How Changes to Claiming Net Operating Losses Under the CARES Act Impact Businesses
Under the CARES Act, taxpayers with 2018, 2019, and 2020 net operating losses (“NOLs”) may now be able to obtain tax relief by filing amended returns to claim tax refunds by offsetting taxable income from prior years.
The CARES Act made several changes to federal tax law, including the following changes to the NOL rules:
- Five-year NOL carryback provision. Pre CARES Act law provided that NOLs incurred after 2017 could only be carried forward (not carried backward). The CARES Act provides a five-year carryback period for NOLs incurred in certain years.
- Suspension of the NOL taxable income limitation rule. Pre CARES Act law provided that NOLs may only be carried forward to offset up to 80% of taxable income in carryover years. The CARES Act eliminates this limitation for certain years.
- Fiscal year NOL carryback technical correction from the Tax Cuts and Jobs Act. For fiscal year taxpayers that had a loss for their fiscal year ending in 2018 and may have generated a NOL but waived their carryback period, the CARES Act permits those taxpayers to file a carryback claim and revoke that election if done by July 25, 2020. These NOLs will be subject to the prior law’s two-year carryback rule and not the five-year carryback period under the CARES Act.
The above changes to the NOL tax rules, together with the fact that tax rates were generally higher in tax years prior to 2018, provide a substantial tax refund opportunity to businesses. For example, C corporations were subject to a maximum federal income tax rate of 35% for tax years prior to 2018 and a maximum federal income tax rate of 21% for tax years beginning in 2018.
Although the NOL relief applies to corporate and non-corporate taxpayers, the following table illustrates how a C corporation taxpayer that had been profitable prior to the COVID-19 pandemic may benefit from the CARES Act NOL rules:
There are a number of other tax rules that may impact whether and how a taxpayer may benefit from the NOL provisions in the CARES Act. The Chambliss tax team assists a wide variety of individual and business taxpayers. Please contact our team or consult with your personal tax advisor to determine whether you may benefit from the changes to the NOL rules under the CARES Act. If you think this may bring some relief to you or your business, we recommend you act swiftly so applicable refunds from prior years’ claims can be utilized as soon as possible to combat the economic impact your business is facing due to the COVID-19 pandemic.
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The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings, and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. In some cases, the underlying legal information is changing quickly in light of the COVID-19 pandemic. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Please contact your legal counsel for advice regarding specific situations.