equine

Article Autumn Hines

As I write this article, the elections have not yet occurred. Much of my recent conversations with our clients, many of whom are horse and farm owners with other operating businesses and/or significant investment portfolios, have focused on “what ifs” – e.g., what happens to income tax rates or the lifetime gifting exemption if there is a change of political party control in Congress and/or the White House. Perhaps by the time you are reading this article, we will know who our next President is and which political party controls each chamber of Congress.  In the meantime, this article includes a few tax planning items that may be helpful as year-end approaches. The items discussed below are current as of September 14, 2024.

Let’s first focus on some year-end income tax planning items. If the goal is to accelerate deductions this year, then consider purchasing and placing in service (meaning the asset is ready to be used for its intended purpose) assets that qualify for the 60% bonus depreciation by 12/31/24. Qualifying assets, which must be used predominantly in the United States, include equipment, fencing, land improvements, barns, and most horse purchases (with some exceptions). In addition to the above favorable depreciation write-off, many horse and farm owners qualify to use the cash method of accounting when filing annual tax returns. If you are cash-basis, consider pre-paying expenses by year-end. Please note, however, that you should have a non-tax reason for doing so. Non-tax reasons may include bulk or early payment discounts obtained for expenditures such as feed, supplies, or advertising or for access to a particular stallion.

The above commentary assumes your horse operations are conducted as a business and you are either an active participant under the material participation rules (a description of which is beyond the scope of this article) or have enough other passive activity income to offset these losses. You should also be aware of the excess business loss limitation, which may limit the amount of net business loss claimed on your individual tax return and convert the excess into a net operating loss carryover available in future years.

For individuals who are charitably inclined, cash contributions made to qualified public operating charities (NOT including donor-advised funds, however) by year-end may offset up to 60% of your 2024 adjusted gross income. For C corporations, these contributions may offset up to 10% of 2024 taxable income. 

In addition to year-end income tax considerations, it may be prudent to address estate planning matters. One of the most effective ways to do this is via lifetime gifts. First, a few basics regarding gifting – Annual gifts of $18,000 may be given to US citizens free of gift and generation-skipping tax (GST) in 2024. In addition to this annual gift limit, the 2024 lifetime gift and GST exclusion is $13.61 million per person.  If the lifetime threshold is exceeded, then the gift is taxable to the person who makes the gift at a 40% gift tax rate and a 40% GST rate (if applicable). The GST is charged in addition to the gift tax if gifts are made to a person who is more than 37.5 years younger than the person making the gift, the intent being to capture the additional tax on gifts that may skip a generation (the most common of which may be gifts to grandchildren).

Under current law, the lifetime gift and GST exemption is scheduled to be at an increased level through 2025 (amount adjusted annually for inflation). In 2026, this lifetime exemption is scheduled to revert to the 2017 limitation of $5 million (plus subsequent inflation adjustments). If you have not previously taken advantage of this increased exemption over the past few years, I recommend discussing this now with your advisors.

An ideal asset to gift is property that is expected to appreciate in value. If you gift something worth $100,000 today and it appreciates to $500,000 at your death, then you’ve gotten $500,000 out of your estate and only used $100,000 of lifetime gifting exemption. On the other hand, if that $100,000 gift depreciates to a $40,000 value, then you’ve potentially wasted $60,000 of lifetime gifting exemption.

Equine assets may also be included in your gifting plan, albeit some equine assets may be more effective than others. Horses are tricky with regard to gifting as it certainly can be difficult to determine whether or not they will appreciate in value. If you want horses to be part of your gifting plan, consider stallion shares from an already profitable stallion (which produces cash-flow) or a broodmare interest versus younger racing prospects. Of course, the person receiving this gift will then be responsible for care of the horses, so that ongoing expense should be considered. Farms, on the other hand, tend to be held long-term which hopefully will lead to appreciation over time.

To maximize the gift, assets are often contributed to a pass-through entity (holding company) by parents or grandparents. Non-controlling interests in this holding company are either gifted or sold at a discount to the children or grandchildren (or trusts for their benefit) with the voting interest retained by the original owner.

As the saying goes, nothing is certain in life except death and taxes. The first is unavoidable, but exposure to the second may be managed via effective tax planning, some of which is mentioned above. It will be interesting to see what impact, if any, the results of the election have on tax planning.

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General Guidelines

  • In general, horses, cattle and other farm assets may be eligible to be depreciated once purchased and placed in service. Horse and farm owners may now use the 200% declining balance for qualifying assets. If the 150% declining balance is preferred, an irrevocable election may be made to utilize this.
  • Some examples of depreciable lives for common equine assets:
    • 3 years: Yearlings placed in service through 12/31/2021, racehorses over 2 years old, any horse other than a racehorse (i.e., breeding stock) which is more than 12 years old
    • 5 years: NEW (but not used) farm equipment, cattle
    • 7 years: Any horse other than a racehorse which is 12 years old or less, farm equipment not eligible for 5-year life, fencing, racing prospects 2 years old or less (yearlings) placed in service after 12/31/2021
    • 15 years: land improvements such as road
    • 20 years: barns
  • It is important to note that the depreciable life for horses depends on the actual age of the horse (based on foaling date versus the January 1 industry standard) when placed in service. Inventory items, such as weanlings or weanling to yearling pinhooks, are not eligible to be depreciated.
  • Assets used predominantly outside of the U.S. and electing farm businesses for purposes of the business interest limitation are required to use the alternative depreciation system (ADS) for certain assets which are also not eligible for the Federal bonus depreciation covered below.

Bonus Depreciation

  • Federal bonus depreciation has been significantly expanded, increasing the deduction in the first year and the type of qualifying property which is eligible for this first-year deduction.
  • Through 2023, 80% of the purchase price may be depreciated when the horse or other qualifying asset is placed in service.
  • After 12/31/2023, the bonus depreciation percentage decreases by 20% each year (so 60% in 2024, 40% in 2025, 20% in 2026 and zero thereafter).
  • In order to qualify, the property must not have been previously owned by the purchaser, must not have been acquired from a related party or via gift or inheritance, and must be predominately used in the United States.
  • Examples of potentially qualifying property are yearlings, racehorses, breeding stock, equipment, fencing, land improvements, and barns.
  • Bonus depreciation applies to large and small businesses – there are no sized-based limits and the deduction is allowed whether or not the business has taxable income. It is also not prorated based on the time of year that assets are placed in service.
  • An annual election out of this bonus depreciation is available on an asset class-by-class basis.

Section 179 Depreciation

  • The 2023 annual limit for Section 179 expense is $1,160,000 but this starts to phase-out dollar-for-dollar if qualifying property additions exceed $2,890,000 (adjusted annually for inflation). For 2024, the Section 179 limit is $1,220,000 on up to $3,050,000 of qualifying property.
  • Like bonus depreciation above, the deductible amount is not impacted by when during the year the property is placed in service – late year qualifying additions receive full benefit.
  • Property previously owned may also qualify for this deduction.
  • However, this deduction is available only to the extent of the taxpayer’s net business income.

Limitations

  • Excess Business Loss limitations (applicable through 2028) – may apply for individuals, trusts or estates. While not equine-specific, net business losses are subject to an annual limitation through 2028, adjusted annually for inflation, with the excess treated as a net operating loss carry-forward. In 2023, total net business losses – both equine and non-equine – are limited to $289,000 ($578,000 if filing a joint tax return). If net business losses exceed this limit, this results in a deferral of the excess loss subject to the net operating loss carry-forward rules (eligible to offset up to 80% of taxable income in subsequent years).
  • Hobby loss rules and – separately – the passive activity rules may either limit the deductibility or defer depreciation expense into future years.
  • Many states have decoupled from the accelerated depreciation provisions so the accelerated depreciation may be a Federal-only tax benefit (merely a timing difference).

Click here to download the summary.

The matters discussed above provide general information only. Industry participants should consult with their professional advisors about their specific situation before undertaking action based on such general information.

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It’s tax time, whether we like it or not, and the United States 2021 tax filing deadline, this year falling on April 18, 2022 is rapidly approaching! Below are some helpful tax reminders for equine industry participants as they complete their 2021 tax returns.

COVID-19 Related Economic Stimulus Programs

  •  The Paycheck Protection Program (PPP) ended on 5/31/21. If a PPP loan was forgiven before 2022, the loan forgiveness, which is non-taxable, should be reported on either a 2020 or 2021 tax return. There are also some 2021 additional reporting requirements for S corporations which previously reported the loan forgiveness on a 2020 tax return based on recent guidance issued by the IRS in 2022.

  • Employee Retention Credits concluded as of 10/1/21 for most. Credits for voluntary employer-provided paid sick and family leave for various COVID-19 related reasons expired 9/30/21.

  • For those who deferred the payment of 2020 employer payroll taxes, 50% of these were due by 12/31/21 with the remaining 50% due by 12/31/22. 

Depreciation

  • 100% bonus depreciation is available on purchases of qualifying assets that were placed in service during 2021 and 2022. Examples of qualifying assets may include yearlings, racehorses, breeding stock, equipment, fencing, land improvements and barns. Bonus depreciation is most commonly used by industry participants since it is not limited to taxable income and may be used to create or increase a tax loss. 

  • Yearlings may use the 3-year depreciation life through 2021
  • NEW farm equipment may use 5-year (versus 7-year) life

Deductions

  • Meals purchased at restaurants (including racetracks and at the sales) are 100% deductible in 2021 and 2022. These are normally only 50% deductible for tax purposes.

  • Cash donated by individuals to public operating charities during 2021 may be eligible to offset up to 100% of adjusted gross income. This limitation returns to 60% in 2022.

  • For profitable businesses owned by individuals, there may be a 20% qualified business deduction available. 

Other Items of Caution

  • Excise Business Loan Loss –

    The excess business loss limitation returns for individuals, trusts and estates in 2021 and remains through 2026 under current law. This limits the 2021 net business loss to ($262,000) or ($524,000) if filing a joint return. The excess above this limitation is treated as a net operating loss (NOL) carryforward available to offset taxable income in future years, subject to the regular NOL carryforward rules. 

  • Hobby Loss Rules –

    Attention should be paid to the hobby loss rules, which require that gross revenues be included in taxable income with no offset for any of the related expenses if an activity is treated as a hobby. The 100% bonus depreciation accelerates tax losses and tax losses sustained over a period of time may cause an IRS audit. Industry participants should employ good business practices and document the steps being taken to make a profit. 

  • Other Transactions –

    There are some additional reporting requirements for individuals who participate in virtual currency transactions (including using the virtual currency to purchase goods or services or accepting virtual currency for goods or services), for partnerships to report gross revenues and expenses for foreign tax credit purposes (even if the partnership does not have any foreign activity), and some basis reporting forms for S corporation shareholders who report losses.

This summary addresses Federal tax reminders. State tax treatment may vary and many states have not adopted the more favorable Federal tax incentives noted above.

Contact your Dean Dorton advisor with questions.

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Written by Jen Shah, Dean Dorton Tax Director and Equine Industry Lead

What drama we have in December! After Congress passed the Consolidated Appropriations Act, 2021 (Act) on December 21st, the President unexpectedly called for amendments. In the meantime, we are getting many questions about what is in this Act, so I’ve decided to issue our summary based on what’s currently in the Act passed by Congress. I will stress, however, that until the President signs this Act (or an amended version), the items covered below are not law. For now, let’s just call this a preview of what may be included if these items in the current bill make it into the final version.

Before I cover the economic relief provisions which may be most impactful to horse and farm owners, I wanted to note that this is a federal Act so the below discussion is focused at the federal level. States will separately decide whether or not to adopt all, some or none of this Act (again, if ultimately signed into law).

For industry participants, there are some favorable updates included within the Act.  The three-year depreciation recovery period for yearlings, set to expire as of 12/31/20, is extended until 12/31/21. This Act also clarifies that farming net operating carrybacks are still eligible for the two-year carryback (versus the general five-year net operating loss carryback as authorized by the CARES Act). Additionally, those who previously waived the carryback period for farming net operating losses prior to the CARES Act being passed in March 2020 may revoke this prior waiver in order to file a net operating loss carryback claim.

As a reminder, the 100% bonus depreciation is still effective for 2020 through 2022 under current tax law. And, while thankfully not included retroactively with this Act, the pesky excess business loss limitation for individuals, trusts and estates (roughly $250K or $500K if married filing a joint return) returns in 2021 through 2025.

There are also other general non-equine specific provisions included within the Act. The employer tax credit for the paid sick and family leave has been extended through March 31, 2021 and the employee retention credit has been extended through July 1, 2021. Meals from restaurants are fully deductible in 2021 and 2022 (increased from 50% in prior years). For those individuals who do not itemize deductions, a $300 ($600 if married filing jointly) charitable deduction is available for cash donations made to qualifying public charities. The increased limitations for cash gifts made to public operating charities (but not donor-advised funds) for individuals (up to 100% of adjusted gross income) and corporations (up to 25% of taxable income) for 2020 are now extended into 2021.

There are several favorable updates to the Paycheck Protection Program (PPP) loans so let’s first cover updates to existing PPP loans and then move on to the new PPP loan program. First, the Act confirms the tax-free nature of the PPP loan proceeds that are forgiven (which quite frankly was the intent of the CARES Act but the IRS disagreed). So, if I used a $10K PPP loan to pay qualified payroll expenses and the PPP loan was fully forgiven, I am still able to deduct those $10K of payroll expenses on my tax return. This has been the topic of much debate since the IRS issued guidance and this Act confirms the tax-free nature of the forgiven PPP loan proceeds.

The amount of PPP loan authorized by the CARES Act was calculated based on average monthly payroll costs over typically a 12-month period times 2.5 (limited to $10M). Amounts spent on qualifying expenditures were eligible to be forgiven but at least 60% of these loan proceeds were required to be used for payroll costs. Qualifying expenditures previously included payroll costs, certain interest, rent and utilities. This Act clarifies that eligible payroll costs also include employer-provided group insurance such as dental, vision, disability and group life. It expands qualifying expenditures to also include costs such as software, human resources, accounting, and personal protective equipment purchased to comply with federal health and safety guidelines. In addition, a borrower may elect a covered period between 8 – 24 weeks after the PPP loan origination.  While these provisions do not increase the amount of the PPP loan for which a business qualifies, they do increase the potential to maximize the PPP loan forgiveness.

For those who would not qualify for full forgiveness of the PPP loan proceeds under the CARES Act, you may be able to apply your PPP loan proceeds towards the expanded qualifying expenses included by this Act. You may do so as long as you have not yet received forgiveness. If your application is in process and you have additional expenses that would increase the PPP loan forgiveness amount, I would recommend contacting your banker as soon as possible.

This Act also expands eligibility to certain industry participants who were not previously eligible to apply for a PPP loan. 501(c)(6) organizations with 300 or fewer employees and minimal lobbying activities are generally now eligible for these PPP loans. Most significantly, however, sole proprietors (including those with a single-member LLC) who file a Schedule F and who do not have employees may apply for a PPP loan as long as they were in business as of February 15, 2020. Previously, in order to qualify, sole proprietors either had to have net self-employment income (often difficult to report a net taxable profit given current tax incentives) or employees. Under this Act, the 2019 gross revenues as reported on Schedule F may be used to calculate the PPP loan for which an owner is eligible even if they do not have employees.

This could potentially apply to industry participants such as trainers, bloodstock agents, consignors, jockeys, breeding businesses, pinhookers, and racing operations (if activities are reported on a Schedule F versus Schedule C) which may rely upon third party independent contractors versus employees. Note that the total 2019 Schedule F gross revenues when calculating the amount of PPP loan is limited to $100K. So, if a sole proprietor has Schedule F gross revenues of $100K or greater, the PPP loan is limited to $20,833. If you have previously applied for a PPP loan and are now eligible for a greater amount due to the above change, this Act allows you to request an additional amount of PPP loan proceeds based on this new calculation.

There is also a simplified application and forgiveness process for PPP loans of less than $150K if the business submits certain information to the bank which should expedite this process.

In addition to the enhancements to the existing PPP loan program, this Act creates a second loan, called a “PPP second draw” loan of up to $2M for smaller businesses that were in operation as of February 15, 2020 with decreased revenues. The loan amount for horse and farm owners (other industries qualify for a higher multiple) is still based on 2.5 times the average monthly payroll for one year prior to the loan or the 2019 calendar year. This second draw loan is also eligible for tax-free forgiveness if the proceeds are spent on the expanded definition of qualified expenses as noted above but at least 60% still needs to be spent on payroll costs.

In order to qualify for this “PPP second draw” loan, businesses must have 300 employees or less, have used (or will use) all of their first PPP loan and demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 versus the same 2019 quarter. Different timelines apply to businesses that were not in operation during all of 2019 and applications submitted after January 1, 2021 are eligible to use the gross receipts from fourth quarter 2020. Eligible entities include businesses with employees and self-employed individuals. Given reduced or cancelled racing and sales, industry participants who used the first round of PPP loan proceeds may qualify for this second draw loan if the 25% reduction of gross receipts test is met.

There is not a specific deadline to apply for these enhanced PPP loan programs but based on the prior PPP loan program, it would be wise to apply as soon as possible. The Act requires that regulations be issued within 10 days of enactment so we should have more information once this guidance is issued. In the meantime, I would recommend gathering the information needed to calculate the potential PPP loan and communicating with your bank on how best to proceed.

Again, please consider the above a preview of what may be included in the final law. Stay tuned as we will communicate substantial updates (if applicable) to the above and continue to monitor legislative developments on these economic relief provisions which may impact horse and farm owners.

In the meantime, I wish everyone a happy and healthy holiday season. Cheers, Jen

Jen Shah, CPA
Tax Director
jshah@deandorton.com • 859.425.7651

Article Dean Dorton

Not much has changed from an income tax perspective since I wrote the below article. Most elections have occurred and we still have some uncertainty on a few races. But there have been no stimulus relief bills or tax law updates yet, so as year-end approaches, keep these planning ideas in mind for 2020.

This article was first published in the November 6th edition of the Blood Horse Magazine
Written by: Jen Shah, CPA

As I write this article, the elections have not yet occurred. Much of my recent conversations with our clients, many of whom are horse and farm owners with other operating businesses and/or significant investment portfolios, have focused on “what ifs” – e.g., what happens to income tax rates or the lifetime gifting exemption if there is a change of political party control in Congress and/or the White House. Perhaps by the time you are reading this article, we will know who our next President is and which political party controls each chamber of Congress. In the meantime, this article includes a few tax planning items that may be helpful as year-end approaches. The items discussed below are current as of October 29th, 2020.

Let’s first focus on some year-end income tax planning items. 2020 could be the optimal year to accelerate deductions in your horse operations (or other operating businesses) both for individuals and C corporations. The CARES Act, passed in March 2020, included two particularly beneficial provisions for industry participants:

  1. Allowing net operating losses generated in 2020 (and also 2018 and 2019) to be carried back five years (applies to both individuals and C corporations), and
  2. Temporarily postponing the new excess business loss (EBL) limitation until 2021 (applies to individuals). These provisions were discussed in our article which appeared in the May 2nd issue of the BloodHorse, so I have not included detailed information about them here.

If the goal is to accelerate deductions this year, then consider purchasing and placing in service (meaning the asset is ready to be used for its intended purpose) assets which qualify for the 100% bonus depreciation by 12/31/20. Qualifying assets, which must be used predominantly in the United States, include equipment, fencing, land improvements, barns, and most horse purchases (with some exceptions). In addition to the above favorable depreciation write-off, many horse and farm owners qualify to use the cash method of accounting when filing annual tax returns.  If you are cash-basis, consider pre-paying expenses by year-end. Please note, however, that you should have a non-tax reason for doing so. Non-tax reasons may include bulk or early payment discounts obtained for expenditures such as feed, supplies, or advertising or for access to a particular stallion.

The above commentary assumes your horse operations are conducted as a business and you are either an active participant under the material participation rules (a description of which is beyond the scope of this article) or have enough other passive activity income to offset these losses.

For individuals who are charitably-inclined, cash contributions made to qualified public operating charities (NOT including donor-advised funds, however) by year-end may offset up to 100% of your adjusted gross income for 2020 only. For C corporations, these contributions may offset up to 25% of 2020 taxable income (up from the normal 10%).

In addition to year-end income tax considerations, it may be prudent to address estate planning matters. One of the most effective ways to do this is via lifetime gifts. First, a few basics regarding gifting – Annual gifts of $15,000 may be given to US citizens free of gift and generation skipping tax (GST). In addition to this annual gift limit, the 2020 lifetime gift and GST exclusion is $11.58 million per person. If the lifetime threshold is exceeded, then the gift is taxable to the person who makes the gift at a 40% gift tax rate and a 40% GST rate (if applicable). The GST is charged in addition to the gift tax if gifts are made to a person who is more than 37.5 years younger than the person making the gift, the intent being to capture the additional tax on gifts that may skip a generation (the most common of which may be gifts to grandchildren).

The lifetime gift and GST exemption significantly increased in 2018 as part of the Tax Cuts and Jobs Act (TCJA) and is scheduled to be at an increased level through 2025 (amount adjusted annually for inflation). In 2026, this lifetime exemption is scheduled to revert to the 2017 limitation of $5 million (plus subsequent inflation adjustments). If the Democrats take control of the White House and/or Congress, many expect a push to pass legislation that reduces these increased annual gifting and GST exemptions sooner than the scheduled 2026 reduction.

An ideal asset to gift is property that is expected to appreciate in value. If you gift something worth $100,000 today and it appreciates to $500,000 at your death, then you’ve gotten $500,000 out of your estate and only used $100,000 of lifetime gifting exemption. On the other hand, if that $100,000 gift depreciates to a $40,000 value, then you’ve potentially wasted $60,000 of lifetime gifting exemption.

Equine assets may also be included in your gifting plan, albeit some equine assets may be more effective than others. Horses are tricky with regard to gifting as it certainly can be difficult to determine whether or not they will appreciate in value. If you want horses to be part of your gifting plan, consider stallion shares from an already profitable stallion (which produces cash-flow) or a broodmare interest versus younger racing prospects. Of course, the person receiving this gift will then be responsible for care of the horses, so that ongoing expense should be considered. Farms, on the other hand, tend to be held long-term which hopefully will lead to appreciation over time.

To maximize the gift, assets are often contributed to a pass-through entity (holding company) by parents or grandparents. Non-controlling interests in this holding company are either gifted or sold at a discount to the children or grandchildren (or trusts for their benefit) with the voting interest retained by the original owner.

Those who made large gifts prior to 2018 may still have substantial exemptions remaining due to the significant increase in the exemption. I recommend discussing this now with your advisors if you are interested in considering gifts by year-end and gaining the benefit of the current historically high exemptions.

As the saying goes, nothing is certain in life except death and taxes. The first is unavoidable, but exposure to the second may be managed via effective tax planning, some of which is mentioned above. It will be interesting to see what impact, if any, the results of the election have on tax planning.

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This article was first published on Blood-Horse Magazine

As the COVID-19 pandemic continues to impact families and businesses across the country, government leaders have focused on helping Americans cope with the economic fallout of the virus. Over the past several weeks the Thoroughbred industry’s focus has been on the various stimulus packages for which horse and farm owners may apply in order to help current cash flow.

In addition to these loan programs, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law at the end of March, contains numerous income tax provisions benefiting taxpayers. Some of these provisions impact 2019 tax filings but might also provide amendment opportunities for 2018 tax filings. Other changes are effective for tax years beginning in 2020. The goal of all of these income tax provisions is to accelerate cash refunds or to keep cash with individuals and businesses.

Below, we break down some of the recent tax changes that might benefit individuals and businesses in the equine industry.

A note on income tax deadlines

Before diving into the CARES Act, it is important to note some changes to income tax deadlines. In response to COVID-19, the Department of Treasury has postponed to July 15 the deadline for most federal income tax returns and payments due on or after April 1 and before July 15, 2020. This extension applies to federal income tax returns and payments for the 2019 tax year that are normally due by April 15. It also applies to first and second quarter estimated income tax payments for tax year 2020, which would otherwise be due April 15 and June 15. For taxpayers struggling with cash flow in the wake of the pandemic, postponement of these tax payment deadlines allows them to retain cash a little longer.

Elimination of the excess business loss limitation for tax years 2018-20

In a big win for the equine industry, the CARES Act retroactively postpones implementation of the excess business loss (EBL) limitation until tax years beginning after Dec. 31, 2020. The Tax Cuts and Jobs Act (TCJA), passed at the end of 2017, introduced a limitation on business losses deductible by individuals and other non-corporate taxpayers (trusts and estates) against non-business income. This is calculated at the individual level and not at the pass-through entity level, as individuals combine all business activities when determining overall net business income or loss. Specifically, the TCJA disallowed net 2018 tax losses from active businesses in excess of $250,000 (for individual taxpayers) and $500,000 (for joint filers), adjusted annually for inflation. Disallowed losses are treated as net operating loss carryforwards to the following tax year. Under the TCJA, the EBL limitation was effective for tax years 2018 through 2025.

Many horse and farm owners who used income tax incentives—such as the 100% bonus depreciation—were subject to this EBL limitation beginning in 2018, which often resulted in a one-year deferral of this EBL.

The CARES Act retroactively postpones the effective date of the EBL limitation until tax years beginning in 2021. Taxpayers that filed a 2018 tax return reflecting a disallowed EBL or a 2019 tax return reflecting a disallowed EBL (or a carryover of a disallowed EBL from 2018) should consider amending those returns. On a less favorable note, once the EBL limitation returns in 2021, W-2 wages will no longer be included in the net business calculation.

Favorable changes to net operating losses

The CARES Act also makes taxpayer-friendly changes to the rules governing net operating losses (NOLs). The TCJA generally eliminated the ability of taxpayers to carry NOLs back to prior tax years, with the exception of farm losses, which could be carried back two years. This change was effective for tax years beginning after Dec. 31, 2017. Prior to the TCJA, taxpayers were permitted to carry NOLs back two years (or five years for farm losses) or forward 20 years.

The CARES Act reinstates carrybacks of NOLs arising in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021, allowing these losses to be carried back five years. This applies to both corporations and individuals, trusts and estates with net business losses. NOLs eligible for the five-year carryback period include farm losses, which would otherwise be subject to a carryback period of two years under the TCJA. Corporations that were subject to a 35% tax rate before the TCJA reduced the corporate rate to 21% as of Jan. 1, 2018, might particularly benefit from carrying back NOLs.

For NOLs arising in tax years beginning after Dec. 31, 2017, the TCJA also limited the NOL deduction to 80% of a taxpayer’s taxable income.

The CARES Act suspends application of the 80% taxable income limitation for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021, allowing losses to offset 100% of taxable income.

These modifications to the NOL rules permit taxpayers to use NOLs to a greater extent to offset taxable income in prior or current tax years, providing taxpayers with liquidity in the form of tax refunds and reduced current tax liability. The IRS is temporarily accepting faxed refund claims for NOL carrybacks and the corporate AMT credit discussed below in order to expedite these refunds.

Acceleration of ability to claim corporate minimum tax credits

Before the TCJA, corporations were subject to an alternative minimum tax (AMT), which was imposed if the AMT calculation resulted in a greater tax liability than the liability computed under the regular income tax. If a corporation was subject to AMT, the amount of the AMT was allowed as a minimum tax credit in any later tax year to the extent the corporation’s regular tax liability exceeded its tentative minimum tax in the later year.

The TCJA repealed the corporate AMT for tax years beginning after Dec. 31, 2017. It also established a method for taxpayers to use their AMT credit carryforwards fully by the end of tax year 2021.

The CARES Act accelerates the ability of corporations to claim AMT credits. Under the CARES Act, corporations can claim 100% of the credit by the end of either tax year 2018 or 2019. Corporations seeking to accelerate an AMT credit refund for tax year 2018 can utilize a “quick” refund procedure by filing Form 1139 with the Internal Revenue Service.

Increased tax benefits for charitable contributions during 2020

The CARES Act modifies certain rules governing charitable contributions, providing taxpayers with greater tax incentives to donate to charitable organizations. For individual taxpayers who do not itemize deductions, the CARES Act creates a $300 above-the-line deduction for cash contributions to qualifying charitable organizations made during a tax year beginning in 2020. This change benefits taxpayers taking the standard deduction, who otherwise would not be able to deduct charitable contributions.

In addition, the CARES Act changes the limitations on individual and corporate cash contributions to charitable organizations during 2020. Generally, individuals are allowed a deduction for cash contributions to qualifying charitable organizations of up to 60% of their adjusted gross income (AGI). The CARES Act removes this limitation for cash contributions made during 2020 only, allowing individuals to offset 100% of their AGI by making cash contributions to qualifying charitable organizations during the current year.

For corporations, charitable contribution deductions generally cannot exceed 10% of taxable income. This limitation is increased to 25% of taxable income for cash contributions made to qualifying charitable organizations during 2020.

The new rules do not apply to cash contributions made to donor-advised funds or to certain supporting organizations.

Like nearly every other industry in the country, the equine business has been tremendously impacted by the COVID-19 pandemic. With postponed or canceled racing and sales and the uncertainty for what will happen during the rest of the year, the need to maximize cash flow remains a top priority. The recent income tax changes in the CARES Act can provide some liquidity to industry participants and assist in weathering this storm.