How the CARES Act Affects Net Operating Losses

The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes provisions impacting net operating losses. Here’s how the rules for claiming certain tax losses have changed in order to provide businesses with relief from the Coronavirus (COVID-19) pandemic.

Deductions for net operating losses

tax cpaThe CARES Act includes changes to the rules for deducting net operating losses (NOLs), including permanently easing the taxable income limitation on deductions.

You may be able to benefit by carrying an NOL into a different year (a year in which you have taxable income) and taking a deduction for it against that year’s income.

Under the Tax Cuts and Jobs Act (TCJA), an NOL arising in a tax year beginning in 2018 and later that is carried over to a later tax year couldn’t offset more than 80% of the taxable income for the carryover year (the later tax year), calculated before the NOL deduction. Under the TCJA, most NOLs arising in tax years ending after 2017 also couldn’t be carried back to earlier years and used to offset taxable income in those earlier years. These unfavorable changes to the NOL deduction rules are now no longer permanent.

For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs carried over into those years. NOL carryovers into tax years beginning before 2021 can be used to fully offset taxable income for those years.

For tax years beginning after 2020, the CARES Act allows NOL deductions equal to the sum of:

  • 100% of NOL carryovers from pre-2018 tax years, plus
  • The lesser of 100% of NOL carryovers from post-2017 tax years, or 80% of remaining taxable income (if any) after deducting NOL carryovers from pre-2018 tax years.

Carrybacks allowed for certain years

NOLs arising in tax years ending after 2017 could only be carried forward for an unlimited number of years. It generally couldn’t be carried back to earlier years and used to offset taxable income in those years.

Under the CARES Act, NOLs that arise in tax years beginning in 2018 through 2020 can be carried back for five years.

You can elect to waive the carryback privilege for an NOL and, instead, carry the NOL forward to future tax years if it’s beneficial for you. In addition, barring a further tax-law change, the no-carryback rule will come back for NOLs that arise in tax years beginning after 2020.

Past year opportunities

These CARES Act changes may affect prior tax years for which you’ve already filed tax returns. To benefit from the changes, you may need to file an amended tax return.

IRS guidance

The IRS has comprehensive guidance on NOLs for taxpayers here.

© 2020

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