Just Taxes Blog by ITEP

The CARES Act Provision for High-Income Business Owners Looks Worse and Worse

The CARES Act Provision for High-Income Business Owners Looks Worse and Worse

April 24, 2020

Steve Wamhoff
Steve Wamhoff
Director of Federal Tax Policy

A select group of millionaires will receive an average tax break of $1.6 million thanks to a CARES Act provision that is receiving delayed but well-deserved scrutiny.

Wealthy business owners are receiving this windfall because the CARES Act provides tax breaks to people with losses from a business they own.  This approach may seem sensible because businesses small and large are taking a hit from the economic recession, but on close inspection, these provisions benefit those least in need and can be easily abused. Many people who benefit do not have business losses in any meaningful sense and the changes may particularly benefit real estate businesses like the ones owned by the Trump and Kushner families.

CARES Act Suspends Limit on Losses for Well-Off Owners of Pass-Through Businesses

ITEP has already explained that while the CARES Act provides needed relief during the COVID-19 crisis, two provisions change rules on business losses in ways that will further enrich the wealthy and do nothing to help our economy.

The larger of these two provisions benefits owners of pass-through businesses. Under rules enacted in 2017, when business owners report losses, they cannot use these losses to offset more than $250,000 of their non-business income (or $500,000 of non-business income in the case of married couples). The provision of the CARES Act temporarily suspending that rule therefore only helps those with other sources of income exceeding $250,000 or $500,000.

Obviously, this provision is not designed to help a restaurant worker or construction worker who is furloughed. While many business owners face short-term losses, this provision is available only to business owners who are simultaneously enjoying even larger amounts of positive income from other sources. In fact, Congress’s official revenue estimators concluded that 82 percent of the benefits of this provision will go to those with incomes greater than $1 million this year.

CARES Act Provision Benefits Those with Paper Losses

It gets worse. It turns out that the business owners we are talking about may, in many cases, not really have “losses” as most of us would understand that term.

This week, South Carolina School of Law Professor Clint Wallace published an essay explaining that in many cases these losses exist on paper only. He gives one example of a business owner who invests $5 million to purchase equipment for the business. This taxpayer had $5 million of cash that was converted into $5 million in equipment (which is expected to produce income) and is not $5 million poorer in any real sense. But said person could nonetheless deduct $5 million as a business loss for tax purposes and offset $5 million of other income. The pre-CARES Act rule at least limited deductions for these losses so that they could not offset more than $250,000 or $500,000 of other income. But even that rule is temporarily suspended under the CARES Act.

Wallace provides other examples of how these losses may exist only on paper. For example, business owners may report losses simply because they direct their company to pay them a high salary, which drains away the business’s revenue.

Another example involves real estate investors who collect a tidy profit on rental income but report losses as a result of deductions for interest payments on debt and deductions for “depreciation” even though the properties they own are actually appreciating in value.

What’s the Deal with Real Estate?

The example of real estate is an interesting one because there has been much speculation about the types of industries most likely to benefit. While it is impossible to know for sure without having access to the tax returns of individual business owners, there is some evidence that certain sectors will likely benefit more than others. For example, the Tax Policy Center’s Steve Rosenthal points out that partnerships (which make up the majority of pass-through businesses) engaged in real estate and leasing reported $154 billion in net losses in 2017 compared to just $31 billion in net losses reported by partnerships engaged in manufacturing.

Much of the losses for the real estate partnerships are rental losses. A rental loss is a type of “passive” loss. The tax code limits passive losses because they are so often paper losses. But special rules for the real estate industry turn these limits off for “real estate professionals,” a term defined in a way that probably encompasses most real estate investors. This is just one of the many provisions described in an ITEP report on special tax breaks for real estate investors and how Congress can shut them down.

The real estate question is particularly relevant given that President Trump and his son-in-law and adviser, Jared Kushner, are heavily invested in real estate and known to use many, if not all, of the real estate tax breaks that ITEP has described. For example, the New York Times reported that Jared Kushner claimed losses on his real estate business even though he and his company did not invest their own money and did not lose money.

Notably, if the president and his family members had disclosed their income taxes in the same way decades of previous presidents had done, we would be able to easily determine whether these retroactive tax breaks could benefit them.

Why This Matters

Senate Majority Leader Mitch McConnell has indicated that any further legislation to provide relief from the COVID-19 crisis must be constrained by the need to control the budget deficit. This comes after the CARES Act provided a tax break on pass-through business owners with paper losses as described here.

According to Congress’s official revenue estimators, the benefits of this CARES Act provision this year will go to 43,000 millionaires who receive a total of $70.3 billion from this break alone. That comes to about $1.6 million for each millionaire who benefited. Recall that the CARES Act’s tax rebates that received far more attention are $1,200 for each adult and $500 for each child.

If lawmakers like Sen. McConnell are going to declare that the deficit suddenly matters again despite enacting trillions of dollars in tax cuts in 2017, they could make themselves appear slightly less outlandish if they showed some concern about tax giveaways for wealthy business owners who are not even suffering real losses.



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