CARES Act

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As discussed in Chapter 17, TCJA repealed two-year NOL carrybacks and only allowed NOL carryforwards limited to 80% of the subsequent year’s taxable income starting in tax year 2018.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