 Hello and welcome to the session. This is Professor Farhat, which we would look at some provisions of the CARES Act of 2020. This topic will be covered on the CPA exam starting October 1st, 2020. Some of it will be tested for a period of time from October till December of 2020. And some of the provisions will be tested permanently. What I do at farhatlectures.com is help people pass the CPA exam. Farhatlectures.com is a supplemental tool, whether you are taking Becker, Roger, Wiley, Gleim, or Sergeant. I don't replace those courses. I can't replace them. I wish I can. But what I can do, I can make those courses much easier for you to understand and follow. So my website will help you understand the material better than those other courses. And the reason is I'm not better than them. The way I teach is differently. They review the material, I teach you the material. So I strongly suggest, if you're studying for your CPA exam, to check out farhatlectures.com. Always I'm gonna ask you to connect with me on LinkedIn. At least subscribe to my YouTube, where I have 1,800 plus accounting, auditing, tax, finance, as well as Excel tutorial. Please like my lectures and share them. If they benefit you, it means they might benefit other people. And this is my website, where I have supplemental resources, especially if you're studying for your CPA, RAG, or any other section for your CPA. So I'm gonna start with discussing net operating loss or NOL. The way I'm gonna do this is basically looking at the old rules, which is the Tax, Cuts, and Jobs Act of 2017. They're not really that old. And then compare this to 2020. This was not expected. There should be any changes, but because of the COVID, the government obviously they wanted to change some rules to help businesses survive this COVID period. And for example, this topic will be tested starting October 1st and NetOL and 2021 continuing until there was some change. But this is the plan for now. Now think about this. 2017 we learned the new rules. 2020 we're learning changing of rules. And who knows if Biden becomes president, we're gonna have new rules as well. That should not be bad news for us. As accountant, as CPA, new rules means more demand for us because people don't understand the tax law. They need experts. And us experts, if you're a future CPA, you have to embrace changes. You have to like changes. You have to learn the changes. And this way you are a valuable employee, a valuable member, and you can add value to yourself as well as to your clients. But let's take a look at the old rules. The old rules, and the old rules means after 2017, after December 31st, 2017, there was no carry back. Before we had, you could carry back the net operating loss. Now the old rules, you can carry them forward and you are limited to 80% of your taxable income. So the NOL cannot eliminate 100% of your taxable income. It eliminated 80%. So basically, the Tax Cuts and Jobs Act trimmed down the benefit of NOL, trimmed it down. The new rule starting 2018, 2019, and 2020, you can carry back, now we can carry back to offset taxable income for the five previous years. So you can go back to 2018, amend your tax return. If you had an NOL, I'm sorry, if yes, let's assume that 2018, you had a net operating loss. You can go back to 2018, amend your return and go back and offset other gains. Losses must be carried back to the oldest year in the carry back period. So if you had any NOL in 2018, you can take the NOL and you have to start 2013, 14, 15, 16, 17. This is how you carry them back. And I will work an example at the end of this session so you will see how it works. This applies to individual, corporation, estate and trust. And this provision is very, very beneficial. Why? You have to understand that by 2017, let's after 2017, 2018 and 2019, the corporate tax rate was 21%. Prior to that, the corporate tax rate was up to 34%. So what happened is when you take those losses and use them for prior years, they're gonna give you a more benefit. So that's really good. And in 2020, remember in 2020 because of COVID, many businesses suffered losses. So what's gonna happen with those losses? They're gonna allow you to go back five years starting with the oldest year, which is good. You want to start with the oldest year because this is when your tax rate was higher and get a refund, basically file an amended return and get a refund. The reason I like this topic NOL, it's close to my heart because my last tax return, my last client, when I was in practice, let's put it this way, was a huge NOL because of the 2008, 2009 crisis. This individual was in real estate business, so they suffered losses, but they took all these losses and they carried them back and they got a big refund. But the rules changes where you can carry them back in 2017, now you can carry them back again. And also what's important about this rule to understand is any changes in the tax rule that allow you to amend your tax return to benefit. What does that mean? It means the CARES Act also made other changes such as the business interests expense deduction. It means this rule has changed too. So even if you don't have a loss now, go back and based on the new rules, you might have a loss. Also, qualified improvement property. If you had a qualified improvement property, now we are using new rules. It means go back and check the qualified improvement property. What are those two? I'm gonna discuss those two in this session in a moment. Just give me a second and we'll discuss those two. Just a review for NOL, just review. You cannot deduct charitable contribution for NOL purposes. You cannot use NOL from prior year to determine NOL for the current year. You cannot deduct a capital loss carry back against a net capital gain in determining a current NOL. And a corporation may deduct capital loss carry over from a current year gain and calculate an NOL. Those are reviews. Just basically, if you are learning about NOL, just keep that in mind when you are computing NOL for your CPA exam. But if you want more about NOL, please visit my lectures, visit my lectures, farhatlectures.com. Let's talk about the business interests expense deduction. And the reason I wanna discuss this, although it's separate than NOL, but sometime because there was a change in the business interest expense deduction, it might trigger an NOL for you, which in turn gives you a refund. So the Tax Cuts and Jobs Act limited the interest expense of 30% of your adjustable taxable income. And that's assuming you have a gross revenue more than 25 million. The new rule increased this limitation to 50% for the year 2019 and 2020. So if you're filing your 2019, you can use 50%. You can adapt up to 50% and for your 2020 up to 50%. For 2020, let's assume you did not, for 2020, let's assume you did not have a lot of adjustable taxable income. And the reason why for 2020 you may not have it is because of COVID. If you don't have income, you're not gonna have taxable income. If you close your business for three months, you're gonna have less revenue. Less revenue means less taxable income. So what they did, for 2020 to determine this limitation, you could use your 2019 Adjust the taxable income. And hopefully 2019 you had more income than 2020, higher because your ATI for 2019 should be higher because of COVID. So that makes sense. And 2020 is anticipated to be lower. So what they did is they gave businesses little bit more leeway, more deductions. So they can survive COVID, they can get a refund and we could move on with our life. Now this applies to corporation, regular corporation and S corporation. It does not apply to partnership. Partnerships starting in 2020 they can do it. So they cannot do it for 2019. They can start 2020 and they can use for 2020 if they did not have any income. They could use their 2019 adjustable taxable income. That's allowed. But 2019 they cannot file using the 50% deduction. Also another change that could affect also your NOL, create an NOL for you is the qualified improvement property. So that's any improvement made to the interior of a real estate building. It's called qualified improvement property. Now before the Tax Cuts and Jobs Act of 2007. So I'm gonna kind of briefly go over even the rules before 2017 because it's good to put things into perspective. Qualified improvement property, you could have deducted it in three different ways depending on what in what industry you were. And we don't have to worry about this whether you're in hospitality or real estate or retail. We don't have to worry about this because this is really, really old. So the Tax Cuts and Jobs Act tried to simplify the old law. And what they did, they tried to simplify it and they said, everyone, everyone, it doesn't matter what industry you are, those qualified improvement property, you would use 30 year, 39 year, you would assume they're 39 year property. So they are, they appreciate it over 39 years. And basically this was kind of a mistake that they made and everybody in old research shows and all the commentators and all the expert shows. So the Congress made a mistake here. Why? Because when you qualify something as 39 years, it's not subject to the 100% bonus depreciation. Because it only applies to assets 20 year or less. So what happened, those qualified improvement property, you could not take the 100% bonus depreciation. Like kind of after they wrote the law, when people started to do this in practice, they find out, whoa, hold on a second, if it's 39 years, if we're gonna treat them as 39 years, they don't apply. So what did the CARES Act try to do? Change their life. They said, now, rather than 39, we're gonna consider those as 15 year property. What does that mean? It means now you can take them as bonus depreciation. What does that mean? It means it's gonna create a loss for you. What does that mean? If you create a loss, you can carry this loss backward and get a refund from prior years. So it's basically what they're trying to do is to help businesses. Now also, the Q2, if you take the 100% deduction, it can create an NOL. So unlike section 179, section 179, you can go down to zero, but section 179 cannot create a loss. Hopefully you know this. Otherwise, go to foreheadlectures.com. But qualified improvement property, the losses from those, it can create an NOL, which is good. Again, we circle back to NOL. Now the best reason to explain an NOL is to actually look at an example. And again, if you went to school prior to 2017, you should be familiar with how an NOL work you can carry them back. So let's take a look at this example. Adam Korp has in 2020 an NOL of $200,000, a lot of losses. The company's taxable income in each of the last five years from 2015 to 2019 is 20,000. Adam's Korp marginal tax rate was 34%, 2015 to 2017. And starting in 2018 with the Tax Cuts and Jobs Act, the tax rate became 21%. Calculate the amount of the refund and any NOL carry forward after to 2021 and forward. Well, we have a loss of $200,000. What's gonna happen to this loss? We're gonna take this loss and if we want to, we can go back five years, starting with the oldest year, which is 2015, and file an amended return because remember we had a loss, we had a loss, I'm sorry, we had a gain, we had income of 20,000. We're gonna take 20,000 of losses against that year. So when we take the loss, what's gonna happen? It's gonna give us a refund. So simply put in 2015, we had $20,000 of income and we paid 6,800 of taxes. What we're gonna do, we're gonna go back say, we're gonna eliminate this 20,000 of gains of income, of profit, of taxable income, whatever you want to call it and we're gonna file an amended return and get a refund of 6,800. Now remember, once you use the 20,000, what remain is 180,000 of NOL. Well, we're gonna go back to 2016 and 2016 we also had 20,000 of income. We're gonna file an amended return and tell the IRS, look, we're gonna take out those 20,000. Now we're down to 160. Again, gave us 6,800. 2017, the same concept, now we're down to 140,000. 2018, remember, you have to be careful. You have to use the applicable tax rate for that year. 2018, because of the Tax Cuts and Jobs Act, it became 21%. It's seen less benefit. So we had more benefit from 2015, 16 and 17 because the tax rate was higher. You guys noticed this. From 2018, you're getting only 4,200. For 2019, you're getting 1,200. So if we add up all what we used up, we used up 100,000 and we still have 100,000 of carry forward. So we still have 100,000 to carry forward into 2021, 2021. And our total refund is 28,800. And this is real money. You are going to get back from the IRS because of the NOL. And this is the benefit. Hopefully you can see why the government did this. Is to benefit the businesses. And this is a clear example how it's benefiting the businesses. As always, I'm gonna remind you to visit my website, farhatlectures.com. If you are studying for your CPA exam, I'm targeting you here. Look, the CPA exam is a lifetime investment in your career. It's 20, 30 year investment. Don't shortchange yourself. I can help you pass the exam. My material can add 10 to 15 points to your performance and you can go over that 75% threshold and pass the exam. That's all what I can tell you. Study hard, stay safe, of course, and good luck.