The Coronavirus Aid, Relief and Economic Security (CARES) Act contains numerous provisions, including a change in net operating losses (NOLs), bringing some financial relief to taxpayers affected by the COVID-19 pandemic. This change allowed taxpayers who had NOLs to go back five years and offset those losses. This is an important reminder that NOL carrybacks for 2018, which can go from 2017 to as far back as 2013, are due June 30, 2020.
What To Do
Taxpayers need to determine if they had a loss in 2018 and income in any prior year to see if they are eligible for an NOL carryback. Eligible taxpayers may file an application for a tentative carryback adjustment of the tax liability for a prior taxable year that is affected by a NOL carryback. The tentative carryback adjustment procedure allows a taxpayer to obtain a tentative tax refund based on an NOL carryback. Taxpayers looking to take advantage of carrybacks for the 2019 calendar year have until September 20, 2020 to do so.
Under pre-TCJA (Tax Cuts and Jobs Act of 2017) law, a two-year NOL carryback was allowed but starting in 2018 under TCJA carrybacks were disallowed. With a variety of tax rates in force, 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 NOL carryback.
Another benefit of the CARES Act is that previous loss limitation rules in effect for 2018 and 2019, such as the 80% of taxable income limit post-2017 NOLs and the $500,000 business loss limitation, have been suspended, thus reducing liabilities and giving individuals and companies more cash flow.
NOLs can be complicated. If you think this change applies to you and need help navigating the complexities of NOLs, please reach out to Mark Abrams or a member of the tax team at Smith & Howard so that we can help you work out the best way to address this modification.