Net Operating Loss Changes Under the CARES Act
The CARES Act rewrites the rules on net operating losses, giving individuals and corporations more tax flexibility.
On March 27th, President Trump signed into law the Coronavirus Aid, Relief and Economic Security, or CARES Act. Among the multiple provisions in the act are a few key changes to the way net operating losses (NOLs) will work for taxpayers going forward. Under the new rules, you may be entitled to additional tax refunds.
CARES Act Key Points:
- The goal of the CARES Act is to expedite cash flow to taxpayers impacted by COVID-19.
- The CARES Act has created impactful changes to the way net operating losses (NOLs) work.
- The tax deduction for NOLs has been increased from 80 to 100 percent for the 2018, 2019 and 2020 tax years.
- Taxpayers can now carry back taxes up to five years preceding the tax year in which the NOL arises.
- The $500,000 limit on NOLs has been suspended until 2021
What is a Net Operating Loss?
A net operating loss occurs when you have a net business loss for the tax year. You also have an NOL when certain deductions exceed your gross income. Since NOLs aren’t always consistent year-to-year, congress established NOL carryback rules. These allow individuals and corporations to use NOLs to offset the tax burdens of more profitable years.
NOL carryback rules have changed over time. The Tax Cuts and Jobs Act (TCJA) of 2017 changed the NOL carryback rules for tax years beginning Jan. 1, 2018. NOLs could no longer be carried back to offset taxable income in prior years. Moreover, NOLs generated in 2018 and subsequent years could be carried forward indefinitely.
The coronavirus pandemic has created an unprecedented economic emergency in America. In response to this, Congress created the CARES Act, which has rewritten the rules on NOLs once again.
The CARES Act
The goal of the CARES Act is to expedite cash flow to taxpayers impacted by COVID-19. By suspending the limitations on NOLs imposed by the TCJA of 2017, the CARES Act creates new possibilities for tax refunds for both individuals and corporations. If you didn’t have an NOL in 2018 or 2019, you could have one now.
Here’s a rundown of what the CARES act does for NOLs:
- Permits taxpayers to carry back any 2018, 2019 or 2020 NOL up to five years.
- Modifies the business interest deduction limitations, the qualified improvement property depreciable life, and the non corporate excess business loss deduction.
- For taxable years beginning before January 1, 2021, you can offset 100% (up from 80%) of your income with NOL carryovers.
There’s no limit on the use of NOLs generated in tax years before January 1, 2018.
NOLs generated in tax years beginning after December 31, 2017 work differently. If they’re carried to a tax year beginning after December 31, 2020, they’re limited to 80 percent of any excess taxable income. This is without regard to the NOL deduction and the deductions under Section 199A and Section 250 (each instance is a case by case basis, and you should consult with a tax advisor).
Claiming Your Refund With Carryback Forms
The best way to claim a refund from an NOL carryback is to use the “tentative refund” procedures by filing either:
- Form 1045, Application for Tentative Refund, or
- Form 1139, Corporation Application forTentative Refund.
If you qualify to use these forms to claim your refund, you get two benefits:
- The IRS makes only a limited examination of the claim for omissions and computational errors.
- You receive your cash refund within 90 days of filing your application.
Normally, to qualify to use this procedure, you’d need to file your application no later than 12 months after the end of the tax year in which your NOL arose. Therefore, for NOLs on a 2018 Form 1040, you’d normally be out of luck, as the deadline was December 31, 2019.
But the IRS has given you mercy: you have a six-month extension to file your Form 1045 or Form 1139 if you have an NOL that arose in a tax year starting in 2018 and that ended on or before June 30, 2019.
For example, if your NOL was on your 2018 Form1040, you now have until June 30, 2020, to file Form 1045.
The CARES Act has changed the way net operating losses work. The act suspends the TCJA limitations on your NOLs for tax years beginning in 2018, 2019, and 2020, which means you can carry back your NOL five years, carry it forward indefinitely, and apply 100 percent of the loss. You can also waive the carryback and only carry forward the NOL.