For weeks, we’ve heard that the net operating loss and loss limitation relief included in the CARES Act is a “massive” tax break for “hedge funds” that was “snuck” into the bill at the last moment. Those of us who advocated for this provision know none of this is true. Here are the key facts readers need to know.
First, the policy at issue is important, even though it may not seem exciting. It gives businesses suffering net operating losses the ability to recognize those losses more quickly. Under the CARES Act, they can file amended returns and claim refunds against taxes they paid in prior years, or they can apply the net operating losses against other forms of income earned this year, including investment and wage income.
Second, the policy follows the old adage that you can’t have your cake and eat it too. Any losses recognized this year will not be around to reduce taxes next year or thereafter, so that any tax benefit claimed in 2020 will be effectively “repaid” through higher tax payments in future years. The benefits of net operating loss carrybacks and relaxing loss limitation restrictions are largely timing benefits in which the goal is to smooth out tax payments so they go down during recessions (such as the one we are in now) and then rise again during the good times.
Third, allowing businesses to speed the recognition of losses is a long-standing anti-recession policy with solid bipartisan support. It was adopted after the Sept. 11, 2001, terrorist attacks, after Hurricane Katrina, and again following the financial crisis. The list of policymakers supporting this approach in the past is long and bipartisan and includes former President Barack Obama, House Speaker Nancy Pelosi, Ways and Means Chairman Richard Neal, and others.
Fourth, these policies have broad support in the business community. Congress was asked by 120 national trade groups to enact this provision as part of the broader COVID-19 response, including the American Farm Bureau, the National Federation of Independent Business, and the National Restaurant Association. These business groups represent sectors of the economy that were hard-hit by the COVID-19 recession, and they know net operating loss and loss limitation relief can help their members now, when they need it.
Finally, there was no sneaking. This provision was requested by the broader business community, included in the initial CARES Act “draft” released on March 19, and included in every subsequent draft leading up to the bill’s adoption by both the Senate (March 26) and the House (March 27).
To sum up, at issue is standard tax policy with a long history of bipartisan support that enables businesses with net operating losses to speed deductions for those losses. Those businesses can reduce their tax burden now, but at the cost of higher taxes in the future.
How did this “business as usual” response to an economic downturn become such a lightning rod? The revenue estimate from the Joint Committee on Taxation had something to do with it. The committee initially estimated that a one-year suspension of the loss limitation rules would reduce revenues by $170 billion over 10 years or about $20 billion more than the entire loss limitation provision was estimated to raise when it was enacted just three years ago.
How can a one-year suspension of a “timing” policy cost the federal government this much revenue? The answer is we have no idea, but the next step in this debate should be a full accounting of the committee’s revenue estimate. Learning why they think this policy costs so much could help inform policymakers — is it because they expect unprecedented numbers of bankruptcies?
Meanwhile, at a time when millions of businesses are suffering losses due to government-imposed shutdowns, giving them a chance to recognize net operating losses more quickly is the least we can do to help them stay solvent and keep their workers employed. Accelerated recognition of net operating losses has been a response to every recession in recent memory, and it needs to be part of this one too.
Brian Reardon is the president of the S Corporation Association and a former special assistant to President George W. Bush at the National Economic Council.
