The CARES Act contains provisions with respect to a temporary five-year net operating loss (“NOL”) carryback for a number of taxpayers. As a result of this provision, many taxpayers may be able to receive significant refunds. For any taxable years ending before December 31, 2018, the highest corporate tax rate was thirty-five percent, compared with the current corporate income tax rate of twenty-one percent. 

The following relief provisions are included in the CARES Act:

  • Five-year NOL carryback provision
  • Suspends the taxable income limitation for use of NOLs
  • Fiscal year NOL carryback technical correction from the Tax Cuts and Jobs Act (“TCJA”)

The TCJA had repealed the NOL carryback for any NOLs resulting from tax years beginning after December 31, 2017.  Additionally, the TCJA dictated that the NOL deduction going forward would be limited to eighty percent of taxable income and NOLs would be able to be carried forward for an indefinite period of time. 

The CARES Act has repealed the taxable income limitation when utilizing NOLs. Taxpayers are now able to offset one hundred percent of taxable income with NOLs on a dollar-for-dollar basis.  For tax years beginning before January 1, 2021 there will no longer be the eighty percent income limitation for NOL carryovers. 

It is important to note that taxpayers are not able to choose to carryback NOLs to any particular period within the five-year lookback; NOL carryback provisions adhere to an all or nothing concept.  Provided the taxpayer does not make an election to forego the entire carryback, any NOLs generated during taxable years beginning in 2018, 2019 or 2020 must be carried back to the earliest tax year within the five-year carryback period for which there is taxable income.  Any portion of the NOL not absorbed in the earliest year will need to be carried forward to the remaining years within the five-year period until entirely exhausted. 

The CARES Act contains one exception to the ordering rules for which NOLs must be utilized.  In addressing the interaction between Internal Revenue Code (“IRC”) §965 transition tax and the NOL carryback provision, the taxpayer is afforded the opportunity to elect to exclude from its NOL carryback five-year period any taxable year in which it had IRC §965 income.  If taxpayers elect to carryback any NOLs to any taxable years in which they had IRC §965 income they are not permitted to use any of the NOLs to offset any IRC §965 income.

When analyzing whether a taxpayer should utilize the five-year NOL carryback provisions there needs to be an understanding of the interplay between any NOL carryback and other IRC provisions. A number of these include, but are not limited to, the following:

  • IRC §179 election is limited to taxable income with any excess generally being able to be carried forward to subsequent years.
  • Although repealed in the TJCA, IRC §199 domestic production activities deduction is limited to taxable income.
  • IRC §170(b)(2)(A), deductions for charitable contributions are limited to ten percent of taxable income; any reduction in this amount due to a NOL carryback would then be carried forward to subsequent years.
  • Any NOL carryback would potentially reduce any general business credits that were previously claimed, any credits modified would be nonrefundable with a twenty-year carryforward.
  • Special consideration should be given to any carrybacks to years where the statute of limitation has been closed.

Any election to carryback NOLs is made annually on the corporate income tax return.  Making the election to forego the carryback period in any of the taxable years, 2018, 2019 and 2020, is separate and not binding with respect to any of the other years.  The CARES Act provides the following with respect to making these elections:

  • For taxable years beginning in either 2018 or 2019, a taxpayer must make the election to forego the NOL carryback by the due date, including extensions, for filing the return for the first taxable year ending after March 27, 2020; accordingly, a calendar year taxpayer must make this election for 2018 and 2019 NOLs by the extended due date of the 2019 return, October 15, 2020
  • For taxable years beginning in 2020, a taxpayer must make the election to forego any NOL carryback by the due date of the return, including any extensions. 

Example

Year

Taxable Income / (Loss)

Scenario 1 (Current)

Scenario 2 (CARES)

2021

100,000

20,000

 

2020

(250,000)

(250,000)

 

2019

150,000

150,000

50,000

2018

  20,000

  20,000

0

2017

(10,000)

(10,000)

(10,000)

2016

    5,000

    5,000

0

2015

125,000

125,000

0

Scenario 1 – Current Law (Pre-CARES Act):

Loss arising from taxable year 2020 can only be carried forward up to 80% of the 2021 taxable income, $80,000, and the remaining NOL will be carried forward indefinitely (tax savings $16,800).  Future tax savings will be $35,700.

Scenario 2 – CARES Act:

The NOL will be carried back five years to offset any income starting in 2015

2015 – fully absorbs all taxable income. (tax savings $32,000)

2016 – fully absorbs all taxable income (tax savings $750)

2017 – election to forego NOL carryback

2018 – fully absorbs all taxable income (tax savings $3,000)

2019 – remaining NOL carryforward of $100,000 utilized (tax savings $22,250)