Paul L. Caron

Tuesday, April 28, 2020

Wallace: The Troubling Case Of The Unlimited Pass-Through Deduction

Clint Wallace (South Carolina), The Troubling Case of the Unlimited Pass-Through Deduction:

The title of section 2304 of the CARES Act—“Modification of limitation on losses for taxpayers other than corporations”—perhaps suggests some sort of innocuous technical fix. It has been described in media reports as allowing greater flexibility for businesses to claim losses, which may seem to make sense at a time when many businesses are facing huge unexpected losses.

This conventional understanding is wrong: the new rule, which I refer to as the unlimited pass-through deduction, benefits individuals, and it has little to do with unexpected losses. The loss limitation at issue previously prevented investors and business owners using pass-through entities from claiming exceptionally large losses (more than $518,000 in 2020) by way of those entities. I provide examples connecting the unlimited pass-through deduction with several background tax provisions to illustrate how the deduction will provide immediate direct payments to high-income taxpayers who do not necessarily have any losses (economic or tax) in 2020, and how it will result in the government to subsidizing and encouraging the realization of what might otherwise be paper losses.

I combine distributional estimates prepared by the Joint Committee on Taxation and the American Enterprise Institute to show that the unlimited pass-through deduction is expected to provide larger payments to 43,000 of the highest income earners--households earning more than $1 million--than the rebate provides to the 47 million taxpayers earning less than $20,000 ($70.3 billion in unlimited pass-through deduction refunds versus $67 billion in rebates). This marks a staggering inversion of the perceived progressive distribution of tax benefits some have attributed to the CARES Act.

Scholarship, Tax, Tax Scholarship | Permalink


I just noticed that the link in my prior post doesn't work. Here is the correct SSRN link:

Posted by: Steve Hodaszy | Apr 29, 2020 7:40:31 AM

Professor Wallace offers an interesting perspective on the disallowance of "excess" business losses under Code section 461(l), which was suspended (retroactively, but temporarily) under the CARES Act.  Toward the end of his paper, Professor Wallace states that he was unable to find anyone who "will defend the unlimited pass-through deduction" for business losses.  Well, last year, I published an article entitled "The Curious Case of Section 461(l): Why This Unclear and Unwise New Rule Should Be Construed as Narrowly as Possible."  In that article, I argue that the business-loss limitation under section 461(l) violates fundamental tenets of income tax theory and contravenes Congress's stated goal of supporting small business, and that it should therefore be repealed permanently.  Professor Wallace's paper makes a thought-provoking contribution to the topic.  But for a different perspective, one might also be interested in:  

Steve Hodaszy
Associate Professor of Taxation
Coordinator, M.S. in Taxation Program
Robert Morris University

Posted by: Steve Hodaszy | Apr 28, 2020 12:18:16 PM