On March 27, 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to provide relief for the acute economic fallout from the coronavirus (COVID-19) pandemic. The CARES Act, among other things, aims to provide significant aid to businesses and employees. One of the key business tax provisions relates to the operating losses for corporations and partnerships.
Corporate Net Operating Losses – Limitations and Carrybacks.
· Prior to the enactment of the CARES Act, corporate net operating loss (“NOL”) carryforwards were deductible only to the extent of 80% of taxable income, and NOLs generally could not be carried back to prior tax years. (See the Tax Cuts and Jobs Act of 2017 (the “TCJA”)).
· The CARES Act changes these rules to expand the ability of corporations to use their NOLs to offset taxable income. NOLs arising in 2018, 2019, or 2020 generally can be carried back up to five years. Under the CARES Act, a corporation with NOLs arising in 2018, 2019, or 2020 that paid tax in one or more of the five preceding tax years will be able to immediately file amended returns seeking a refund of taxes paid during such years. For 2020 and prior years, the taxable income limitation has been eliminated so that NOLs can be used to offset 100% of the corporation’s taxable income. In 2021 and subsequent years, the CARES Act relaxed taxable income limitations created under the TCJA. (The CARES Act does not alter the indefinite carryforward of NOLs).
Non-Corporate Net Operating Losses – Disallowance Rule Delayed.
· The CARES Act modifies loss limitations for many partnerships and individuals such that NOLs are now generally subject to the same rules as corporations. The CARES Act allows these excess business losses to be claimed in 2018, 2019, and 2020, thus delaying the disallowance rule until 2021. A partnership, subject to certain rules, that filed a tax return for 2018 without claiming a deduction for excess business losses may be able to file an amended return claiming a refund.