NET OPERATING LOSS PROVISIONS IN COVID-19 TAX LEGISLATION

On: September 23, 2020

To help taxpayers with the negative economic consequences caused by COVID-19, Congress and President Trump have agreed on certain tax legislation, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020.

Net operating loss provisions can enable businesses to better utilize losses for tax purposes, by carrying them back or carrying them forward to other taxable years.  Under Section 2303 of the CARES Act, the rules regarding net operating losses have been modified, helping taxpayers.

What are the net operating loss provisions under the CARES Act?

Five-Year Carryback of Net Operating Losses

While the Tax Cuts and Jobs Act of 2017 disallowed net operating loss carrybacks, the CARES Act changes this provision.  Specifically, under the CARES Act, businesses are allowed to carryback net operating losses realized in taxable years 2018, 2019, and 2020 for up to five years to offset taxable income in those prior taxable years.

Suspension of 80 Percent of Taxable Income Limitation on Net Operating Losses

While the Tax Cuts and Jobs Act of 2017 limited the utilization of net operating losses to only 80 percent of taxable income, the CARES Act changes this provision.  Specifically, under the CARES Act, this “80 percent of taxable income limitation” is suspended and inapplicable with respect to taxable years 2018, 2019, and 2020.

Implications of CARES Act Net Operating Loss Provisions

The above-described CARES Act net operating loss provisions significantly liberalize the utilization of net operating losses by taxpayers.  If you incur a 2018 net operating loss, you can carry it back against an unlimited amount of taxable income in taxable years 2013, 2014, 2015, 2016, and/or 2017.  If you incur a 2019 net operating loss, you can carry it back against an unlimited amount of taxable income in taxable years 2014, 2015, 2016, 2017, and/or 2018.  If you incur a 2020 net operating loss, you can carry it back against an unlimited amount of taxable income in taxable years 2015, 2016, 2017, 2018, and/or 2019.

Taxpayers can generally take advantage of net operating loss carrybacks by filing an amended return for the prior taxable year or by requesting a “quick refund” (commonly known as a “tentative refund”).  However, the Internal Revenue Service, under IRS Notice 2020-26, generally set the deadline to file for a tentative refund based on a calendar taxable year 2018 net operating loss as June 30, 2020.  The “tentative refund” approach (which can more quickly provide critical cash for businesses during COVID-19) can still be currently used by other applicable taxpayers, including those with a calendar taxable year 2019 net operating loss.

To the extent a taxpayer was subject to higher income tax rates in the prior taxable year (as was the case for many corporations before the Tax Cuts and Jobs Act of 2017), the tax savings from these net operating loss provisions would be magnified, as the taxpayer would be utilizing the net operating loss against “higher-taxed” income.

These net operating loss provisions also make companies that have realized net operating losses more attractive candidates for acquisition.

Please remember that the CARES Act still permits an indefinite carryforward of net operating losses.

If you need tax help, always make sure to call Leading Tax Group and don’t attempt to do it yourself.