Hodgepodge of CARES Act Conformity Will Confuse and Frustrate New York Taxpayers

Earlier this year, Congress passed and the president signed into law the CARES Act, P.L. 116-136, which, in part, granted tax relief to taxpayers to offset the impact of the COVID-19 pandemic on the economy. Many of the federal tax breaks would, in the ordinary course, be incorporated into the New York state and City corporate and personal (individual) income taxes. Presumably concerned with its diminished ability to fill its coffers, the New York state legislature quickly enacted legislation (L. 2020, ch. 58, part WWW) to “decouple” from parts of the CARES Act for purposes of both state and City income taxes. In the past few weeks, an additional bill (2020 NY Senate-Assembly Bill S8411, A10519) further decoupling has been proposed. New Yorkers will have to make sense of a patchwork of conformity and non-conformity between New York and federal law. Moreover, for New York taxpayers, the status of two popular aspects of the CARES Acts—the tax-free forgiveness of PPP (as defined below) loans and corrections to depreciation of QIP (as defined below)—is unclear.

The tax relief in the CARES Act largely consisted of statutory relief from certain revenue-raising amendments that the 2017 tax act, P.L. 115-97 (commonly referred to as the Tax Cuts and Jobs Act or TCJA) made to the Internal Revenue Code (IRC). One TCJA amendment, the revision of IRC §163(j), generally limited a taxpayer’s deduction for business interest expense to 30% of that taxpayer’s taxable income (with certain adjustments). The CARES Act permits, for 2019 and 2020, a 50% (rather than 30%) limitation, the use of (presumably higher) 2019 income for purposes of computing the 2020 limitation, and the use of a certain liberalized computation for partnerships. Another TCJA amendment, to IRC §172, generally limited net operating loss (NOL) deductions to 80% of a taxpayer’s taxable income and eliminated NOL “carrybacks.” The CARES Act, for 2018, 2019, and 2020, removes the 80% limitation and permits carrybacks for five years prior to the year in which the loss arises. One other TCJA amendment, the addition of IRC §461(l), generally disallowed for non-corporate taxpayers the deduction of a business loss against investment income. The CARES Act, for 2018, 2019, and 2020, eliminates the disallowance.