In light of the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act eases the rules for claiming certain tax losses to provide businesses and their owners with some relief from the financial effects of the pandemic. This article reviews the modifications for net operating losses (NOLs) and guidance provided in Revenue Procedure 2020-24.

CARES Act Liberalizes Rules for NOL Carryforwards

The CARES Act included changes to the rules for deducting NOLs. The Act eased the taxable income limitation on deducting NOLs.

A provision included in the 2017 Tax Cuts and Jobs Act (TCJA) limited NOL carryforwards arising after Dec. 31, 2017, to 80 percent of the taxable income for the carryforward year, calculated before the NOL deduction.

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

For tax years beginning after Dec. 31, 2020, the CARES Act allows NOL deductions equal to the sum of:

  • 100 percent of NOL carryforwards from pre-2018 tax years, plus
  • The lesser of 1) 100 percent of NOL carryforwards from post-2017 tax years, or 2) 80 percent of remaining taxable income (if any) after deducting NOL carryforwards from pre-2018 tax years.

This is a complicated rule but is now more taxpayer-friendly than what the TCJA allowed.

COVID Relief Allows Carrybacks for Certain NOLs

The TCJA provision for NOLs eliminated carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income (as discussed above). It repealed carryback provisions, except for certain farm and property and casualty losses allowing NOLs to be carried forward indefinitely.

Under the CARES Act, NOLs that arise in tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021 can be carried back for five years. This means that a taxpayer could carry back an NOL arising from 2020 to 2015 and recover federal income tax paid for that year. That could be very beneficial because the federal income tax rates for both individuals and corporations were higher before the TCJA rate cuts took effect in 2018.

Taxpayers can also take advantage of tax savings by electing to waive the carryback privilege for an NOL and carry the NOL forward to future tax years. Barring a further tax law change, the no-carryback rule will come back into play for NOLs that arise in tax years beginning after 2020.

Excess Business Loss Disallowance Rule for Non-Corporate Taxpayers Is Postponed

Under the TCJA, a non-corporate taxpayer is disallowed current deductions for excess business losses for tax years beginning after December 31, 2017, and before January 1, 2026. An excess business loss is an amount that exceeds $250,000 ($500,000 for a married filing jointly). These limits are adjusted annually for inflation.

The CARES Act postponed the excess business loss disallowance rule for losses arising in tax years beginning in 2018 through 2020. Barring further tax law changes, the excess business loss disallowance rule will come back into play for losses that arise in tax years beginning in 2021 through 2025. Any disallowed excess business loss for one of those years will be carried forward to the following year and can be deducted under the rules for NOL carryforwards.

Amended Return Opportunities

These advantageous CARES Act modifications can affect prior tax years for which you’ve already filed returns. Amended returns may be needed to benefit from the changes. Contact your tax professional for more information.

Please contact your tax advisor for more information on this or any tax matter. If you do not have a tax advisor, please call 615-377-4600 or contact us through our website with your questions.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.