Wolters Kluwer Looks at the Changes the CARES Act Made to Net Operating Losses and the Help These Changes Can Bring to Businesses Impacted by the Covid-19 Pandemic
Business taxpayers have new opportunities to generate cash from the net operating loss (NOL) provisions of the CARES Act. Taxpayers who have net operating losses or who may create net operating losses through other provisions of the CARES Act, such as additional first-year depreciation or additional business interest deductions, need to be familiar with the elections and deadlines to act on NOLs. Some of those deadlines are quickly approaching.
The Tax Cuts and Jobs Act (TCJA), enacted in 2017, eliminated NOL carrybacks, allowed unlimited NOL carryforwards, and provided an 80 percent of taxable income limit on NOL deductions. Through a language error, the TCJA imposed a retroactive elimination of NOL carrybacks on businesses with fiscal years starting in 2017. The CARES Act, enacted in March 2020, created a five-year NOL carryback for tax years 2018, 2019 and 2020; eliminated the 80 percent of taxable income limit on NOL deductions for 2018, 2019 and 2020; and eliminated the retroactive effect of the NOL carryback elimination on fiscal year businesses. The IRS has provided guidance and elections for implementing these changes.
- NOL carrybacks can now go back as far as 2013, when tax rates were higher than under current tax law
- Claiming net operating loss carrybacks for prior years can result in quick tax refunds from the IRS, providing much needed cash to help get businesses through a shutdown period
- Taxpayers can elect to exclude from carryback years those years that include a tax on unrepatriated earnings
- Taxpayers can elect to waive NOL carrybacks for 2018 or 2019
- Taxpayers who have a 2018 NOL carryback have only until June 30, 2020 to claim that carryback
- Fiscal-year taxpayers who experienced a retroactive loss of NOL carrybacks for part of 2017 have until July 27, 2020 to claim those carrybacks
- Corporations claim the carryback on Form 1139; other taxpayers on Form 1045
- Partnerships subject to the partnership audit rules are given special permission to file amended Form 1065s and K-1s, permitting partners from those earlier years to take advantage of NOL carrybacks
- Special rules apply to Real Estate Investment Trusts and life insurance companies
- These changes should be especially helpful to businesses that experience a net operating loss for the first time in 2020 due to the shutdowns & restrictions resulting from the COVID-19 pandemic
Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help explain the new options available for net operating losses.
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