COVID-19 and Losses, Losses, Losses ….NOL Tax Relief from the CARES Act

On March 25, 2020, the Senate unanimously passed (96-0) the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) providing desperately needed relief to, among others, individuals and businesses suffering economic distress wrought by the COVID-19 pandemic. Two days later, March 27, 2020, the House of Representatives passed the CARES Act by voice vote and President Trump signed the bill into law that same day.  It is undoubted that many individuals and businesses are suffering severe economic losses in these trying times.

A very significant provision in the CARES Act concerns net operating losses (NOLs).  As part of the Tax Cuts and Jobs Act (TCJA) enacted in 2017, certain restrictions were imposed on the use of NOL.  The CARES Act retroactively unwinds some of these restrictions.  The CARES ACT changes will permit taxpayers to reduce current taxable income and possibly file amended tax returns to claim refunds for earlier tax years.

TCJAs NOL Restrictions

Pursuant to the TCJA NOL rules –

  • a taxpayer can only use NOL carryforwards arising in tax years beginning after December 31, 2017, to offset 80% of the taxpayer’s income, and
  • net operating losses arising in tax years beginning after December 31, 2017, cannot be carried back.

CARES Act to the Rescue

Taxpayers should consider if they have an opportunity to file amended tax returns to claim refunds as a result of the new temporary NOL rules, described below.

  • The CARES Act eliminates the 80% limit on deductions for NOLs for 2020 and two prior tax years (2019, 2018). This means that a taxpayer who would otherwise have been affected by the 80% limitation on his 2019 tax return can now calculate his 2019 and 2020 tax liabilities without regard to the 80% limit. In addition, a taxpayer who was similarly limited in the use of NOLs in 2018 can file an amended tax return to claim a refund.
  • The CARES Act eliminates the limit on NOL carrybacks for losses arising in 2018, 2019 and 2020. NOLs incurred in these years can now be carried back five years. It’s time to look at prior years’ returns and see if a tax refund is in your future. Notably, the NOLs cannot be carried back to offset the “transition tax” or “deemed repatriation tax” imposed under Internal Revenue Code Section 965, as amended by TCJA in 2017. On the bright side, taxpayers can elect to exclude from the determination of the five-year carryback period any tax years in which these foreign earnings were included in gross income.  You can read more about the “transition tax” at various of  my tax blog posts listed here.  [UPDATE May 1 2020: The Internal Revenue Service has posted new Frequently Asked Questions (FAQs) about Carrybacks of NOLs for Taxpayers who have had Section 965 Inclusions.]

The CARES Act also amends the effective date of the NOL rule changes brought on by TCJA. The pre-TCJA NOL rules now apply to NOLs arising in tax years that began before January 1, 2018. Those NOLs can be carried back two years, and then forward 20 years without being subject to the 80%-of-taxable-income limitation. NOLs arising in tax years that begin after December 31, 2017, will have an unlimited carryforward period. Once the temporary rules expire, NOLs arising in tax years that begin after December 31, 2020, cannot be carried back, and when carried forward will be subject to the 80% limitation.

The CARES Act benefits that involve filing claims for a refund will not be immediately felt. Tangible benefits will depend on the taxpayers’ ability to file amended returns and for the IRS to process those returns quickly. The IRS is encouraging taxpayers that will be entitled to refunds to file their amended tax returns as soon as possible. In order to expedite processing IRS encourages taxpayers to file electronically, and to provide direct deposit information.

Here is a link to the CARES Act ; Section 2303 contains the modifications for NOLs (Internal Revenue Code Section 172).

Posted April 2, 2020 / Updated May 1, 2020

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