CARES Act Sunset 2026: Financial Impact on Small Businesses

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, was a monumental piece of legislation designed to provide immediate economic relief to individuals, families, and businesses grappling with the unprecedented challenges of the COVID-19 pandemic. For small businesses, in particular, the CARES Act introduced a lifeline through various programs, tax provisions, and financial support mechanisms that helped many stay afloat during periods of economic uncertainty and widespread shutdowns. From the Paycheck Protection Program (PPP) to employee retention credits and temporary tax adjustments, these measures offered crucial breathing room and enabled countless businesses to retain employees, cover operational costs, and adapt to a rapidly changing landscape.

However, as with many legislative packages designed for emergency response, the provisions of the CARES Act were not intended to be permanent. Many of these temporary measures are set to sunset or expire in 2026, marking a significant transition point for the American economy, and especially for small businesses that have grown accustomed to, or even reliant on, these benefits. The impending CARES Act sunset in 2026 presents a complex challenge, requiring proactive planning and strategic adjustments to navigate the financial landscape post-expiration.

Understanding these changes is not merely an academic exercise; it’s an essential step for the sustained viability and growth of small businesses across the nation. The sunsetting of these provisions will impact everything from cash flow and tax liabilities to hiring practices and investment decisions. Businesses that fail to anticipate and prepare for these shifts risk facing unexpected financial pressures, operational disruptions, and a potential decline in competitiveness. This comprehensive guide aims to shed light on the five critical financial changes stemming from the CARES Act sunset in 2026, providing small business owners with the knowledge and foresight needed to adapt effectively and continue thriving in a post-CARES Act era.

The Foundation: A Brief Overview of the CARES Act and its Purpose

To fully grasp the implications of the CARES Act sunset, it’s vital to first understand the breadth and depth of the original legislation. Enacted on March 27, 2020, the CARES Act was a $2.2 trillion economic stimulus package, the largest in U.S. history at the time. Its primary objectives were multifaceted: to provide direct financial assistance to American workers, expand unemployment benefits, offer relief to distressed industries, and, critically, support small businesses through a variety of mechanisms.

For small businesses, the Act introduced several cornerstone programs:

• Paycheck Protection Program (PPP): Perhaps the most widely recognized component, PPP offered forgivable loans to help businesses keep their workforce employed during the COVID-19 crisis. These loans could be fully forgiven if used for payroll costs, rent, utilities, and mortgage interest within a specified period.
• Economic Injury Disaster Loan (EIDL) Program: This program provided low-interest loans to help businesses and private, non-profit organizations meet financial obligations and operating expenses that could have been met had the disaster not occurred. It also included EIDL Advance grants, which did not have to be repaid.
• Employee Retention Credit (ERC): A refundable tax credit designed to encourage businesses to keep employees on their payroll. Eligible employers could receive a credit against certain employment taxes for qualified wages paid to employees.
• Modifications to Net Operating Loss (NOL) Rules: The CARES Act temporarily allowed businesses to carry back Net Operating Losses arising in 2018, 2019, and 2020 for up to five years, providing significant cash flow relief through tax refunds.
• Business Interest Expense Deduction (Section 163(j)): The Act temporarily increased the limitation on the deduction for business interest expense from 30% of adjusted taxable income (ATI) to 50% for tax years 2019 and 2020 (and 2021 for partnerships).
• Qualified Improvement Property (QIP) Fix: The CARES Act corrected a drafting error in the Tax Cuts and Jobs Act of 2017 (TCJA) to classify QIP as 15-year property, making it eligible for 100% bonus depreciation.

These provisions collectively provided a crucial safety net, allowing businesses to retain talent, maintain operations, and invest in necessary adaptations. Many small businesses relied heavily on these measures to navigate the initial shock and subsequent prolonged impact of the pandemic. As we approach 2026, the temporary nature of these benefits becomes a focal point, necessitating a deep dive into what exactly will change and how to prepare for it. The CARES Act sunset isn’t just an administrative deadline; it’s a fundamental shift in the financial environment for small businesses.

Critical Financial Change 1: Reversion of Net Operating Loss (NOL) Rules

One of the significant tax reliefs provided by the CARES Act was the temporary modification of Net Operating Loss (NOL) rules. Prior to the CARES Act, the Tax Cuts and Jobs Act of 2017 (TCJA) had significantly altered NOL deductions, limiting them to 80% of taxable income and generally eliminating NOL carrybacks for losses incurred after 2017. This meant businesses could only carry forward losses indefinitely.

The CARES Act temporarily reversed some of these TCJA changes, allowing businesses to:

• Carry back NOLs: For losses arising in tax years 2018, 2019, and 2020, businesses could carry back these losses for up to five years. This provided an immediate cash infusion through tax refunds for past profitable years.
• Remove the 80% limitation: For tax years beginning before January 1, 2021, the 80% taxable income limitation on NOL deductions was temporarily suspended, allowing businesses to offset 100% of their taxable income with NOLs.

Impact of the CARES Act Sunset: When the CARES Act sunset provisions take full effect in 2026 (or earlier, depending on the specific NOL rule), these temporary benefits will expire. The NOL rules will revert to the TCJA framework:

• NOLs incurred in tax years beginning after December 31, 2020, generally cannot be carried back.
• NOL deductions for tax years beginning after December 31, 2020, will once again be limited to 80% of taxable income.

What Small Businesses Need to Do:

1. Review Past NOLs: If your business generated losses during 2018-2020 and utilized the five-year carryback, ensure all necessary filings were completed correctly.
2. Strategic Loss Planning: For future losses, understand that carrybacks will no longer be an option. Businesses will need to rely solely on NOL carryforwards, which can still be valuable but offer no immediate cash refund.
3. Forecasting and Tax Planning: Work closely with a tax advisor to forecast taxable income and potential losses. Develop strategies to maximize current deductions and manage future tax liabilities, understanding the 80% limitation will be back in play.
4. Consider Business Structure: The impact of NOL rules can vary by business structure (e.g., C-Corp vs. S-Corp or partnership). Re-evaluate if your current structure remains optimal under the reverted rules.

This change emphasizes the importance of accurate financial forecasting and proactive tax planning. The loss of immediate cash infusions from NOL carrybacks means businesses must build stronger cash reserves and explore other avenues for liquidity during lean years. The CARES Act sunset in this area requires a fundamental shift in how small businesses approach tax loss utilization.

Critical Financial Change 2: Reversion of Business Interest Expense Deduction Limits

Another significant provision modified by the CARES Act concerned the limitation on the deduction for business interest expense under Section 163(j) of the Internal Revenue Code. The TCJA had previously limited net business interest expense deductions to 30% of a business’s adjusted taxable income (ATI). This was a major change for many businesses, especially those with significant debt or in capital-intensive industries.

The CARES Act provided temporary relief by:

• Increasing the Limitation: For tax years beginning in 2019 and 2020 (and 2021 for partnerships), the CARES Act temporarily increased the business interest expense deduction limitation from 30% to 50% of ATI. This allowed businesses to deduct a larger portion of their interest expenses, reducing their taxable income.
• Electing 2019 ATI: Businesses could also elect to use their 2019 ATI to calculate their 2020 interest expense limitation, which was beneficial for businesses whose ATI significantly declined in 2020 due to the pandemic.

Impact of the CARES Act Sunset: With the CARES Act sunset, the Section 163(j) limitation will revert to the original 30% of ATI for tax years beginning after December 31, 2020 (or after December 31, 2021, for partnerships). This means:

• Businesses will be able to deduct a smaller percentage of their net business interest expense.
• Any interest expense disallowed due to the limitation can still be carried forward indefinitely, but its immediate deductibility will be restricted.

What Small Businesses Need to Do:

1. Assess Debt Structure: Review your current debt levels and interest expenses. Businesses with high leverage or significant interest payments will feel the impact of the 30% limitation more acutely.
2. Financial Modeling: Conduct financial modeling to understand how the reduced deduction limit will affect your taxable income and cash flow starting in 2026.
3. Debt Management Strategies: Explore strategies to manage interest expenses, such as refinancing debt at lower rates, paying down principal, or restructuring debt to reduce overall interest burdens.
4. Investment Decisions: Factor the 30% interest deduction limit into future investment and expansion plans, especially those that require significant borrowing. The cost of capital may effectively increase due to reduced tax benefits.
5. Consult Tax Professionals: Engage with tax advisors to explore potential strategies for mitigating the impact, such as optimizing other deductions or credits.

The reversion to the 30% ATI limit on business interest expense deductions requires a careful re-evaluation of a business’s capital structure and financing strategies. Businesses that relied on the expanded deduction to manage debt during the pandemic will need to find alternative ways to optimize their tax position as the CARES Act sunset becomes a reality.

Critical Financial Change 3: Expiration of Enhanced Employee Retention Credits (ERC)

The Employee Retention Credit (ERC) was a cornerstone of the CARES Act, designed to encourage businesses to keep employees on their payroll during the pandemic. Initially, the credit was for 50% of qualified wages up to $10,000 per employee per year for 2020. Subsequent legislation significantly enhanced the ERC for 2021, making it 70% of qualified wages up to $10,000 per employee per quarter, and expanding eligibility.

While the ability to claim the ERC for 2020 and 2021 has largely passed its initial deadlines, the implications of its expiration are still relevant, particularly for businesses that received or are still processing these credits. The ERC was a temporary measure, and its availability concluded for most businesses at the end of Q3 2021 (or Q4 2021 for recovery startup businesses).

Impact of the CARES Act Sunset (or prior expiration): The direct impact of the CARES Act sunset on the ERC is that these credits are no longer available for new wages paid after their respective expiration dates. This means:

• Businesses can no longer claim a substantial refundable tax credit for retaining employees.
• The significant cash flow benefit provided by the ERC is gone, requiring businesses to cover 100% of payroll taxes and wages without this offset.
• Businesses that relied on the ERC to maintain staffing levels or expand during the pandemic will need to adjust their payroll budgets accordingly.

What Small Businesses Need to Do:

1. Finalize ERC Claims: If your business is still in the process of claiming eligible ERCs for 2020 or 2021, ensure all documentation is complete and submitted accurately and timely. Retroactive claims are still possible for some periods, but deadlines are approaching.
2. Budget for Full Payroll Costs: Re-evaluate your payroll budget to account for the full cost of employee wages and associated payroll taxes, without the offset provided by the ERC. This might necessitate adjustments to staffing levels or compensation structures.
3. Explore Alternative Incentives: Research other federal, state, and local hiring incentives or tax credits that may be available. While unlikely to be as broad as the ERC, targeted programs might exist for specific industries or demographics.
4. Focus on Productivity and Efficiency: Without the ERC, businesses must ensure that every payroll dollar is generating maximum value. Focus on improving employee productivity, operational efficiency, and strategic growth to justify staffing costs.
5. Cash Flow Management: Strengthen cash flow management practices to absorb the full burden of payroll without external support.

While the ERC’s direct sunset occurred earlier than 2026 for most, its absence will continue to be felt as businesses adjust to a post-pandemic economic reality. The CARES Act sunset effectively means a return to pre-pandemic payroll tax liabilities, requiring careful financial planning to absorb the increased costs.

Critical Financial Change 4: Expiration of Expanded Unemployment Benefits and Related Flexibility

The CARES Act dramatically expanded unemployment benefits and introduced new programs to support workers who lost their jobs due to the pandemic. Key provisions included:

• Federal Pandemic Unemployment Compensation (FPUC): Provided an additional $600 (later reduced to $300) per week to individuals receiving unemployment benefits.
• Pandemic Unemployment Assistance (PUA): Extended unemployment benefits to workers not traditionally eligible, such as self-employed individuals, independent contractors, and gig workers.
• Pandemic Emergency Unemployment Compensation (PEUC): Provided additional weeks of unemployment benefits beyond the standard state limits.

These expanded benefits, while critical for individuals, also had an indirect impact on small businesses by influencing the labor market, affecting hiring decisions, and potentially impacting the availability of labor.

Impact of the CARES Act Sunset (or prior expiration): Most of these expanded unemployment benefits officially expired in September 2021. Therefore, the CARES Act sunset in 2026 primarily solidifies this return to pre-pandemic unemployment structures. The key implications for small businesses are:

• Labor Market Adjustment: The labor market has already largely adjusted to the absence of these enhanced benefits. However, businesses should be aware that the workforce is now operating under standard unemployment rules, which may influence labor supply and demand dynamics, albeit less dramatically than the initial expiration.
• Reduced Employee Retention Pressure (from benefits): The initial enhanced benefits created a dynamic where some workers might have delayed returning to work. With their expiration, the incentive to seek employment through traditional channels has increased.
• State-Level Differences: Businesses must be acutely aware of their specific state’s unemployment insurance rules, as federal enhancements are no longer a factor.

What Small Businesses Need to Do:

1. Monitor Labor Market Trends: Continue to monitor local and national labor market trends, including unemployment rates, wage growth, and labor force participation.
2. Competitive Compensation and Benefits: To attract and retain talent, small businesses must offer competitive wages, benefits, and a positive work environment, as the safety net of enhanced federal unemployment benefits is no longer available.
3. Workforce Planning: Develop robust workforce planning strategies to ensure you have the right talent in place. This includes forecasting staffing needs, succession planning, and investing in employee training and development.
4. Understand State UI Costs: Be aware of how your state’s unemployment insurance (UI) system works and how your claims history can impact your UI tax rates.

While the direct expiration of these benefits occurred before 2026, the overall CARES Act sunset reinforces the long-term return to standard economic conditions, requiring businesses to compete for talent based on their intrinsic value proposition rather than external federal incentives.

Critical Financial Change 5: Reversion of Qualified Improvement Property (QIP) Depreciation

The CARES Act addressed a critical issue stemming from the Tax Cuts and Jobs Act of 2017 (TCJA) regarding Qualified Improvement Property (QIP). QIP refers to certain improvements made to the interior of nonresidential real property. Due to a drafting error in the TCJA, QIP was inadvertently excluded from being eligible for 100% bonus depreciation and was instead assigned a 39-year depreciable life, making it a less attractive investment.

The CARES Act corrected this error, retroactively classifying QIP as 15-year property, which made it eligible for 100% bonus depreciation. This change was crucial for businesses undertaking renovations and improvements, allowing them to immediately deduct the full cost of these improvements, significantly boosting cash flow and incentivizing investment.

Impact of the CARES Act Sunset: The 100% bonus depreciation for QIP (and other qualified assets) is a temporary measure, scheduled to phase out. While the CARES Act fixed the initial QIP classification, the broader bonus depreciation rules are governed by the TCJA, which stipulates a gradual phase-down:

• 100% bonus depreciation was available for property placed in service after September 27, 2017, and before January 1, 2023.
• It then phases down to 80% for property placed in service in 2023.
• 60% for property placed in service in 2024.
• 40% for property placed in service in 2025.
• 20% for property placed in service in 2026.
• And will be 0% for property placed in service after December 31, 2026.

Therefore, as the CARES Act sunset aligns with the final phase-out of bonus depreciation in 2026, businesses will see a significant reduction, and eventually elimination, of this immediate deduction for QIP and other eligible assets.

What Small Businesses Need to Do:

1. Accelerate Capital Expenditures: If your business plans significant property improvements or equipment purchases, consider accelerating these capital expenditures to take advantage of the remaining bonus depreciation percentages in 2025 and 2026.
2. Depreciation Planning: Work with your accountant to understand the declining bonus depreciation rates and how they will impact your tax liability and cash flow.
3. Cost Segregation Studies: For larger real estate projects, consider a cost segregation study to reclassify certain building components into shorter depreciable lives, even without bonus depreciation.
4. Leasing vs. Buying: Re-evaluate financing strategies. The reduced depreciation benefits might make leasing certain assets more attractive than outright purchasing, depending on your specific financial situation.
5. Long-Term Investment Strategy: Adjust your long-term investment strategy to account for the reduced upfront tax benefits from capital expenditures. This impacts the effective cost of new assets.

The phasing out of bonus depreciation, coinciding with the broader CARES Act sunset, means that businesses will no longer enjoy the same immediate tax savings from capital investments. This necessitates a more strategic and forward-looking approach to capital expenditure planning and depreciation management.

Preparing for the CARES Act Sunset: Proactive Strategies for Small Businesses

The impending CARES Act sunset in 2026 is not a cliff edge but a horizon that small businesses can proactively prepare for. The key to mitigating potential negative impacts and even finding new opportunities lies in foresight and strategic planning. Here are actionable steps small businesses should take:

1. Conduct a Comprehensive Financial Review and Forecast

The first step is to get a clear picture of your current financial health and how it might change. This involves:

• Detailed Cash Flow Analysis: Understand your current cash inflows and outflows. Identify any reliance on past CARES Act benefits (e.g., ERC refunds, PPP loan forgiveness impact on past P&L).
• Revenue and Expense Forecasting: Develop realistic projections for revenue and expenses for 2025, 2026, and beyond. Factor in the absence of CARES Act tax benefits and potential market shifts.
• Scenario Planning: Create different financial scenarios (e.g., best-case, worst-case, most likely) to assess your business’s resilience under various conditions post-sunset.
• Balance Sheet Health Check: Review your balance sheet, paying close attention to debt levels, working capital, and equity. Ensure you have adequate reserves.

2. Engage with Tax and Financial Advisors Early

This is perhaps the most critical step. Tax laws are complex, and the specific impact of the CARES Act sunset will vary for each business. A qualified professional can provide tailored guidance:

• Tax Strategy Development: Work with a tax advisor to develop a proactive tax strategy that accounts for the reverted NOL rules, interest expense limitations, and phased-out bonus depreciation. This might involve optimizing other deductions, exploring new credits, or adjusting your accounting methods.
• Financial Planning: A financial advisor can help you develop a long-term financial plan that incorporates these changes, advises on capital allocation, debt management, and investment strategies.
• Business Structure Review: Discuss whether your current business entity structure (e.g., sole proprietorship, LLC, S-Corp, C-Corp) remains the most tax-efficient choice given the changing landscape.

3. Optimize Operational Efficiency and Cost Management

With potentially higher tax liabilities and reduced cash flow benefits, operational efficiency becomes even more paramount:

• Cost Reduction: Identify areas where costs can be safely reduced without impacting quality or growth. This could include renegotiating vendor contracts, optimizing supply chains, or leveraging technology for automation.
• Productivity Improvements: Invest in training, technology, and processes that enhance employee productivity and overall operational efficiency.
• Pricing Strategy Review: Evaluate your pricing strategy to ensure it adequately covers costs and maintains healthy profit margins in a post-CARES Act environment.

4. Strengthen Cash Flow and Capital Reserves

Building a robust financial buffer is essential to weather any unexpected impacts of the CARES Act sunset:

• Build Cash Reserves: Prioritize building a healthy cash reserve to cover several months of operating expenses. This provides flexibility and reduces reliance on external financing.
• Diversify Funding Sources: Explore various funding options beyond traditional loans, such as lines of credit, venture capital, or grants, to ensure access to capital when needed.
• Accounts Receivable Management: Improve your accounts receivable processes to ensure timely collection of payments, boosting immediate cash flow.

5. Stay Informed and Adaptable

The legislative and economic environment is constantly evolving. Small businesses must remain vigilant:

• Monitor Legislative Developments: Keep an eye on any new legislative proposals that might impact small business taxation or support programs.
• Industry-Specific Impacts: Understand how the CARES Act sunset specifically affects your industry and competitive landscape.
• Foster an Adaptive Culture: Encourage a culture of adaptability within your organization, ready to pivot strategies as new challenges and opportunities arise.

Conclusion: Navigating the Post-CARES Act Landscape with Confidence

The CARES Act was a critical intervention that provided unprecedented support to small businesses during a period of extreme economic distress. As the provisions of this landmark legislation gradually sunset, particularly in 2026, the financial landscape for small businesses will undeniably shift. The reversion of Net Operating Loss rules, the tightening of business interest expense deduction limits, the full expiration of enhanced Employee Retention Credits, the return to pre-pandemic unemployment benefit structures, and the final phase-out of bonus depreciation significantly alter the financial calculus for entrepreneurs.

However, this transition is not a cause for alarm but a call to action. The businesses that will thrive in the post-CARES Act era are those that embrace proactive planning, seek expert guidance, and commit to operational excellence. By conducting thorough financial reviews, engaging with tax and financial professionals, optimizing operational efficiency, strengthening cash flow, and remaining adaptable, small businesses can transform potential challenges into opportunities for sustainable growth.

The CARES Act sunset serves as a powerful reminder of the dynamic nature of economic policy and the importance of continuous strategic foresight. For small business owners, understanding these five critical financial changes and implementing the recommended proactive strategies will be paramount to not just surviving, but flourishing in the evolving economic climate. The time to prepare is now, ensuring your business is well-positioned for success long after the CARES Act provisions have faded into history.