Tax Changes to Net Operation Losses for Businesses

The CARES Act resulted in several tax changes, including those related to net operating losses — or NOLs. These changes were meant to provide much-needed relief to businesses to improve cash flow.

The modifications to NOLs that improve cash flow include:

• A five-year carryback for losses earned in 2018, 2019, or 2020 that allows businesses to modify their tax returns for up to five previous years to offset taxable income from those tax years. Previous law, starting on Jan. 1, 2018, did not allow a NOL to be carried back except for farm NOLs. 2018 tax returns can file a Form 1045 (Application for Tentative Refund) to carryback net operating losses until June 30, 2020. After June 30, 2020, a business would need to file an amended return for 2018 to take advantage of a NOL carryback.
• Suspension of the NOL deduction limit of 80 percent of taxable income. In other words, businesses can now deduct their NOLs to eliminate all of their taxable income in a given year, instead of having to carry forward any NOL beyond 80 percent of their taxable income.
• Changes to non-business income. Now, pass-through business owners may use NOLs to offset their non-business income above the previous limit of $250,000 for those who are single or $500,000 for those who are married and filing jointly for 2018, 2019, and 2020.

Although these changes can help businesses with taxable income, those businesses that haven’t posted profits won’t see any relief. So, for example, startups — who might not have turned a profit yet — won’t benefit from the tax law change. Also, those businesses that weren’t operating during those applicable tax years won’t have profits to offset with losses.

This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.