The Coronavirus Aid, Relief and Economic Security Act (CARES Act) provided for the temporary suspension of the taxable income limitation for Net Operating Losses (NOL’s). The Tax Cuts and Jobs Act (TCJA) provided that Net Operating Losses could no longer be carried backward to prior tax years, but must now only be carried forward. In addition, TCJA limited the amount of taxable income that could be offset by an NOL to 80 percent.
The modifications under the CARES act allow the net operating losses generated in tax years beginning before January 1, 2021 (therefore generated in the 2018, 2019 or 2020 tax years) to be carried back to the five preceding tax years of the year the loss was generated, and the remaining NOL will carried forward indefinitely. In addition, taxable years beginning before January 1, 2021 will allow the aggregate net operating loss carryover plus the aggregate net operating loss carrybacks to such year to offset 100 percent of taxable income. The TCJA previously allowed NOL’s to offset only 80 percent of taxable income. The 80 percent limitation will be back in effect for taxable years beginning after December 31, 2020.
The CARES act modifications do not apply to Real Estate Investment Trusts (REIT’s). In addition, any loss generated in 2018, 2019 or 2020 that is not in a REIT may not be carried back to a taxable year in which the taxpayer was a REIT.
In the case of life insurance companies, a net operating loss is carried back in the same manner as an operations loss within the meaning of Internal Revenue Code (IRC) Section 810.
There is also a special provision relating to years to which IRC 965 income inclusion applies. This provision will not allow a net operating loss carryback to offset IRC 965(a) income in those taxable years.
The timing of elections to carryback losses for NOL’s arising out of the 2018 or 2019 taxable years shall be made by the due date (including extensions of Time) for filing the taxpayer’s return for the first taxable year ending after the date of enactment of the CARES act.
As you can see these rules are fairly complex and should be carefully navigated. These provisions will provide taxpayers with the ability to accelerate the utilization of NOL’s generated in tax years 2018 through 2020, including providing the opportunity to carryback the losses to accelerate cash flow.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.