By Alex M. Parker

Law360 (April 13, 2020, 8:44 PM EDT ) A provision in the recent $2 trillion coronavirus relief bill that gave pass-through businesses and other noncorporate entities more leeway to claim losses has sparked opposition from Democrats, who claim it's aiming assistance at the wrong people.

The Coronavirus Aid, Relief, and Economic Security Act suspended Internal Revenue Code Section 461(l) , which limited how much partnerships, S corporations and pass-throughs could claim in losses against nonbusiness income in a given year. The suspension will give self-owned businesses faster access to liquidity to weather the economic storm wrought by the pandemic, but it could also benefit taxpayers with large amounts of investment income.

Former Vice President Joe Biden, the presumptive Democratic nominee for president, has proposed repealing that part of the law — which the Joint Committee on Taxation said would cost $170 billion over 10 years — to pay for partial cancellation of student loan debt.

"That tax cut overwhelmingly benefits the richest Americans and is unnecessary for addressing the current COVID-19 economic relief efforts," Biden said in an April 9 post on Medium, referring to the respiratory disease caused by the virus.

Along with billions of dollars in other types of relief, the CARES Act loosened many of the restrictions on the use of losses that the Tax Cuts and Jobs Act had tightened less than three years ago. The ability to carry losses back and apply them to income from prior years, repealed by the TCJA, was restored for years going back to 2013. The CARES Act also temporarily nixed an 80% limitation on the use of net operating losses moving forward.

But 461(l), if left in place, could have prohibited these same benefits for noncorporate taxpayers. The section classifies net business losses above $250,000, or $500,000 for joint filers, as "excess business losses." Those cannot be claimed against other forms of income, but they can be transferred as a net operating loss into the next year.

"Suspending this provision was really critical for pass-through businesses to be able to use the same loss provisions available to corporations," said Dustin Stamper, a managing director at Grant Thornton LLP. "Considering half the economy goes through pass-through businesses, this was critical for the NOL provision to work."

Because 461(l) pushes the excess business losses forward, it would have delayed when pass-throughs could use them to claim against prior, profitable years, Stamper said. Given that the goal of the CARES Act was to get relief to companies in 2020, when so much commerce has been shut down by social distancing measures, 461(l) could have worked against its central point.

But Democrats in Congress already are suspicious that the bill could also help other taxpayers in less dire straits.

On Friday, Sen. Sheldon Whitehouse, D-R.I., and Rep. Lloyd Doggett, D-Texas, sent a letter to the White House and the U.S. Treasury Department asking for any communications about the provision, as well as the $200 billion in business tax relief. They provided an example in which the provision could benefit a couple whose business losses had been offset by stock market gains.

Whitehouse and Doggett also said they hoped to determine whether "any individuals within the administration who stand to gain from these provisions were involved in their development."

A Republican aide on the Senate Finance Committee said the legislation was meant to ensure that both corporations and noncorporate business entities could use prior year gains to offset 2020 losses. The surprisingly high price tag is an indication of just how massive the 2020 losses will be, underscoring why it was necessary, the aide said.

But regardless of its aim, the provision likely will also benefit the lucky few who have made income gains this year.

"To some extent, it will help out those with significant investment income," said John Warner of Buchanan Ingersoll & Rooney PC.

Steve Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center, said it was not an optimal way to target assistance at such a time of need.

"There is a limited amount of tax relief Congress can permit," Rosenthal said. "Congress ought to focus directly on working and unemployed Americans. Not trickle down through high-income taxpayers."

--Editing by Tim Ruel and John Oudens.

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