NOL and Excess Business Loss Limitations Under the CARES Act

To support the economy and to provide tax relief to individuals and businesses, The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted on March 27, 2020. The CARES Act makes numerous changes and modifications to the treatment for Net Operating Losses (NOLs) and Excess Business Losses, which we have summarized below.

Net Operating Losses

Carryback and Carryforward Periods

Before the passage of the CARES Act, carrybacks for net operating losses had been eliminated for tax years beginning after 2017. The CARES Act allows a loss originating in tax years 2018, 2019, or 2020 to be carried back five years unless the carryback period is waived. Both prior law and new law allow NOLs to be carried forward indefinitely for these years.  The five-year carryback could potentially allow a company to use NOLs to reduce income in previous years when the top tax rate was higher at 35%.  For years beginning January 1, 2021, NOL’s will revert back to only being eligible to be carried forward.

For tax years 2016 and 2017, NOLs were previously allowed to be carried back two years and forward 20 years. The CARES Act changes the carry forward period to be indefinite and remains the same for a two-year carryback.

The five year carryback period may be waived by making an election. For NOLs arising in the 2018 and 2019 tax years, the waiver election is extended to the due date (including extensions) of the return. Normally, the election is required by the due date of the return for the year in which the NOL arose. The extended due date is necessary because the deadline for making the waiver election has expired for some taxpayers.

• Taxable Income Limitation – NOLs originating in tax years beginning after 2017 were previously limited to reduce 80% of a taxpayer’s taxable income. That limitation has been removed under the CARES Act to allow losses before January 1, 2021, to offset 100% of a taxpayer’s taxable income.
• State Tax Implications – Many states have not made decisions regarding the benefits of many of the provisions in the CARES Act including the NOL provisions.  The states have to decide whether they will adopt or decouple from the changes made by the CARES Act.  New Jersey and Pennsylvania have their own NOL rules, which as of the writing of this blog have not changed due to the CARES Act. New Jersey generally allows a net operating loss to be carried forward 20 years for corporations and has no provision to allow for a carryback or carryover for individuals.  New Jersey recently changed how their NOL is calculated due to combined reporting requirements that are now in place.  Pennsylvania permits corporations to carry forward net operating losses for 20 years and does not allow for carrybacks. The NOL is limited to a percentage of income (40% in 2019).  For individuals, there is no carry forward or carryback of losses to other tax years.

Excess Business Losses

An excess business loss is the excess of deductions over the gross income or gain for the year from a trade or business plus $250,000 for single filers or $500,000 for taxpayers filing a joint return.

Previously a non-corporate taxpayer was not allowed a deduction for excess business loss for tax years after 2017 and before January 1, 2026. The CARES Act modifies the deduction limitation to apply for tax years after 2020 and before January 1, 2026.  Therefore, the limit of excess business losses will not apply for tax years 2018, 2019, and 2020. Taxpayers who were subject to the limitation and have filed returns for the 2018 and 2019 tax years are eligible to file amended returns to claim a potential refund.

Contact Us

The modifications discussed above could help taxpayers utilize business losses and improve cash flow. If you have questions about the information or to determine if you will benefit by filing an amended return, Klatzkin can help. Click here to contact us.

The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change.  This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.