The SALT Implications of the CARES Act

4/1/2020 - By Saltmarsh, Cleaveland & Gund

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which among numerous other provisions, modifies certain business tax provisions in the Internal Revenue Code (IRC). After the Tax Cuts and Jobs Act (TCJA) in December 2017 added these provisions to the IRC, states and taxpayers have only recently come to understand the conformity implications of the TCJA. The CARES Act modifications will present a new round of state and federal conformity challenges for states, taxpayers, and practitioners.


The CARES Act enacts a number of business and individual tax modifications aimed at assisting businesses and individuals impacted by COVID-19. Three key CARES Act provisions modify business tax changes enacted as part of the 2017 federal tax reform: (1) the business interest expense deduction limitation of Section 163(j), (2) the net operating loss (NOL) limitations of Section 172, and (3) the nonbusiness loss limitation applicable to individuals under Section 461(l). The CARES Act also corrects the so-called “retail glitch” by allowing qualified improvement property placed in service after December 31, 2017, to be treated as 15-year property and eligible for federal 100% bonus depreciation. Any remaining federal alternative minimum tax (AMT) credit becomes fully refundable for the 2019 tax year, or at a corporate taxpayer’s election, the 2018 tax year. The first three CARES Act changes have the furthest reach for state income tax purposes.

For the 2018 and 2019 tax years, the CARES Act increases the Section 163(j) limitation from 30% to 50% of a taxpayer’s adjusted taxable income (ATI) (i.e., a 20% greater amount of business interest expenses becomes deductible for federal purposes). A taxpayer may elect to apply the 30% limitation. A taxpayer may also elect to substitute the ATI for the last taxable year beginning in 2019 for 2020 ATI. For a partnership, this election is made by the partnership. Also, for partnerships, the increased 50% limitation applies for 2020, but not 2019. In lieu of the increased limitation applying for 2019, for any excess business interest expense (EBIE) allocated from a partnership for any taxable year beginning in 2019, 50% of such EBIE shall be treated as business interest that is paid or accrued by the partner in the partner’s first taxable year beginning in 2020 and that is not subject to the partner’s Section 163(j) limit in 2020. A partner may elect out of this special rule.

With respect to the CARES Act NOL modifications, the 80% limitation enacted by the TCJA is modified, as follows:

    For tax years beginning after December 31, 2020, the NOL deduction is limited to the sum of:

  • NOLs generated in taxable years beginning before January 1, 2018, plus
  • The lesser of:
    • NOLs generated in taxable years beginning after December 31, 2017, or
    • 80% of taxable income computed after the reduction for any pre-2018 NOLs, but before any deduction pursuant to Sections 199A and 250.

NOLs generated in 2018 through 2020 are subject to the 80% limitation, but not until 2021. In addition, NOLs generated in tax years after December 31, 2017, and before January 1, 2021, may be carried back five taxable years. The CARES Act also provides a technical correction to the TCJA in that the indefinite carryover and prohibited carryback (other than for special five-year carrybacks) enacted by the TCJA is effective for taxable years beginning after December 31, 2017. The CARES Act also enacts a number of other rules applicable to the special carryback provisions. For example, a carryback is inapplicable to real estate investment trust (REIT) NOLs and a carryback cannot offset Section 965 income.

With respect to Section 461(l), the CARES Act defers application of the TCJA’s limitation until 2021 (and removes the separate limitation on farm losses Section 461(j) until 2026). Under the TCJA amendments, Section 461(l) business losses for non-corporate taxpayers were limited to $500,000 annually for taxpayers married filing joint or $250,000 for all other taxpayers. Both limitations were adjusted for inflation. Any business loss in excess of the limit is carried forward as an NOL.

Methods of State Conformity to the IRC

As taxpayers learned after enactment of the TCJA, states generally fall into three categories or methods of conformity to the IRC: (1) rolling, (2) fixed-date, or (3) selective. A rolling IRC conformity state conforms to the IRC automatically or “as amended” and the state legislature must specifically decouple from amendments to the IRC, otherwise the state conforms to any federal changes. A fixed-date IRC conformity state is just that – the state conforms to the IRC as of a date certain (i.e., to the IRC “as amended and in effect on” a specific date or the IRC “as enacted on” a specific date). Some states conform only to specific IRC sections on a rolling basis (e.g., Pennsylvania) or on a fixed-date basis (e.g., California).

Examples of rolling IRC conformity states are Illinois, Massachusetts, New Jersey, New York, and Tennessee, while fixed-date IRC conformity states include Arizona, Florida, Georgia, Michigan, and Texas. Although rolling, fixed-date, and selective IRC conformity descriptors are useful rules of thumb, the precise statutory language used by a state, including retroactive effective date provisions or terms addressing prospective federal enactments, will ultimately determine a state’s income tax conformity to the IRC, and the CARES Act.

Will States Conform to the CARES Act Business Tax Provisions?

The novel coronavirus (COVID-19) will have unfortunate revenue impacts across the landscape, including for state budgets. As a result, it is reasonable to expect some rolling IRC conformity states will decouple from some or all of the CARES Act business tax provisions. Likewise, some fixed-date IRC conformity states may decide not to update their IRC conformity dates from their current 2018, 2019, or even prior conformity dates (such as California and Texas that currently conform to 2015 and 2007 IRCs, respectively).

IRC Section 163(j) Modifications

Various states decoupled from Section 163(j) outright after the provision was amended by the TCJA (e.g., Connecticut, Indiana, Missouri, South Carolina and Wisconsin). Other states continue to follow the pre-TCJA version of Section 163(j) (e.g., Arkansas, California and Georgia), while a few states never conformed to Section 163(j) and still don’t. For these states, the CARES Act modification will not apply. Whether other fixed-date IRC conformity states will conform to the CARES Act modifications will depend on whether and how those states update their IRC conformity date. For example, if a state, like Virginia has recently done, updates to the IRC “as it existed on December 31, 2019,” the CARES Act modification likely does not apply. Alternatively, a state like Arizona recently updated its IRC conformity date to the IRC “as amended and in effect on” January 1, 2020, including retroactive federal effective dates, but excluding any amendments to the IRC after January 1, 2020. Unless there is subsequent legislation in Arizona, the CARES Act modification to Section 163(j) is not adopted.

Application of Section 163(j) at the state level was already complicated, and the CARES Act results in another layer of complexity. For example, Tennessee conformed to Section 163(j), as amended by the TCJA, but only for the 2018 and 2019 tax years. As a rolling conformity state, Tennessee should conform to the CARES Act modifications, but only for 2019. Beginning with 2020 tax years, Tennessee converts back to follow the version of Section 163(j) “as it existed and applied immediately before” the TCJA and, absent a further legislative change, will not follow the CARES Act modifications to Section 163(j).

Likewise, the elections now applicable pursuant to the CARES Act may not be applicable on the state level.

Conversely, while the increase in the Section 163(j) limitation to 50% does not apply to partnerships in 2019 for federal purposes, there may be a position in a few states that impose income tax on partnerships at the entity level, or that provide a “PTE tax election,” to use the greater limitation amount for state purposes depending on how these states determine a partnership’s federal starting point. Again, among other considerations, this will depend on whether a state is a rolling or fixed-date IRC conformity state. 

Not only will the state implications create uncertainty and new layers of complexity with respect to Section 163(j) for 2019 and 2020 state returns, taxpayers and practitioners will have to understand the various state differences so as to manage state tax costs that could offset federal tax savings of the CARES Act.

NOL Modifications

The same fixed-date or rolling IRC conformity issues apply to the CARES Act’s NOL modifications on the state level. In addition, most states apply their own NOL calculations and methodologies and may have not conformed to the TCJA’s limitations on NOL deductions. A handful of states did adopt the federal 80% limitation enacted by the TCJA, and whether these states adopt the CARES Act modification will depend on whether they are a rolling IRC conformity state or a fixed-date state that updates to include the CARES Act modifications. Further, most states already disallow NOL carrybacks, so the benefits of the CARES Act NOL modification at the state level could be limited. However, given the CARES Act NOL carryback provisions, federal returns will likely need to be amended, which will also likely trigger a requirement to amend state returns, even though no state tax benefit results.

IRC Section 461(l) Modifications

By now, it should be clear that the rolling versus fixed-date IRC conformity dichotomy among states will largely determine whether the CARES Act tax provisions apply at the state income tax level. This will have a significant effect on individuals with business losses in 2019 or 2020. Again, fixed-date conformity states that do not update their IRC conformity dates in a way that includes the CARES Act modifications will continue to apply the Section 461(l) limitations even though those limitations are delayed until 2021 for federal tax purposes. Thus, individuals could find themselves with unlimited federal business losses for 2019 and 2020, but separate state NOL carryforwards due to their excess business losses limited by the pre-CARES Act version of Section 461(l) applied by the state.

Employee Retention Tax Credit

While the CARES Act’s employee retention credit does not raise similar conformity questions, it could be a valuable and complementary tax benefit to an employer’s existing portfolio of state tax credits and incentives. The employee retention credit is a refundable payroll tax credit for employers who are harmed by COVID-19, but who retain their employees. The credit is equal to 50% of qualified wages paid to employees between March 12, 2020, through December 31, 2020, and is capped at $10,000 of wages per employee. The maximum available credit is $5,000 per employee. Employers qualify for the credit if their operations were fully or partially suspended due to a COVID-19 related shutdown order, or their gross receipts for the quarter were less than 50% of the gross receipts for the same quarter in the prior year. Employers with more than 100 full-time employees (on average in 2019) only receive the credit for wages paid to employees who are not working. Employers with 100 or fewer employees receive the credit for all wages paid to employees.

Employers impacted by COVID-19 could risk not qualifying for state jobs tax credits, or a reduction in tax benefits provided by state jobs tax credits or similar state incentives. The CARES Act employee retention tax credit may not only provide a valuable federal tax benefit, but it may complement an employer’s continuing qualification for existing state jobs tax credits and associated state tax benefits. Further, the new federal employee retention tax credit could also be packaged with state and local tax credit and incentive programs being provided in response to COVID-19.

Other CARES Act Provisions

The same rolling or fixed-date IRC conformity issues will initially determine whether or to what extent different states conform to other CARES Act provisions, such as the special rules for uses of retirement funds and the charitable contributions modifications. Likewise, for the handful of states that already conformed to federal 100% bonus depreciation, the correction of the “retail glitch” related to qualified improvement property applies to those states as well depending on resolution of the rolling versus fixed-date IRC conformity dichotomy.


  • Taxpayers, practitioners, and states will now be confronted by similar federal and state IRC conformity issues presented by the CARES Act modifications to a number of TCJA provisions.
  • Whether the federal tax benefits of the CARES Act will be realized at the state level will vary from state to state. The initial consideration will be the method a state uses to conform to the IRC in general – rolling or fixed date, including whether the state conforms to only selective IRC sections.
  • How a state conformed to or decoupled from TCJA provisions, and the state effective dates of such conformity or decoupling, will also determine to implications of the CARES Act at the state level.
  • Bottom line, the CARES Act will add another layer of complexity to state income tax compliance, which was already complicated by the TCJA.


If you have specific questions, please reach out to your engagement shareholder, manager or another member of our team. General questions and inquiries can be directed to Jayme Terrell.

Visit our COVID-19 RESOURCE HUB for ongoing updates and information. Due to the ever-changing nature of this event, you should always consult a professional.

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