The Troubling Case of the Unlimited Pass-Through Deduction

12 Pages Posted: 24 Apr 2020 Last revised: 1 May 2020

See all articles by Clint Wallace

Clint Wallace

University of South Carolina School of Law

Date Written: April 22, 2020


Updated 4/30/20. 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 $500,000 in 2018, or $510,000 in 2019) 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 who may only have tax losses (on assets that actually appreciated) in 2018 and 2019, the years for which they are now able to receive immediate refund payments.

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.

Keywords: Tax, Tax Policy, COVID-19, CARES Act

Suggested Citation

Wallace, Clint, The Troubling Case of the Unlimited Pass-Through Deduction (April 22, 2020). Available at SSRN: or

Clint Wallace (Contact Author)

University of South Carolina School of Law ( email )

1525 Senate Street
Columbia, SC 29208
United States

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