Category: CARES Act

Emergency $900 Billion Pandemic Relief

January 10, 2021 | By: Robert A. Green, CPA

On Dec. 21, 2020, Congress passed an emergency $900 billion pandemic relief bill, extending CARES to people in need. On Dec. 27, 2020, the President signed the legislation, part of a government funding package. The new Covid-19 legislation includes:

Direct payments: The maximum amount is $600 for individuals and $1,200 for married couples filing jointly, plus an additional $600 per qualifying child. Subject to phase out for individuals making more than $75,000 modified adjusted gross income and married couples over $150,000. It’s a 2020 advanced recovery rebate with eligibility based on 2019 tax returns. These direct payments are non-taxable income.

Extension of federal pandemic unemployment compensation: Restores FPUC supplement to all state and federal unemployment benefits at $300 per week, starting after Dec. 26, 2020, and ending March 14, 2021. These unemployment benefits are taxable income.

Small business PPP forgivable loans: The new legislation clarifies tax treatment under the CARES Act. Borrowers may deduct PPP business expenses financed with PPP loans, and loan forgiveness is not taxable income. New funding allows “PPP second-draw” loans for smaller and harder-hit businesses, with a maximum of $2 million.

Business meals tax deduction raised to 100% through 2022, increased from 50%. Traders don’t have many business meals.

TTS traders might qualify for direct payments but not unemployment benefits since they don’t have earned income from trading. The SBA labels trading a speculative business precluding it from SBA loans, including PPP loans.

Full details have yet to be released, so stay tuned to our blog to see how this impacts TTS traders.

See the CARES Act in our Tax Center.

How Traders Improve Tax Savings With Year-End Strategies

November 11, 2020 | By: Robert A. Green, CPA | Read it on

Tax Planning

Year-end tax planning for traders varies based on eligibility for trader tax status (TTS) in 2020 and 2021. There are different strategies to consider for investors, TTS traders using the capital gains method, and TTS traders using Section 475 MTM ordinary gain and loss treatment.

In this blog post, I examine all three groups and touch on the topics of new traders, S-Corps for employee benefits, Roth IRA conversions, and navigating the SALT cap.

The 2017 Tax Cuts And Jobs Act (TCJA) suspended investment fees and expenses for investors, and the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act did not change that. After TCJA, the only itemized deductions for investors are margin interest expense limited to investment income and stock-borrow fees. TCJA roughly doubled the standard deduction: with an inflation adjustment for 2020, it’s $24,800 married, $12,400 single, and $18,650 head of household. TCJA’s $10,000 cap on state and local taxes (SALT) leads many taxpayers to use the standard deduction.

TTS traders are better off; they deduct trading business expenses, startup costs, and home office expenses from gross income (Schedule C for sole proprietors). Brokerage commissions are transaction costs deducted from trading gains or losses; they are not separate expenses.

In 2020 with Covid-19 stay-at-home orders and remote work, many new traders entered the markets. Some achieved TTS for a partial year in 2020, whereas others won’t qualify until 2021. If your TTS commences in January 2021, you can capitalize on some hardware, software, and other intangible costs incurred in 2020 for depreciation and amortization expense with TTS’s commencement in early 2021. For example, computers, monitors, and home office furniture contribute to these costs at fair market value for TTS expensing in 2021. Some expenses like subscriptions, education, and software can be capitalized as Section 195 startup costs. Section 195 allows expensing up to $5,000 in 2021, with the rest deducted straight-line over 15 years. We allow TTS traders to go back six months before TTS inception for Section 195 costs and even further back for hardware costs.

Investors and TTS traders using the default realization method (not Section 475 MTM) should consider “tax-loss selling” before year-end to reduce capital gains income and the related tax liability. However, be careful to avoid wash-sale loss adjustments on securities at year-end 2020, which defer the tax loss to 2021. For example, suppose you realize a capital loss on Dec. 15, 2020, in Exxon and repurchase a substantially identical position (Exxon stock or option) 30 days before or after that date. In that case, it’s a wash-sale (WS) loss adjustment. The WS loss defers to 2021 when it is added to the replacement position’s cost basis. The rules are different for brokers vs. taxpayers, so avoid permanent WS between taxable and IRA accounts. Section 1256 contracts have MTM by default, so WS is a moot point on futures. (See more on WS on our website.)

If you expect a net capital loss for 2020 over the $3,000 capital loss limitation against other income, then you’ll have a capital loss carryover (CLCO) to 2021 and subsequent years. You can use up a CLCO with capital gains in the following years. For example, if your CLCO is $25,000 going into 2021, and you have 2021 capital gains of $30,000, then you’ll have $5,000 of net capital gains for 2021.

If you incur a significant capital loss in Section 1256 contracts, consider a 1256 loss carryback election made on Form 6781 filed with your 2020 tax return. That allows you to amend the prior three-year tax returns to apply the 1256 loss against 1256 gains only.

If your 2020 taxable income is considerably under the capital gains tax bracket of $80,000 for married and $40,000 for unmarried individuals, then your long-term capital gains (LTCG) tax rate is 0%. For example, assume your taxable married-filing-joint income is $50,000 as of late December 2020. You can sell investments held over 12 months with up to $30,000 of capital gains at a 0% tax rate. Don’t cut it too close, though: If your taxable income is $80,500, it will trigger the 15% rate on all LTCG. The 0% rate applies to Section 1256 contracts: 60% uses the LTCG rate, and 40% the short-term rate, which is the ordinary rate.

There is also the Affordable Care Act (ACA) 3.8% net investment tax (NIT) on net investment income (NII) for upper-income taxpayers with modified AGI above $250,000 married and $200,000 single. Tax-loss selling and other deductions lower AGI and NII, which can help avoid or reduce NIT.

President-elect Joe Biden’s Tax Plan proposed raising the top LTCG rate of 20% to a maximum ordinary rate of 39.6% (up from 37%), applying only to taxpayers with income over $1 million. Passing Biden’s tax plan will be difficult if the Senate remains under Republican control.

There may be further Covid-19 aid and tax relief bills enacted during the lame-duck session, impacting year-end tax planning. (See How Covid-19 Tax Relief & Aid Legislation Impacts Traders.)

Traders who have massive trading gains in 2020 should focus on 2020 Q4 estimated taxes due Jan. 15, 2021. Using the safe-harbor exception to cover 2019 tax liabilities, some traders can defer much of their tax payments to April 15, 2021. Just don’t lose the tax money in the markets in Q1 2021; consider setting it aside. (See Traders Should Focus On Q4 Estimated Taxes Due January 15.)

Traders eligible for TTS
If a trader qualifies for TTS in 2020, he or she can deduct trading business expenses, startup costs, and home-office expenses. The trader did not have to elect TTS or create an entity. (Section 475 requires a timely election.) It’s okay to commence TTS during the year, although we prefer not later than Sept. 30; otherwise, the IRS could challenge TTS for Q4 or less. (See How To Be Eligible For Substantial Tax Savings As A Trader.)

TTS traders planning to upgrade computers and other expenses should consider accelerating business expenses before year-end. New equipment and furniture need be purchased and put to use before year-end. TCJA mostly provides full expensing with tangible property expense up to $2,500 per item, Section 179 (100%) depreciation, or bonus depreciation.

TTS traders with Section 475 MTM
TTS traders using section 475 mark-to-market (MTM) accounting report ordinary gains or losses on Form 4797. Section 475 trades are not subject to WS or a capital-loss limitation so that an ordinary loss can offset income of any kind. MTM reports unrealized gains and losses at year-end, so the taxpayer doesn’t have to do tax-loss selling on TTS trading positions.

Many TTS traders also have segregated investment positions, so they should consider WS and tax-loss selling on investment positions. Investments are not subject to Section 475, meaning you can defer capital gains and achieve the LTCG rate on investment positions if held 12 months. If you trade in substantially identical positions that you also invest in, the IRS can attempt to recharacterize TTS trades vs. investments. Avoid that issue by considering a TTS LLC/partnership or TTS LLC/S-Corp for 2021 to ring-fence trading positions.

If you have significant Section 475 ordinary losses for 2020, the CARES Act provides substantial relief. The CARES Act allows a five-year net operating loss (NOL) carryback applied against income of any kind. CARES also temporarily reversed TCJA’s “excess business loss” (EBL) limitation of $500,000 married and $250,000 for other taxpayers (2018 limits and adjusted each year for inflation). Under TCJA, you have to add EBL amounts to NOL carryforwards.

For example, a TTS/475 trader filing single with a $300,000 ordinary loss and $25,000 TTS expenses would have a 2020 NOL of approximately $325,000. The $250,000 EBL limitation does not apply. This trader can carry back the 2020 NOL five years and use it against any type of income. Alternatively, if preferred, the taxpayer can elect to carry it forward instead. TCJA NOL rules apply again in 2021, limiting NOLs to 80% of taxable income with the remainder carried over to subsequent years. Under its latest Covid-19 relief bills, the House proposed revising the NOL and EBL rules, reapplying EBL to all years, and limiting the number of NOL carryback years. Many taxpayers already filed NOL carryback returns under CARES, so it’s hard to reverse those rules now.

If a TTS trader has significant TTS/475 income, they might be eligible for a 20% “qualified business income” (QBI) deduction. Sole proprietors only get this QBI deduction if they are under the QBI taxable income threshold of $326,600 married and $163,300 for other taxpayers (2020 threshold adjusted for inflation). Determine the QBI deduction on the lower of taxable income or QBI. Suppose you have a TTS S-Corp with officer compensation. In that case, there is also a phase-out/phase-in range based on wages and qualified property for an additional $100,000 married and $50,000 other taxpayers.

New traders
No matter when you started trading, you can claim TTS eligibility and add a Schedule C for the TTS expense deductions for all or part of the year. (See Will The IRS Deny Tax Benefits To Traders Due To Covid?)

It’s now too late in 2020 to form a new entity that can qualify for TTS, as we like to see entity trading for at least all of Q4. Instead, consider a Section 475 election for 2021, due by April 15, 2021, for individuals and March 15, 2021, for existing partnerships and S-Corps. (See Traders Elect 475 For Enormous Tax Savings.)

S-Corps for employee benefits
A TTS S-Corp can unlock officer health insurance (HI) and retirement plan deductions using officer payroll. The insurance premium can be added to officer payroll on the W-2. That opens an AGI deduction for HI on the officer’s tax return. The officer HI compensation is not subject to payroll tax (social security and Medicare).

If profitable as of early December 2020, the S-Corp can pay additional compensation up to a maximum of $150,000 to maximize a Solo 401(k) retirement plan contribution. For 2020, it combines a 100% deductible “elective deferral” (ED) contribution of $19,500 with a 25% deductible profit-sharing plan contribution (PSP) up to a maximum of $37,500. There is also an ED “catch-up provision” of $6,500 for 2020 for taxpayers age 50 and over. Together, the maximum 2020 tax-deductible contribution is $57,000, and when including the catch-up provision, it’s $63,500. The ED portion can be a Roth, so there would be no tax deduction but permanent tax-free status. The PSP must be traditional, though.

Payroll tax includes 12.4% social security taxes but not exceeding the social security base amount of $137,700 for 2020. Medicare tax of 2.9% is unlimited without a base. The employer and employee each pay half the payroll taxes, and the employer deducts its 50% share.

Joe Biden’s tax Plan proposes to subject earned income over $400,000 to payroll taxes. Social security taxes (FICA) only apply to the SSA base amount of $137,700 for 2020 and $142,800 for 2021. Biden’s plan creates a donut hole, but it should not affect traders since they only need $150,000 of wages to maximize a Solo 401(k) retirement plan. A TTS S Corp is not subject to IRS “reasonable compensation” rules as its underlying income is unearned.

An S-Corp accountable reimbursement plan can be used to pay the officer shareholder for home-office and other employee expenses. The IRS requires reimbursement before the year-end 2020.

Partners in LLCs taxed as partnerships can deduct “unreimbursed partnership expenses” (UPE). That is how they usually deduct home office expenses. UPE is more convenient than using an S-Corp accountable plan because the partner can arrange the UPE after year-end.

Roth IRA conversions
You may wish to convert a traditional IRA into a Roth IRA before the year-end. The conversion income is taxable in 2020. Avoid the 10% excise tax on early withdrawals before age 59 1⁄2 by paying the Roth conversion taxes outside the Roth plan. TCJA repealed the recharacterization option, so you can no longer reverse the conversion if the plan assets decline. Roth IRA conversions have no income limit, unlike regular Roth IRA contributions.

Navigating around the SALT cap
According to Bloomberg Law’s SALT Cap Workarounds May Catch On in More States After IRS OK (Nov. 10, 2020):

“More states are expected to pass laws letting businesses avoid the limit on personal tax deductions for state and local taxes, following IRS guidance approving the workaround. Already, states including New Jersey and Connecticut softened the blow of the $10,000 SALT cap with provisions for pass-through businesses like partnerships and S corporations, which are taxed normally at the owner level. The IRS said Monday in a notice that forthcoming proposed rules will allow the states’ workaround, which involves an entity-level tax that is offset by a corresponding individual income tax credit.

“The agency in 2019 killed off (T.D. 9864) a different workaround some states tried, which would have allowed state tax credits for donations made to charitable funds.”

More states might enact this workaround before the year-end 2020. Before you pay Q4 2020 estimated taxes due by Jan. 15, 2021, see if your state allows or requires your partnership or S-Corp to pay taxes for your benefit. Connecticut’s workaround law is mandatory.

For more year-end tax planning strategies, see Green’s 2020 Trader Tax Guide and stay tuned for blog updates.

Consider our 2020 tax compliance service, which includes year-end tax planning and 2020 tax return preparation. We accept new clients for our tax compliance service, providing you are a retail trader, a proprietary trader, or an investment manager. Most of our trader clients are eligible for trader tax status (TTS) benefits. We are pleased to invite traders who fall short of TTS in 2020 to use our 2020 tax compliance service. Perhaps, you will qualify for TTS in 2021 and need a 475 election then, too. By email, please request a new client evaluation (NCE).

Darren Neuschwander, CPA contributed to this blog post.

Will The IRS Deny Tax Benefits To Traders Due To Covid?

September 14, 2020 | By: Robert A. Green, CPA | Read it on

So far, 2020 has been a highly volatile year in the financial markets due to significant uncertainty over Covid-19, a shock to the economy, and job losses. As the virus spread in the U.S, millions of displaced Americans turned to trading in financial markets as a means of making a new living. Some became active enough to qualify for trader tax status (TTS) benefits, which requires regular, frequent, and continuous trading. However, will the IRS deny TTS to Covid-19 traders if they only carry on a trading business during the pandemic for a short time?

I’m not as worried about existing traders from 2019 who incurred massive trading losses in Q1 2020 during the Covid correction and stopped trading at that time. Hopefully, they made a Section 475 ordinary loss election due by the July 15, 2020 deadline, which is conditional on eligibility for TTS. These pre-Covid traders were in business for more than 15 months, so their TTS/475 ordinary loss deduction should be safe.

I am more concerned with the millions of newcomer traders who opened online trading accounts offering free or low commissions in 2020. Many rookies have significant trading gains year-to-date, even after the recent sell-off. In the trading business, gains can turn into losses with a substantial correction. When that happens, TTS traders count on Section 475 for tax-loss or fire-loss insurance: The trading house burns down, and you can file for a refund with the IRS. The CARES Act permits five-year net operating loss (NOL) carryback refund claims for 2020, 2019, and 2018 tax returns.

Some rookie traders start off meeting the IRS requirements for TTS. Those rules are vague, so see GreenTraderTax’s golden rules for TTS. I wonder how IRS agents will consider the Covid pandemic when assessing TTS. Consider a furloughed worker who started trading at home full time in mid-2020. Was the trader’s intention to create a new business for the long-term, or to buy time and make some extra money before returning to his or her career after the pandemic subsides? TTS requires the intention to run a business from catching daily market movements, not from making investments for appreciation.

If a new trader started trading on June 1, 2020, but stops or significantly slows down trading when returning to work in November 2020, will the IRS deny TTS because he only traded actively for five months? The IRS agent might cite the landmark tax court case Chen vs. Commissioner, where TTS was denied. Chen only carried on TTS for three months.

I analyzed the Chen case in my trader tax guide; here’s an excerpt. 

Chen vs. Commissioner

Comments from a senior IRS official about the Chen tax court case point out the IRS doesn’t respect individual traders who are brand new to trading activity and who enter and exit it too quickly. Chen only traded for three months before losing his trading money, thereby leaving his trading activity. Chen kept his software engineering job during his three months of trading.

The Chen case indicates the IRS wants to see a more extended time to establish TTS. Some IRS agents like to intimidate taxpayers with a full year requirement, but the law does not require that. Hundreds of thousands of businesses start and fail within three months, and the IRS doesn’t challenge them on business status. The IRS is rightfully more skeptical of traders vs. investors, perhaps even more so during the pandemic. The longer a trader can continue his business trading activity, the better his chances are with the IRS. We often ask clients about their trading activities in the prior and subsequent years as we prepare their tax returns for the year that just ended. Vigorous subsequent-year trading activities and gains add credibility to the tax return being filed. We mention these points in tax return footnotes, too. Traders can start their trading business in Q4 and continue it into the subsequent year.

Chen messed up many things in this case. First and foremost, he lied to the IRS about electing Section 475 MTM ordinary loss treatment on time and then used 475 MTM when he wasn’t eligible. Chen should have been subject to a $3,000 capital loss limitation rather than deducting a massive 475 ordinary loss triggering a huge tax refund. Second, he brought a losing case to tax court and made the mistake of representing himself. Once Chen was busted on the phony MTM election, he caved in on all points, including TTS. Chen did not have many TTS business expenses, so he figured it wasn’t worth continuing to fight.

Even though he only traded for three months while keeping his full-time job, it doesn’t mean he didn’t start a new business — intending to change careers to business trading — and make a substantial investment of time, money, and activity. Tax code or case law doesn’t state that a business must be carried on for a full year or as the primary means of making a living. Countless companies startup and fail in a few short months, and many times the entrepreneur hasn’t left his or her job while experimenting as a businessperson. Chen may have won TTS had he been upfront with the IRS and engaged a tax attorney or trader tax expert to represent him in court.

TTS tax benefits

  1. TTS traders deduct business expenses, startup costs, and home office expenses. Without TTS, investors may only deduct margin interest expense to the extent they have investment income as an itemized deduction. Many use the standard deduction instead.
  2. TTS traders are entitled to elect the robust Section 475 mark-to-market accounting, which converts capital gains and losses into ordinary gains and losses. Short-term capital gains on securities are ordinary income; whereas, 475 ordinary business losses generate tax refunds much faster than a $3,000 capital loss limitation. Section 475 also exempts securities trades from onerous wash sale loss rules, a headache for active traders, which causes phantom income and potentially excess tax liability. The 20% qualified business income (QBI) deduction applies to 475 net income if the taxpayer is under a taxable income threshold. QBI excludes capital gains. Individuals had to elect 475 for 2020 by the postponed deadline of July 15, 2020. A new LLC partnership or S-Corp can select 475 within 75 days of inception.
  3. With a TTS S-Corp, traders can deduct health insurance and retirement plan contributions.

I consult new traders on TTS. It’s incredible how many of these traders, from all walks of life, ages and careers, have made small fortunes since April. Others incurred substantial losses. During my tax consultations, many clients tell me they don’t want to return to their jobs if and when called back, and that TTS trading is their new career, which they cherish.

In The Tax Moves Day Traders Need to Make Now, Laura Saunders and Mischa Frankl-Duval report on this very issue (Wall Street Journal, Sept. 11, 2020), warning taxpayers to be careful when thinking about claiming TTS.

Our own Darren Neuschwander, CPA, was interviewed for the piece, stating he has seen a rise in inquiries about trader tax status this year. “The requirements for this break haven’t been clarified by the IRS, but they are stiff. Among other things, traders often need to trade for at least four hours a day, for an average of four days a week, and make at least 720 trades a year,” Neuschwander said.

Also, see my interview in theWall Street Journal’s July 5, 2020 article, The Benefits of Calling Yourself a ‘Trader’ for Tax Purposes by Nick Ravo.

How Covid-19 Tax Relief & Aid Legislation Impacts Traders (Updates)

May 31, 2020 | By: Robert A. Green, CPA | Read it on

Tax tips for the July 15 deadline, extensions, 475 elections, NOL carrybacks, CARES relief, and more.

Update June 29: “IRS today announced the tax filing and payment deadline of July 15 will not be postponed. Individual taxpayers unable to meet the July 15 due date can request an automatic extension of time to file until Oct. 15 – it is not an extension to pay any taxes due. For people facing hardships, including those affected by COVID-19, who cannot pay in full, the IRS has several options available to help.” (See Taxpayers should file by July 15 tax deadline; automatic extension to Oct. 15 available.)

Watch our Webinar or recording Last-Minute Tax Tips & Extensions For Traders.

Original post

Congress postponed the tax filing and payment deadline from April 15 to July 15, 2020, for 2019 individual tax returns, extensions, and 2020 elections (i.e., Section 475). That’s good news for sole proprietor traders.

The July 15 deadline also applies to calendar-year 2019 C-Corps, U.S. residents abroad, estates, trusts, gift tax returns, information returns, IRA, and HSA contributions originally due April 1, or later.

Partnerships and S-Corps
Calendar-year 2019 partnership and S-Corp tax returns and 2020 Section 475 elections for partnerships and S-Corps were due March 16, 2020. These pass-through tax returns and entity 475 elections are not eligible for the July 15 postponement deadline because the March 16 deadline was before April 1. IRS virus relief guidance mentions pass-through entities, but that’s for a fiscal-year partnership or S-Corp tax return due on or after April 1, 2020.

Traders have calendar-year partnerships and S-Corps, so their entities are not eligible for the July 15 postponement relief. Some asked our firm if their existing partnership or S-Corp could take advantage of the postponed deadline for making a 2020 Section 475 MTM election. The answer is no.

Extensions for individual taxpayers
If you need more time to file your 2019 individual income tax return, file an automatic extension (Form 4868) for three additional months until October 15, 2020.

If you cannot pay the taxes you owe for 2019, then it’s essential to file the one-page extension to avoid IRS late-filing penalties of 5% per month for up to five months. The IRS charges this penalty based on the tax balance due. On Form 4868, enter your estimate of total tax liability for 2019, total 2019 payments, including overpayment credits, balance due, and the amount you’re paying. “If your return is more than 60 days late, the minimum penalty is $330 (adjusted for inflation) or the balance of the tax due on your return, whichever is smaller.” Even if you cannot pay any amount due, filing the extension on time avoids the late-filing penalty.

The IRS also charges late-payment penalties if the taxpayer does not pay at least 90% of their 2019 tax liability by the postponed deadline of July 15, 2020. The late-payment penalty is 0.5% per month, for up to five months, for a maximum of 2.5%. It’s ten times less than the late-filing penalty. For example, if the taxpayer owes $50,000 by July 15 but doesn’t pay it until October 15, 2020, the total penalty is $750 (three months of 0.5% equals 1.5% times $50,000).

The IRS allows the taxpayer to request abatement of late-payment and late-filing penalties based on a “reasonable cause.” Contracting coronavirus in your family or being negatively impacted by the virus might constitute a reasonable cause. “Attach a statement to your return, fully explaining the reason. Don’t attach the statement to Form 4868.”

The IRS calculates penalties and interest based on the tax payment paid after July 15.

The current interest rate on late payments is 4.5%, and the IRS does not forgive interest charges.

2020 estimated taxes
Treasury also postponed Q1 and Q2 quarterly estimated tax payments for 2020 until July 15, 2020. The original due dates were April 15 for Q1 and June 15 for Q2. Third and fourth quarters keep their original due dates of September 15, 2020, and January 15, 2021, respectively.

Mark your payment memo “2020 Form 1040-ES,” so the IRS does not confuse it with 2019 tax payments. Consider overpaying the 2019 extension, planning for an overpayment credit to apply to 2020 estimated taxes.

States also postponed the deadline
All states with a personal income tax have extended their April 15 due dates. See AICPA state filing conformity chart that they update.

Check if your state is decoupling from CARES, such as for NOL carrybacks. That’s happened in prior stimulus legislation.

Consider a section 475 election by July 15
If you have 2020 YTD trading losses and are eligible for trader tax status (TTS) as a sole proprietor, consider a 475 election on securities and or commodities due by July 15, 2020, the postponed tax deadline. Many traders have massive trading losses in 2020, and they desperately need a 475 election for ordinary loss treatment to unlock NOL carryback refunds.

Section 475 ordinary losses offset all types of income, which navigates around the $3,000 capital loss limitation. Section 475 securities trades are also exempt from wash-sale loss adjustments, which can create phantom income and capital gains taxes. I call Section 475, “tax loss insurance.” I generally recommend 475 for securities only to retain lower 60/40 capital gains rates on commodities (Section 1256 contracts). Section 475 does not apply to segregated investment positions so that you can enjoy deferral and long-term capital gains treatment, too.

There’s also a 20% QBI deduction on 475 income, net of TTS expenses. QBI excludes capital gains and portfolio income. Trading is a “specified service activity,” so you must be under the taxable income threshold of $326,600/$163,300 (married/other taxpayers) for 2020 to be eligible for the QBI tax deduction on TTS/475 income.

Be careful to follow the election rules properly. Attach a 2020 Section 475 election statement to your 2019 individual income tax return or extension filed by July 15, 2020.

E-filing an extension is convenient, but taxpayers cannot attach an election statement to an e-filed extension. Print the extension, attach the election, and mail or fax them together to the IRS.

If you are ready to file your tax return by July 15, there might be a problem: Most tax preparation software programs for consumers don’t include 475 elections. Either mail the 2019 tax return with 2020 Section 475 election statement attached, or e-file the tax return and send the election to the IRS separately by July 15. (See an example election statement and information about Form 3115 in Green’s 2020 Trader Tax Guide, chapter 2.)

CARES allows five-year NOL carrybacks
Starting with the 2018 tax year, TCJA repealed two-year NOL carrybacks and only allowed NOL carryforwards limited to 80% of the subsequent year’s taxable income. 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. TCJA deferred losses into the future.

CARES suspended TCJA’s EBL limitation for 2018, 2019, and 2020. It also allows five-year NOL carrybacks for 2018, 2019, and 2020 and/or 100% application of NOL carryforwards.

Business owners should consider amending 2018 and 2019 tax returns to remove EBL limitations and consider five-year NOL carryback refund claims. It’s too late to elect 475 ordinary loss treatment for 2018 and 2019; a 2019 Section 475 election was due April 15, 2019. 2020 NOL carrybacks must wait until 2021 unless Congress speeds up that process with more virus legislation.

Businesses have until June 30, 2020, to file a 2018 Form 1045 (quickie refund) for a 2018 NOL carryback. They should get moving on these NOL carrybacks ASAP. Otherwise, they need Form 1040-X, which allows the IRS more time to process the refund.

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. If Congress changes the rules again (see below), your refund claim should be respected by the IRS as you filed based on current law in effect at the time.

The House passed new virus legislation
The House recently passed new virus legislation, backtracking on CARES business loss relief. However, the Senate rejected taking up this new House legislation. The House law restricts taxpayers to carry back NOLs from 2019 and 2020 only to tax years beginning on or after January 1, 2018.

The House legislation retains EBL limitations for 2018, 2019, and 2020 and it lifts the SALT limitation for 2020 and 2021. Proponents of the House bill argued that CARES business loss relief mostly benefits the wealthy. Proponents of CARES claim small businesses, plenty of which are not wealthy, need NOL carryback refunds to replenish their capital to remain in business — a goal for virus relief. Opponents of the House bill say lifting SALT helps mostly upper-income taxpayers. Pundits expect Congress to enact more virus legislation, so stay tuned.

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

Traders generate “unearned income,” and the CARES Act focuses on “earned income” (jobs). Traders eligible for trader tax status (TTS) operating in an S-Corp might be able to receive state and federal unemployment benefits if they close their trading business due to the negative impact of the pandemic.

TTS traders don’t qualify for a loan under the SBA Paycheck Protection Program (PPP), or any other SBA loan because trading is considered a “speculative business,” which the SBA bars from its lending programs.

TTS traders might be eligible for NOL carrybacks, relaxed retirement plan distributions, and recovery rebates.

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.

Here’s an example
My client, Josh, was recently laid off due to Covid-19. He is collecting state unemployment insurance plus federal pandemic relief of $600 per week. Josh is eligible for the $100,000 early withdrawal from his employer 401(k), and he can pay taxes or roll it over during the following three years, depending on how things work out. Josh plans to use a 401(k) early withdrawal of $50,000 to finance a new TTS sole proprietorship.

Josh’s TTS Schedule C does not conflict with his unemployment insurance benefits because he is buying and selling capital assets and not collecting a salary. Josh plans to submit a Section 475 election on securities only for 2020, due by July 15, 2020. He wants tax loss insurance and to be eligible for a 20% QBI deduction.

Next year, after Josh’s unemployment insurance ends, he might form a TTS S-Corp to have a salary in December to unlock health-insurance and retirement-plan deductions. S-Corp salary would conflict with unemployment insurance. (It’s always best to check with your state.) The financial markets are highly volatile in 2020, so there’s an opportunity for traders, especially with zero commissions. Josh operates his trading business from home, where he is safer from the pandemic. Brokers have reported strong growth in new trading accounts.

See blog posts:
April 15 Tax Deadline Moved To July 15 (Live Updates)
Massive Market Losses? Elect 475 For Enormous Tax Savings
How Traders Should Mine the CARES Act For Tax Relief & Aid
Tax Extensions: 12 Tips To Save You Money
IRS Coronavirus Tax Relief

Darren Neuschwander CPA contributed to this blog post.


Traders Elect 475 For Enormous Tax Savings (Live Updates)

May 20, 2020 | By: Robert A. Green, CPA | Read it on


May 20: 2019 calendar-year partnership and S-Corp tax returns, and 2020 Section 475 elections for partnerships and S-Corps, were due March 16, 2020. These pass-through tax returns and entity 475 elections are not eligible for virus tax relief with the July 15, 2020 postponement deadline. Postponement relief is limited to 2019 tax returns due April 1, 2020, or after, and the March 16 deadline was before April 1. However, fiscal-year partnership or S-Corp tax returns due on April 1, 2020, or later are eligible for the July 15 deadline.

Traders have calendar-year partnerships and S-Corps, so these entities are not eligible for the July 15 postponement date. Most traders filed 2019 partnership or S-Corp extensions by March 16, some along with 2020 Section 475 elections for the entity. Some of these traders asked our firm if their entity could take advantage of the postponed deadline for making a Section 475 MTM election. The answer is no. Individual traders (sole proprietors) are eligible for July 15 relief for filing 2019 individual tax returns, extensions, and 2020 individual Section 475 elections.

April 9: IRS Notice 2020-23, dated April 9, states on page 7: “Finally, elections that are made or required to be made on a timely filed Specified Form (or attachment to a Specified Form) shall be timely made if filed on such Specified Form or attachment, as appropriate, on or before July 15, 2020.”

Good news: TTS traders as sole proprietor individuals now have to July 15, 2020, to elect Section 475(f) for 2020, as the 475 MTM election is an attachment to a specified form, either F1040 or F4868. Previously, we recommended TTS traders elect 475 by April 15, 2020, to play it safe.

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. See how TTS traders carryback NOLs five tax years for 2018, 2019 and 2020 in our blog post CARES Act Allows 5-Year NOL Carrybacks For Immediate Tax Refunds. If you have massive trading losses in 2020, a timely-filed 475 election is essential for TTS traders this year!

March 25: Our Darren Neuschwander, CPA, communicated with the IRS Chief Counsel’s office for Section 475(f) MTM elections. Mr. Neuschwander asked whether the tax deadline for submitting a 2020 Section 475 election is April 15 or July 15, considering that the IRS delayed the tax-filing deadline to July 15. In our email to the IRS, we gave our rationale for why it should be July 15 (see March 24 update below).

The IRS official told us to watch for an IRS FAQ, which they might add to answer our question, although she gave us no assurances or a timeline.

In the meantime, she highly recommends that those who want to elect 475 MTM for 2020 to file the election statement by attachment to a 2019 tax extension (Form 4868) mailed to the IRS by April 15. That’s what Rev Proc 99-17 requires. The IRS tracks 475 elections with extensions or tax return filings, but not if the taxpayer sends a separate letter with the election. It’s okay if the taxpayer files another extension Form 4868 on July 15 to pay 2019 taxes owed. She reminded us that the IRS does not grant tax relief for late-filed 475 elections.

Therefore, we have been advising clients to make 2020 Section 475 MTM elections on securities and/or commodities by April 15. You can prepare the 2019 tax extension with the 2020 election statement attachment, but wait to file it until the April 15 deadline. Meanwhile, monitor the IRS FAQs and our blog to see if the IRS postpones that deadline as well.

What’s the fuss?
A Section 475 election could be a savior this year with extreme volatility and massive trading losses. Instead of having a capital loss limitation of $3,000, you’ll have unlimited ordinary losses and perhaps a net operating loss (NOL) carryback refund.

Pending stimulus legislation suspends the TCJA business loss limitations, including reauthorizing NOL five-year carrybacks for 2018, 2019, and 2020, and repealing the excess business loss (EBL) restriction. TTS traders with 475 elections would get immediate tax relief. That can replenish your trading account and keep you in business!

March 24: The IRS published FAQs to support Notice 2020-18 for the April 15 tax-deadline postponement to July 15: Filing and Payment Deadlines Questions and Answers. CPA industry groups will likely ask for another round of FAQs to address unanswered questions. It’s important to note that FAQs are not yet “substantial authority,” as tax notices are, and the IRS often changes FAQs at a future date like it recently did with cryptocurrency.

  • Elections: The FAQs don’t mention the word “elections,” including the Section 475 election for TTS traders. The Section 475 MTM election wording comes directly from Rev Proc 99-17, which states:

    “The (election) statement must be filed not later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year and must be attached either to that  return or, if applicable, to a request for an extension of time to file that return.”

    In the Notice 2020-18, the IRS moved the due date for 2019 individual tax returns to July 15. The above Q12 allows an automatic extension request on July 15 for more time to file. It seems logical to conclude that a 2020 Section 475 election is due July 15. If the IRS does not explicitly address this question, then a TTS trader with a massive 2020 YTD trading loss might want to file a protective extension request with a 475 election statement attachment by April 15 to play it safe.

March 20: It’s not yet certain if the IRS will accept a 2020 Section 475 election submitted by July 15 in conformity with the postponed tax filing deadline. It would afford traders 90 days of additional hindsight. The IRS promised FAQs soon, which might address “elections.” The original CARES Act bill included moving election deadlines, too. (Update March 23: However, the latest version of the CARES Act bill removed that entire section, perhaps because Treasury already moved the tax deadline to July 15.) If you have a significant Q1 2020 trading loss as a trader eligible for trader tax status (TTS), and you are counting on 475 ordinary loss treatment, then it’s currently safer to file an extension by April 15 and attach a 2020 Section 475 election statement. Stay tuned to our blog posts about the election issue. (See April 15 Tax Deadline Moved To July 15.)

Original blog post, dated Feb. 29, 2020:

With heightened market volatility in Q1 2020, many traders incurred massive losses. TTS traders should consider a 2020 Section 475 election to turn capital losses into ordinary losses. Don’t get stuck with a $3,000 capital loss limitation for 2020 and a considerable capital loss carryover to 2021; unlock immediate tax savings with ordinary-loss deductions against wages and other income this year.

Election procedures: Existing TTS partnerships and S-Corps should attach a 475 election statement to their 2019 entity tax return or extension due March 16, 2020. TTS sole proprietors (individuals) should attach a 475 election statement to their 2019 income tax return or extension due April 15, 2020. The second step is to file a 2020 Form 3115 (Application for Change in Accounting Method) with your 2020 tax return. There are other benefits: 475 trades are exempt from dreaded wash sale loss adjustments, and profitable 475/TTS traders are eligible for the 20% QBI deduction if they are under the QBI taxable income thresholds.

Example 1: A TTS securities trader incurred a capital loss of $103,000 in Q1 2020. He elects Section 475 on securities only by April 15, converting the Q1 capital loss into an ordinary loss on Form 4797 Part II. He also plans to deduct $12,000 of trading business expenses on a Schedule C. He intends to offset the entire trading business loss of $115,000 against a wage income of $175,000 for a gross income of $60,000. Without a 475 election, this trader would have a $3,000 capital loss limitation on Schedule D, a $12,000 ordinary loss on Schedule C, and a gross income of $160,000. He would also have a capital loss carryover to 2021 of $100,000. By deducting the entire $100,000 in 2020 with a 475 election, the trader generates a considerable tax refund.

More about 475
Traders eligible for TTS have the option to make a timely election for the Section 475 accounting method on securities and/or commodities. Section 475 is mark-to-market (MTM) accounting with ordinary gain or loss treatment. MTM imputes sales of open positions at the year-end at market prices. Without MTM, securities traders use the realization (cash) method with capital gains and loss treatment, including wash sale loss adjustments and the annual $3,000 capital loss limitation.

Caution: Sole proprietor (individual) TTS traders who missed the Section 475 MTM election date (April 15, 2019, for 2019) can’t use ordinary-loss treatment for 2019 and are stuck with capital gains and losses and perhaps capital-loss carryovers to 2020. Carefully consider a 475 election for 2020, as you need capital gains to use up capital loss carryovers, and 475 is ordinary income.

A new entity set up after April 15 could deliver Section 475 MTM for the rest of 2020 on trading losses generated in the entity account if it filed an internal Section 475 MTM election within 75 days of inception.

Ordinary losses offset all types of income (wages, portfolio income, and capital gains) on a joint or single filing, whereas capital losses only offset capital gains. Plus, business expenses and ordinary trading losses comprise a net operating loss (NOL) carry forward.

By making a 475 election on securities only, TTS traders retain lower 60/40 capital gains rates on Section 1256 contracts (futures), and they can segregate investment positions for long-term capital gains.

TCJA introduced an excess business loss (EBL) limitation starting in 2018. For 2019, the inflation-adjusted EBL limitation is $510,000/married and $255,000/other taxpayers. The EBL applies to Section 475 ordinary losses and trading expenses. Add an EBL to an NOL carryforward. For example, a single taxpayer with a $300,000 ordinary loss from 475 and trading costs, and no other wage or business income, might have an EBL of $45,000.

TCJA offers a 20% qualified business income (QBI) tax deduction for pass-through businesses, including sole proprietors. TTS trading is a specified service activity. QBI includes 475 ordinary income but excludes capital gains/losses, portfolio income, and forex. TTS expenses are negative QBI. A profitable TTS/475 trader is eligible for the QBI deduction providing their taxable income is not over the QBI thresholds.

Don’t miss the 475 election deadline
Applying for 9100 relief within six months of the 475 election due date by private letter ruling is an expensive process, and it’s likely to fail. Only one trader won this type of relief — Mr. Vines displayed no hindsight and good faith, and he had a perfect set of factors. In PLR 202009013 dated Nov. 15, 2019, the IRS ruled, “Taxpayers are not entitled to § 301.9100 relief to make a late § 475(f)(1) election because Taxpayers did not act reasonably and in good faith and granting relief would prejudice the interests of the Government.”

For more information and a sample 475 election statement, see Green’s 2020 Trader Tax Guide, Chapter 2, on Section 475 MTM.

Darren Neuschwander, CPA, contributed to this blog post.

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–Fact-Sheet.pdf and

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.