Net Operating Loss Tax Changes Provide Relief Through CARES Act

Net Operating Loss Tax Changes Provide Relief Through CARES Act


  • Find out how the CARES Act favorably changes some provisions of TCJA regarding NOLs.
  • Learn how the CARES Act changes the rules for deducting NOLs.
  • Learn more about how the CARES Act eases the taxable income limitations on deductions.
  • Find out how certain NOLs can now carry back for five years.
  • Find out if you can amend past tax returns based on the changes made by the CARES Act.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act eliminates some of the tax-revenue-generating provisions included in a previous tax law. Fiducial has a look at how Congress has modified the rules for claiming certain tax losses. These new changes may provide businesses with relief from the (COVID-19) crisis.

Net operating loss (NOL) deductions

Basically, you may be able to benefit by carrying a net operating loss (NOL) into a different year — a year in which you have taxable income — and taking a deduction for it against that year’s income. The CARES Act includes favorable changes to the rules for deducting NOLs. First, it permanently eases the taxable income limitation on deductions.

Under an unfavorable provision included in the Tax Cuts and Jobs Act (TCJA), a net operating loss arising in a tax year beginning in 2018 and later and carried over to a later tax year couldn’t offset more than 80% of the taxable income for the carryover year (the later tax year), calculated before the net operating loss deduction. As explained below, under the TCJA, most NOLs arising in tax years ending after 2017 also couldn’t be carried back to earlier years and used to offset taxable income in those earlier years. These unfavorable changes to the NOL deduction rules were permanent — until now.

For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs carried over into those years. So, NOL carryovers into tax years beginning before 2021 can be used to fully offset taxable income for those years.

For tax years beginning after 2020, the CARES Act allows NOL deductions equal to the sum of:

  • 100% of net operating loss carryovers from pre-2018 tax years, plus
  • The lesser of 100% of NOL carryovers from post-2017 tax years, or 80% of remaining taxable income (if any) after deducting NOL carryovers from pre-2018 tax years.

As you can see, this is a complex rule. However, it’s more favorable than what the TCJA allowed and the change is permanent.

Brainstorming over paper, net operating loss tax changes with CARES Act
Photographer: Scott Graham | Source: Unsplash

Certain net operating loss carrybacks now allowed

And there’s more! Under another unfavorable TCJA provision, NOLs arising in tax years ending after 2017 generally didn’t allow businesses to carry back to earlier years and offset taxable income in those years. Instead, NOLs arising in tax years ending after 2017 could only carry forward to later years. But they could carry forward for an unlimited number of years. (There were also exceptions to the general no-carryback rule for losses by farmers and property/casualty insurance companies).

Under the CARES Act, NOLs that arise in tax years beginning in 2018 through 2020 can carry back for five years.

Important: If it’s beneficial, you can elect to waive the carryback privilege for a net operating loss. Instead, you can carry the net operating loss forward to future tax years. In addition, barring a further tax-law change, the no-carryback rule will come back for NOLs that arise in tax years beginning after 2020.

Past year opportunities

These favorable CARES Act changes may affect prior tax years for which you’ve already filed tax returns. To benefit from the changes, you may need to file an amended tax return. Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations for assistance. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!

For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.