The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily reinstates the net operating loss (NOL) carryback option and removes the limitations on the amount of NOL deductions that can be taken. However, the time window for a taxpayer to maximize an NOL’s value is short. These NOL rule changes under the CARES Act only apply to tax years 2018, 2019, and 2020.
Prior to the law known as the Tax Cuts and Jobs Act (TCJA), an NOL generally could be carried back two years and forward 20 years. In addition, generally, no dollar limitations existed on the amount of the NOL that could be used in a particular year into which the NOL deduction was carried, except for the amount of taxable income. Those rules all changed with the enactment of the TCJA.
Under the TCJA, the carryback rule was eliminated for most NOLs arising in tax years beginning after December 31, 2017, although farming and certain insurance losses that could be carried back five years before the TCJA, retained a two-year carryback. NOLs arising in a year beginning after 2017 could be carried forward indefinitely. From a taxpayer perspective, the elimination of the carryback rule prevented certain taxpayers from receiving a quick cash refund from previously filed returns, which was a drawback of the TCJA rules.
The TCJA also limited the amount of an NOL deduction that may be used in a given year. For tax years beginning after December 31, 2017, the NOL deduction was limited for both corporate and noncorporate taxpayers to the “amount equal to the lesser of (1) the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, or (2) 80% of taxable income computed without regard to the deduction allowable under this section”.
Section 2303(b) of the CARES Act temporarily reinstated a carryback period for all NOLs generated in years beginning after December 31, 2017, and before January 1, 2021 (i.e., for tax years 2018, 2019, and 2020). The carryback period for those tax years is five years under CARES. Therefore, an NOL generated in the 2018 tax year can be carried back to the 2013 tax year, assuming there was taxable income in 2013. Because the top corporate tax rate was 35% prior to its reduction by the TCJA to 21% for tax years after 2017, carrying back an NOL from 2018, 2019, or 2020 could result in a greater benefit than carrying the NOL forward.
In addition, the CARES Act temporarily suspends the above 80% taxable income limitation, allowing an NOL carryforward to fully offset taxable income in tax years beginning before January 1, 2021.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.