Tag Archives: CARES

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.

CARES Act

| By: Robert A. Green, CPA

Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES) on March 27, 2020. CARES temporarily affected 2018, 2019, and 2020 taxes by overriding the 2017 Tax Cuts and Jobs Act (TCJA) elements. For example, CARES provided five-year NOL carryback refund claims, whereas TCJA allowed NOL carryforwards. CARES also waived TCJA’s excess business loss limitation (EBL). These changes are temporary; TCJA applies again in 2021 through 2025. Recent tax laws extended the EBL limitation to 2028. Trader tax status (TTS) business expenses and Section 475 ordinary losses comprise EBL and an NOL. (See TCJA changes in Chapter 18).

The CARES Act provides tax relief and economic aid to employees, independent contractors, sole proprietors, and other 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 TTS operating in an S-Corp might be able to receive state and federal unemployment benefits. TTS S-Corps do not qualify for a forgivable loan under the Small Business Administration (SBA) Paycheck Protection Program (PPP) because trading is a “speculative business.” TTS traders structured as sole proprietors, partnerships, or S-Corps might be eligible for CARES five-year NOL carrybacks, relaxed retirement plan distributions, and recovery rebates.

A trader’s capital gains and Section 475 ordinary income differ from wages, earned income, and self-employment income (SEI) required for many business-related benefits under CARES. TTS sole proprietors report business expenses on Schedule C. 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.

CARES ALLOWS NOL CARRYBACKS

As discussed in Chapter 17, TCJA repealed two-year NOL carrybacks and only allowed NOL carryforwards limited to 80% of the subsequent year’s taxable income starting in tax year 2018. 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) are considered an NOL carryforward.

CARES suspended TCJA’s EBL limitation for 2018, 2019, and 2020 and permitted five-year NOL carrybacks for 2018, 2019, and 2020 NOLs. 

Business owners could consider amending 2018, 2019, and 2020 tax returns to remove EBL limitations and consider a five-year NOL carryback refund claim. If you haven’t elected Section 475 as of year-end 20243, the next opportunity is for 20254, with an election statement due by April 15, 20254. 

Businesses had until June 30, 2020, to file a 2018 Form 1045 (quickie refund) for a 2018 NOL carryback. 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 who have significant NOLs from expenses should consider NOL carrybacks. If Congress changes the rules again, the IRS should respect the refund claim since it was filed based on current law in effect at the time.

Excerpt from Green’s Trader Tax Guide Chapter 18 CARES Act.

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.