The Troubling Case of the Unlimited Pass-Through Deduction

University of Chicago Law Review Online

13 Pages Posted: 24 Apr 2020 Last revised: 7 Jul 2020

See all articles by Clint Wallace

Clint Wallace

University of South Carolina School of Law

Date Written: June 29, 2020


Updated 6/29/20. This paper dissects section 2304 of the CARES Act, which temporarily suspends § 461(l), a limitation on deducting certain business tax losses. Enacted by Congress less than three years ago as part of the 2017 Tax Act, § 461(l) prevented individuals from deducting business losses from pass-through entities against more than $500,000 of other ordinary income. The suspension of this provision in the CARES Act, which I refer to as the unlimited pass-through deduction, allows taxpayers with extremely high incomes to deduct tax losses and thus to reduce or even totally zero out their income tax liability, including retroactively. Combining distributional estimates of other provisions of the CARES Act with estimates from the unlimited pass-through deduction, I show that the unlimited pass-through deduction inverts the perceived progressivity of the cash rebates that were the primary individual-focused element of the federal government’s response to the COVID-19 crisis. I detail how the deduction operates, including how it interacts with other provisions of the CARES Act and other provisions of the Tax Code, in particular bonus depreciation. I also examine the legislative backstory of how the limitation came to exist as part of the 2017 Tax Act and how it came to be repealed in the CARES Act.

The context explored here sheds light on the current political economy of federal tax legislation generally, and in particular on the political economy of hastily enacted tax legislation, which should perhaps be viewed as a regular mode of tax legislating. The high-income beneficiaries of the unlimited pass-through deduction will receive cash rebates in 2020 based on losses they realized long before the COVID-19 crisis hit, as detailed below, and there are no particular indicators that these taxpayers have faced particular challenges due to COVID-19 or are in any current need regardless of the cause. Further, the deduction payouts are not conditioned on taking any future actions or using the funds received in a way that might have positive spillover effects for the broader economy or for populations that are particularly vulnerable to suffer negative economic consequences of COVID-19. Thus, the unlimited pass-through deduction cannot be justified as a targeted response to circumstances created by the spread of COVID-19. And, it is definitively not a minor technical fix that should be accepted as necessary or ignored as inevitable given the circumstances.

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

Suggested Citation

Wallace, Clint, The Troubling Case of the Unlimited Pass-Through Deduction (June 29, 2020). University of Chicago Law Review Online, Available at SSRN: or

Clint Wallace (Contact Author)

University of South Carolina School of Law ( email )

1525 Senate Street
Columbia, SC 29208
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics