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Inside the CARES Act: Five-Year Carryback for Net Operating Losses and Taxable Income Offset

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) relaxes the limitations on a company’s use of losses. Under the current rules amended by the 2017 Tax Cuts and Jobs Act (“TCJA”), net operating losses (“NOLs”) are subject to a taxable-income limitation and cannot be carried back to reduce income in a prior tax year.

CARES Act Carryback for Net Operating Losses

The CARES Act gives companies a five-year carryback period for NOLs arising in the 2018, 2019, and 2020 tax years. Under the timing rules of the Internal Revenue Code (“IRC”) Section 172 and the promulgated Treasury Regulations, the carried back NOLs are carried to the earliest of the tax years to which the loss may be carried.

CARES Act Taxable Income Offset

Additionally, the CARES Act suspends the 80% of taxable income limitation on the use of NOLs for tax years beginning before January 1, 2021. The TCJA imposed the 80% of taxable income limitation on the use of NOLs, which applied to years beginning after December 31, 2017. As a result of the CARES Act, corporate taxpayers may use NOLs to fully offset taxable income in the 2018, 2019, and 2020 tax years.

The below table summarizes three categories of federal NOLs that are effectively created as a result of the TCJA and CARES Act:

NOL generated

Carryback

 

(tax years)

Carryforward

 

(tax years)

Can offset % of
taxable income
On or prior to
December 31, 2017
2 20 100%
After December 31, 2017,
and before January 1, 2021
5 Indefinite

100% (prior to 2021)

 

80% (after 2020)

On or after
January 1, 2021
No Indefinite 80%

COVID-19 Tax Savings

As a result of the changes to federal NOL provisions, corporate taxpayers may be able to amend prior year returns to offset pre-2018 income that was taxed at higher tax rates of up to 35% (the TCJA changed the corporate income tax rate to 21%). This will generate a current year refund for companies and provide them with additional cash flow and liquidity. Corporations with NOLs generated pre-2021 tax year will be able to completely offset their taxable income for the 2018, 2019, and 2020 tax years and allocate the tax savings to other expenses arising out of the COVID-19 emergency.

©2020 Norris McLaughlin P.A., All Rights Reserved

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About this Author

Milan Jakubcak Tax Lawyer Norris Law
Associate

Milan Jakubcak focuses his practice on all areas of taxation and business law.

Milan is experienced in preparing tax structure papers and identifying US tax consequences of domestic and cross-border transactions, including the impact of the US tax reform on clients structures and contemplated transactions. He advises private equity and corporate clients on a range of domestic and cross-border transactions, including entity mergers and acquisitions, tax-free corporate reorganizations, Section 351 transactions, and business joint ventures.

Prior to joining the firm, Milan was...

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