Temporary Allowance of NOL Carrybacks Creates Refund Opportunity

For businesses that experience losses this year, a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act may deliver a welcome cash flow boost. The act temporarily lifts restrictions on net operating loss (NOL) carrybacks. This allows businesses to offset losses against income earned in previous years and claim a tax refund.

No looking back

At one time, NOLs could be carried back up to two years and forward up to 20 years and offset up to 100% of taxable income. But then the Tax Cuts and Jobs Act (TCJA) changed the rules. It prohibits NOL carrybacks, allows NOLs to be carried forward indefinitely and limits NOL deductions to 80% of taxable income.

CARES Act to the rescue

To assist cash-strapped businesses, the CARES Act temporarily reinstates NOL carrybacks, extends the carryback period to five years and suspends the 80% limit. This relief is available for losses arising in tax years starting after December 31, 2017, and before January 1, 2021 — in other words, for calendar-year businesses, losses arising in 2018, 2019 or 2020.

Next steps

If your business will experience an NOL in 2020 or had NOLs in recent tax years, consult your tax advisors to discuss strategies for making the most of those losses. For many businesses, carrying NOLs back to previous years (particularly pre-TCJA years when tax rates were higher) will generate substantial refunds.

However, depending on your tax situation, waiving NOL carrybacks and instead carrying losses forward might produce greater tax benefits. Keep in mind, though, that the 80% limit will return for tax years starting after December 31, 2020.

It’s also important to consider the impact of the technical correction to the TCJA, included in the CARES Act. If you’re on a fiscal year and had an NOL for your tax year ending in 2018, you may now be able to carry that loss back up to two years.

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