Everything You Need to Know About the CARES Act's Impact on Net Operating Losses


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Commonly referred to as the CARES Act, the Coronavirus Aid, Relief and Economic Security Act is designed to eliminate some of those tax-revenue-generating provisions that have proven to be troublesome since their implementation in the Tax Cuts and Jobs Act in 2017.

Now more than ever, large and small businesses alike need all the relief they can get to help weather this storm and possibly come out stronger on the other side of it, once the ongoing global pandemic has finally passed us by. At its core, the CARES Act is designed to do precisely that.

The Immediate Impact of the CARES Act: Breaking Things Down

One of the most important changes debuting with the CARES Act has to do with net operating loss deductions, otherwise known as NOL deductions. Provided that you qualify, under the current regulations you may now be able to carry an NOL into a different year - preferably one in which you have taxable income - and take a deduction for it against your earnings in that period.

With the CARES Act, a number of important changes are instituted - like the elimination of the existing taxable income limitation on the deductions themselves. Right now, thanks to the Tax Cuts and Jobs Act, any net operating loss you're working with in 2018 or later couldn't offset more than 80% of the taxable income you made for the carryover year. Likewise, most net operating losses that happened after 2018 couldn't be pushed back to earlier years to offset taxable income in those periods.

While the changes to the TCJA were intended to be permanent, they have been formally removed starting in 2021. NOLs that you move into tax years prior to 2021 can be used to fully offset your taxable income - something that will come as a welcome relief to struggling business owners everywhere.

Taxpayers can also elect to forgo the carryback provision and carry 2018 or 2019 losses forward to future years. Losses incurred in tax years beginning before 2018 may be carried forward to tax years beginning after 2020 without being subject to the 80% income limitation. However, amounts carried forward to tax years beginning on or after January 1, 2021 are once again subject to the 80% limit.

Obviously, tax laws related to net operating loss carryovers is still a complicated topic in the United States - as are most of our tax laws in general. Having said that, this is still a far more beneficial situation than the one created by the Tax Cuts and Jobs Act - and it truly couldn't have come along at a better time.

Likewise, under the CARES Act, net operating losses from the 2018 through the 2020 tax years can be carried back for up to five years - something that was also not allowable under the TCJA. You can even elect to carry your net operating losses to future tax years, depending on which option is more beneficial to you in the moment. Even if you've already filed your tax returns, if these changes impact you the option is available to file an amended return so that you can take full advantage of them.

If you'd like to find out more about the changes that the CARES Act has brought to NOL carryovers and carrybacks in particular, or if you have any additional questions you'd like to discuss with someone in a bit more detail, please don't delay - contact Baldwin CPAs today.