The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides added relief for taxpayers with net operating losses (NOLs). The Act allows for a five-year carryback period and eliminates the 80% income limitation for NOLs, which may generate significant tax refunds for many taxpayers.
Carrying Back Net Operating Losses
NOLs incurred in 2018, 2019, and 2020 may be carried back to the preceding five tax years to offset taxable income reported during those prior years. Prior to this change, losses could only be carried forward. This is welcome news for taxpayers that were profitable in the past, but expect a loss due to the COVID-19 crisis. The extended carryback provision allows taxpayers to recoup income taxes paid during those profitable years.
The CARES Act also suspends the 80% limitation for tax years beginning before January 1, 2021. Under prior law, NOLs that were carried forward were limited to the lesser of the NOL carryover or 80% of the taxpayer’s pre-NOL taxable income for the current period.
More Benefits to the CARES Act
An added benefit to the provision is that taxpayers may be carrying losses back to years in which they paid taxes at a higher effective rate. The corporate tax rate was reduced to 21% beginning in 2018. Prior to this change, the maximum corporate rate was 35%. Individual rates were also lowered beginning in 2018. Therefore, it is probable that many taxpayers will benefit by carrying back losses to years with higher effective tax rates as opposed to carrying these losses forward to years with lower overall tax rates.
These provisions provide taxpayers an opportunity to address liquidity issues during the current COVID-19 crisis by claiming refunds for taxes paid in prior years and also provide a host of other planning opportunities.