Much of the attention related to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has focused on small business loans. However, all businesses should also understand how three important changes to rules governing net operating losses (NOLs) can improve cash flow needed by so many businesses during this time.
NOL deductions help businesses with greater volatility in net income profitability avoid being taxed at a higher effective tax rate. The goal is to tax net income more consistently from one business or industry to another. One way to do this is to allow an NOL deduction by carrying over a loss from one year and deducting it from its net income in a more profitable year. However, the tax code imposes certain restrictions governing how firms may do so.
The Tax Cuts and Jobs Act (TCJA) of 2017 changed limits on NOL carrybacks and carryforwards—carrybacks were no longer allowed while carryforwards were unlimited. There was also a limit of 80% of taxable income that could be offset each tax year; the balance had to be carried forward. Additionally, NOLs for pass-through businesses were limited to $250,000 for single filers and $500,000 for joint filers.
NOL Changes Intended to Ease Cash Flow
- Under the CARES Act, businesses can apply a five-year carryback for losses incurred from 2018, 2019 and 2020. Tax returns up to five years prior can now be modified to offset taxable income from each of those years. When it is advantageous, taxpayers can still waive the carryback and choose to elect to carry NOLs forward to subsequent tax years.
- The 80% limit mentioned above has been suspended under the CARES Act. There no longer is a requirement to carry forward excessive NOL—all NOLs can be deducted to eliminate all taxable income in a set year. The change applies to tax years beginning prior to January 1, 2021.
- Pass-through business owners and sole proprietors can now use NOLs to offset non-business income over the $250,000 and $500,000 limits.
The intent of these changes is to help businesses with cash flow needs during this crisis. However, we should note that the NOL deduction changes only apply with businesses that had profits in the applicable years. There is some discussion among policymakers to include businesses that have NOL carryforwards.
GPP will work with taxpayers to take advantage of these changes by amending returns as appropriate. For specific questions about NOL changes, please contact Kevin Harris, CPA at 214-635-2473.
GPP will continue to keep you posted through our COVID-19 Business Assistance and Resource Center. If your business needs assistance during this challenging time, our COVID-19 Business Advisory and Planning Services Group is ready to assist.
For immediate questions, email CARETEAM@GPPcpa.com.
Note: This content is accurate as of the date published above and is subject to change, as definitions change. Please seek professional advice before acting on any matter contained in this article.