CARES Act Brings Change to Net Operating Losses to Benefit Businesses

by: Smith and Howard

April 6, 2020

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The recently passed Coronavirus Aid, Relief and Economic Security (CARES) Act contains many provisions designed to bring financial help to both corporate and individual taxpayers as they face financial struggles during the COVID-19 pandemic. One of the provisions is a change in net operating losses (NOLs), aimed at giving tax relief to taxpayers who will lose money this year because of the pandemic or who had losses in 2018 and 2019.

Losses Carried Back as Far as 2013

The new provision allows NOLs generated in taxable years beginning after December 31, 2017 and before January 1, 2021 to be carried back 5 taxable years. Under pre-TCJA (Tax Cuts and Jobs Act of 2017) law, a 2-year NOL carryback was allowed but starting in 2018 under TCJA, carrybacks were disallowed. Now, because of the CARES Act, 2018 losses can be carried back as far as 2013.

Careful Analysis Needed to Realize Maximum Benefits

With a variety of tax rates in force across the carryback years due to TCJA changes, along with other income-based modifications such as DPAD (pre-2018 Domestic Production Activities Deduction) and Section 179 deductions, careful analysis is needed to maximize the benefits of a Net Operating Loss carryback. It is incumbent upon those considering taking advantage of NOLs to work closely with their tax advisor on this.

Loss Limitation Rules for 2018 and 2019 Suspended

Another benefit of the CARES Act is that previous loss limitation rules in effect for 2018 and 2019, such as the limit for post-2017 NOLs to only offset 80% of taxable income and the $500,000 business loss limitation, have been suspended. These changes can potentially generate refunds for tax years 2018 and 2019 through amended returns where applicable. For the 2021 tax year, the 80% limitation will be reinstated. A breakdown of these numbers is provided in the chart below.

NOL Generated Carryback
(tax years)
(tax years)
Can offset % of taxable income
On or prior to December 31, 2017220100%
After December 31, 2017, and before January 1, 20215Indefinite100% (prior to 2021)

80% (after 2020)
On or after January 1, 2021NoIndefinite80%

Net Operating Loss carryback claims for tax year 2018 are due by July 27, 2020 under the provisions of the CARES Act. After that date, 2018 losses will need to be realized on prior year returns through amended returns.

NOLs can be complicated. If you think this change applies to you and need help navigating the complexities of NOLs, please reach out to the tax team at Smith and Howard so that we can help you work out the best way to address this modification. Fill out the form below and someone will be in touch with you.

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