NOL Flexibility Remains A Sticking Point In Virus Relief Bill

By Alan K. Ota
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Law360 (August 6, 2020, 7:35 PM EDT) -- Republicans are looking to help farmers by reshaping a newly enacted five-year carryback allowance for net operating losses, while Democrats may be losing ground in their drive to downsize the carryback incentive in legislation addressing economic fallout from the coronavirus.

Senate Finance Committee Chairman Chuck Grassley has been pushing a proposal as part of the Senate Republicans' coronavirus relief package to give farmers an option regarding how long they can carry back net operating losses. (AP)

A dispute over competing plans to reshape the temporary five-year carryback allowance for business net operating losses in 2018, 2019 and 2020 contained in the Coronavirus Aid, Relief and Economic Security Act  has emerged as a potential flashpoint in talks to frame a bicameral pandemic response package.

Senate Finance Chairman Chuck Grassley, R-Iowa, has been pushing a proposal in the Senate GOP pandemic plan to give farmers the option of either a five-year NOL carryback under the CARES Act or the exclusive two-year NOL carryback for farmers under the Tax Cuts and Jobs Act . The 2017 law allowed such losses to be carried forward indefinitely, but did not allow them to be carried back by most taxpayers, except farmers.

Grassley's proposal also would allow revocation by farmers of decisions they made 2018 and 2019 to waive a two-year NOL carryback, and let them claim a five-year NOL carryback for losses in 2018, 2019 and 2020.

The top Senate tax writer said additional flexibility would aid farmers facing challenges such as fluctuating market prices for grains and beef during the pandemic.

"Farmers are a business, too. We need to help farmers," Grassley told Law360.

While playing offense on tweaks for farmers, Grassley has held the line against an ambitious Democratic proposal passed by the House in the Health and Economic Recovery Omnibus Emergency Solutions Act to prevent losses from being carried back beyond 2018. Democrats argued that such losses should not be used as offsets before the 2018 implementation of the tax overhaul's lower rates. But Grassley has argued that the temporary five-year carryback allowance is needed to help businesses deal with novel coronavirus-related setbacks.

"Do away with that? No. It's only until the end of the year," Grassley said.

On the other side, Democrats have made the case for curtailing loss-related incentives in the CARES Act to raise revenue and help finance the Heroes Act's relief measures, including broader incentives for families with children and a suspension of the $10,000 cap on state and local tax deductions for 2020 and 2021. The Democratic plan also would end a suspension from 2018 through 2020 of annual caps on pass-through business losses that can offset nonbusiness income — $250,000 for individuals and $500,000 for married couples — in Internal Revenue Code Section 461(l) and make them permanent instead of expiring after 2025.

Speaker Nancy Pelosi, D-Calif., has called for shrinking the five-year NOL carryback allowance and reviving the so-called excess loss caps — projected together to raise $254 billion over 10 years by the Joint Committee on Taxation — in order to "use that money for working families in our country."

But on Tuesday, Pelosi acknowledged on PBS that proposed carryback curbs might be losing traction in negotiations with the White House and GOP lawmakers.

"We'd like to get rid of that. I don't think we'll have that chance. But when we address the issue of taxation in our country, we will do that in a way that is bipartisan, has sustainability, fairness and transparency," Pelosi said.

Ways and Means Committee Chairman Richard Neal, D-Mass., made clear he and other Democrats were not quite ready to give up efforts to curb the carryback allowance and restore the excess business loss framework.

"I support the speaker's position," Neal told Law360.

But Neal declined to take a stance on Grassley's proposal to make modest tweaks to the five-year carryback to help farmers.

"I want the Heroes Act done. I want the full package. I don't want to just negotiate piecemeal," Neal said.

As both parties try to agree on a replacement for an expired expansion of jobless aid and other items, business advocates are working to try to protect the current carryback allowance. They also are trying to resolve a dispute over President Donald Trump's efforts to revive a proposed payroll tax cut.

Conor Bernstein, a spokesman for the National Mining Association, told Law360 in an email that adoption of the House Democrats' tax proposal "would be a crippling blow to the economy and to millions of families."

"If the goal is to weather this storm, keep people working and build momentum towards recovery, this proposal does just the opposite," Bernstein said.

In a June letter to the Senate Finance Committee, a coalition of business groups said the loss-related tax items in the CARES Act came at a challenging time for many industries, and will provide liquidity that is necessary for operations.

"We are concerned that some in Congress are seeking to reverse these changes and would urge you to leave them in place," the coalition said. Participants include the mining association, American Farm Bureau Federation, National Restaurant Association, National Retail Federation and S Corporation Association.

Whatever happens to the proposed Democratic tax framework for business losses, it remains unclear whether Grassley will succeed in getting his proposal from the Senate GOP plan — the Health, Economic Assistance, Liability Protection and Schools Act — included in a final package that resolves differences between GOP business incentives and Democratic relief measures.

Kristine Tidgren, director of the Center for Agricultural Law and Taxation at Iowa State University, said Grassley's proposal could help a number of farm operations. For example, some farmers would prefer to use the two-year NOL carryback, she said, because "the administrative hassle of going back five years would be a burden without a benefit."

Roger McEowen, a professor at Washburn University School of Law, said other farmers would prefer to use the five-year NOL carryback to offset higher incomes they had in several prior years including 2013 and 2014.

"It's not something they were counting on. But it would be a bonus if it does occur. It would be helpful to many farm operations to have more cash on hand right now," McEowen told Law360.

With such concerns in mind, several Democrats including Sen. Debbie Stabenow, D-Mich., a senior tax writer and ranking member on the Agriculture Committee, said they remained open to Grassley's approach to altering the temporary five-year NOL carryback for farmers. But like Neal, Stabenow said Grassley's proposal would have to be weighed as part of a broader deal on loss-related incentives and other issues.

"You have to have a package. Right now, I just don't know what's going to happen. It's going to have to be part a package that's fair to businesses and farmers and families," Stabenow told Law360.

--Editing by Tim Ruel and Neil Cohen.

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