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Maryland Bill Would Disallow Retroactive Tax Breaks in CARES Act 

Posted on Feb. 3, 2021

A Maryland bill would disallow federal tax breaks for net operating loss deductions, excess business losses, and business interest expense deductions. 

S.B. 578, introduced January 29 by Sen. Cory V. McCray (D), would create an addition modification for amounts related to the retroactive tax breaks, which were enacted under the federal Coronavirus Aid, Relief, and Economic Security Act. The provisions are designed to provide tax relief to businesses amid the COVID-19 pandemic, but conforming to the provisions is expected to have a large effect on state revenues, which have taken a hit during the pandemic.

In a December 2020 report, the Maryland Office of Policy Analysis said the comptroller’s office initially estimated that conforming to the changes would reduce state revenues by $51.4 million in fiscal 2020 and $257.5 million in fiscal 2021, but that the estimates were later adjusted to $16 million in fiscal 2020 and $81.5 million in fiscal 2021.

The report said that “while decoupling would reduce the estimated revenue losses, it would create significant complexities for taxpayers, tax professionals, and the Comptroller’s Office, since impacted tax returns are already being processed.”

One of those CARES Act provisions temporarily and retroactively expanded net operating loss lookback provisions that were enacted under the federal Tax Cuts and Jobs Act for tax years 2018, 2019, and 2020.

Another provision changed the business interest expense deduction in IRC section 163(j) that allows taxpayers to deduct a higher amount of business interest expense for tax years beginning in 2019 and 2020 and increased from 30 percent to 50 percent the portion of a taxpayer’s adjusted taxable income used to calculate the deductibility of business interest expense.

Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities, has argued that this provision will allow businesses that lost money before the pandemic but profited during the pandemic reduce their tax liability. 

A third provision eliminated loss limitations on noncorporate taxpayers under IRC section 461(l) for tax years 2018, 2019, and 2020. Critics have called this change a giveaway to the wealthiest taxpayers.

Todd Betor, counsel at Eversheds Sutherland (US) LLP, told Tax Notes that the S.B. 578 would require taxpayers to add back to income any amounts that were deducted from their federal taxable income as a result of the CARES Act. In effect, this would limit a taxpayer’s deductions to what they would have been without the CARES Act.

For example, Betor said, this means a Maryland taxpayer that did not elect out of section 163(j)(10) for federal income tax purposes for its 2019 federal tax year and thus took a deduction for business interest expense equal to 50 percent of its ATI, would have to add back to its federal taxable income the amount of business interest expense deducted in excess of 30 percent of its ATI in calculating its Maryland corporate income tax liability.

The Maryland Chamber of Commerce opposed S.B. 578. Andrew Griffin, senior policy analyst for the chamber, told Tax Notes that undoing the intent of the CARES Act would be a step in the wrong direction, and that this bill would increase taxes for small and medium-sized businesses.

Meanwhile, a companion bill (H.B. 495) was introduced in the House January 15 by Del. Julie Palakovich Carr (D). It is supported by Mazerov and opposed by the Maryland Association of CPAs, which raised issues with the bill on its blog. The association said many small employers are closed or operating at a smaller percentage of previous revenue levels, and H.B. 495 “will add an additional layer of financial complexity for these struggling businesses, and it will eliminate much needed fiscal help from the state.”

But Palakovich Carr told Tax Notes that the three CARES Act provisions are estimated to cost Maryland $110 million in fiscal 2020 and 2021.

"This is a huge expense, and it warrants the attention and deliberation of the General Assembly. Maryland, like other states, is faced with fiscal challenges due to the COVID-19 pandemic; these challenges will be exacerbated by retaining the costly tax breaks included in the CARES Act," Palakovich Carr said. 

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