example, California did not allow NOL carrybacks at all, and it restricted NOL carryforwards in several ways. 

Stay tuned to our blog post as we seek answers to these questions. I plan to cover other CARES tax changes that affect TTS traders, too. 

March 27: Congress and President Trump enacted into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This “virus bill” includes significant economic aide and tax provisions to help all taxpayers. The House did not make any changes to the Senate version.

March 25: Senate Passes Updated Economic Relief Plan (CARES Act) for Individuals and Businesses (Tax Foundation). The final version of the law includes the tax-loss provisions covered in the March 20 update below. Here are the code sections from Thomson Reuters CheckPoint:

  • “NOLs arising in a tax year beginning after December 31, 2018 and before January 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. (Code Sec. 172(b)(1) as amended by Act Sec. 2303(b)(1))
  • temporarily removes the taxable income limitation to allow an NOL to fully offset income. (Code Sec. 172(a), as amended by Act Sec. 2303(a)(1))
  • temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020. (Code Sec. 461(l)(1), as amended by Act Sec. 2304(a))
  • temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Sec. 163(j)(1) from 30% to 50% for tax years beginning in 2019 and 2020. (Code Sec. 163(j)(10)(A)(i) as amended by Act Sec. 2306(a)).” (See special rules for partnerships.)

March 20: Congress should proceed with new legislation like the Coronavirus Aid, Relief, and Economic Security Act, to provide additional tax relief, beyond the Treasury Department moving the April 15 tax deadline to July 15, 2020.

Senate Majority Leader Mitch McConnell’s CARES Act bill temporarily suspends the Tax Cuts and Jobs Act (TCJA) business loss limitations, including reauthorizing NOL five-year carrybacks, repealing the excess business loss (EBL) limitation, and loosening the business interest expense limitation. That’s fantastic news, as businesses need tax relief for losses ASAP. Here are the related CARES Act provisions:

  • 2203: Section 172(b)(1) – “Net operating loss carrybacks and carryovers” – Special Rule for losses arising in 2018, 2019, and 2020, such loss shall be a net operating loss carryback to each of the five taxable years preceding the taxable year of such loss.
  • 2203: Temporary repeal of 80% income limitation to deduct a 2018 and forward NOL for year beginning before 2021.
  • 2204: Repeal of 461(l) for 2018, 2019 and 2020 – excess business losses.
  • 2206: 163(j) special rules for 2019 and 2020, increasing ATI percentage from 30% to 50% for limitation on business interest.

CPA industry groups are also asking Congress to raise the $3,000 capital loss limitation, which was never indexed for inflation.

Treasury Secretary Steven Mnuchin announced President Trump’s directive to move the April 15 tax deadline to July 15, 2020, thereby postponing tax filings and tax payments for all taxpayers. Mnuchin said the extension would give “all taxpayers and business this additional time” to file returns and make tax payments “without interest or penalties.” I expect Treasury and the IRS will issue specific guidance soon. Hopefully, all states will follow suit with this federal change, so taxpayers don’t face conflicting rules.

Traders and 475 elections: Although it’s not guaranteed, I think the IRS might accept a 2020 Section 475 election submitted by July 15, 2020, since that is the new tax filing date. It would afford traders 90 days of additional hindsight. IRS FAQs might not address elections, although the CARES Act includes moving of election deadlines, too. If you have a massive Q1 2020 trading loss as a TTS trader, and you are counting on an NOL carryforward, or carryback if allowed, then it might be wise to file an extension by April 15, 2020, and attach a 2020 Section 475 election statement. I think you should be able to revise the election by July 15, 2020, if warranted. (See Massive Market Losses? Elect 475 For Enormous Tax Savings.)

March 19: Senator John Thune introduced a two-page bill Tax Filing Relief for America Act “To extend the due date for the return and payment of Federal income taxes to July 15, 2020, for taxable year 2019.” Treasury and the IRS recently issued guidance to delay certain tax payments for 90 days until July 15, 2020. Still, Treasury did not postpone the April 15 tax filing deadline, putting an undue burden on taxpayers and accountants. Thune’s legislation syncs tax filings with tax payments in a simple manner, whereas Treasury’s guidance is causing tremendous confusion. Senate Majority Leader Mitch McConnell introduced the Coronavirus Aid, Relief, and Economic Security Act, which incorporates Thune’s bill. Thanks to the AICPA for pushing Congress and Treasury hard to get this critical April 15 tax relief. Why rush an April 15 tax filing, exposing clients and accountants to coronavirus, if Treasury already postponed tax payments? See the AICPA Coronavirus Resource Center.

For prior updates, see Updated: April 15 Tax Deadline Moved To July 15.


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