CARES Act – Net Operating Losses (NOLs)

By: Timothy Lynn

The CARES Act provides relief to businesses in the form of greater use of NOL carrybacks. The Act allows a five year carryback of NOLs arising in the 2018, 2019 and 2020 tax years. Prior to the Tax Cut & Jobs Act of 2017 (the TCJA), taxpayers were allowed to carryback NOLs to the two prior tax years. Under the TCJA, carrybacks were eliminated.

In order to expedite getting cash in the hands of struggling businesses, these NOL carrybacks are eligible for an expedited tentative refund procedure. For example, if a business had an NOL for 2019 that it could not carryback, it can now file an amended return for prior tax years (the five years before 2019) and request a tentative refund that would hopefully be issued quickly.

For many businesses, this relief may be of limited utility because the economy was strong in 2018 and 2019. The NOLs caused by COVID-19 will not be recognized until 2020, meaning calendar year taxpayers have a long wait before claiming those carryback refunds.

Note also that the 80% of taxable income cap on NOLs imposed under the TCJA is eliminated for tax years beginning before January 1, 2021.