Did you know if you have a tax loss during calendar years 2018, 2019, or 2020 from business activity that resulted in an overall net operating loss (NOL), the Coronavirus Aid, Relief and Economic Security (CARES) Act modifies the carryback rules? These were previously restricted under tax reform. Here’s what your business should know.

NOLs and the Tax Cuts and Jobs Act (TCJA)

First off, an NOL is a loss generated in a period when a company’s allowable tax deductions are greater than its taxable revenues. Prior to 2018, NOLs could be carried back up to two years to recover past tax payments, any unused amount would then be carried forward up to 20 years and it could offset 100% of taxable income whether carried back or forward. Since the enactment of the TCJA in 2017, NOLs could no longer be carried back but could only be carried forward indefinitely.

Additionally, the NOL deduction was limited to 80% of taxable income, before the NOL is applied (for losses arising in tax years after December 31, 2017).

How does the CARES Act change this?

The CARES Act changes these rules so that NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five tax years preceding the tax year of the loss. IRS has published guidance that also allows for the revocation of previous elections that forgo the carryback of an NOL. In addition, the CARES Act temporarily removes the 80% offsetting loss limitation. Fair Warning – the restrictive rules will be reinstated for tax years beginning after December 31, 2020.

Refund opportunity

Taxpayers with eligible NOLs can now claim a refund from prior years due to the changes under the CARES Act. To make it easier, IRS has granted taxpayers an additional 6 months to file the quick claim of refund on Forms 1045 or 1139 for losses in years beginning on or after January 1, 2018. These are streamlined forms designed only for carrybacks. Taxpayers still have the option to waive the carryback period and elect to carry an NOL forward only to future tax years. It’s important to note that in the eligible carryforward tax years, taxpayers can use NOLs to fully offset taxable income, instead of the restrictive 80% of taxable income limitation.

Relief for partnerships impacted by NOLs

As you may have experienced, for tax years beginning in 2018, partnerships have restrictions on amending and restating returns already filed. For partnerships effected by the changes in the CARES Act, the IRS issued Revenue Procedure 2020-23 (PDF), allowing eligible partnerships to file amended partnership returns using a Form 1065, checking the “Amended Return” box, and issuing amended Schedules K-1’s to each of its partners.

Impact on multinational corporate groups that own CFCs

For taxpayers that are part of multinational corporate groups and own controlled foreign corporations (CFCs), you will need to take into consideration the interaction of an NOL carryback with other IRC provisions such as Section 965. These rules are complex and offer several options that you’ll want to confer with an expert in this area.

How will the carryback impact other tax attributes?

Businesses will also want to pay attention to how the carryback affects other tax attributes including foreign tax credits, general business credits, charitable contributions, domestic activities production deductions, ownership changes, and more. These are often impacted in computing modified taxable income for the carryback year and you’ll want to consider these things as part of the decision process while working through a net operating loss carryback.

Questions on the CARES Act and how it might impact you? Contact us.