Net Operating Losses after the CARES Act
Pre-CARES Act Rule:
The Tax Cuts and Jobs Act disallowed the carryback of net operating losses but allowed for the indefinite carryforward of the losses. (The only exception to this rule applies to farmers and property and casualty insurance companies; they can still use the old carryback rule).
Limitations:
The NOL can only offset up to 80% of the taxable income in the current year. The rest will be carried forward indefinitely.
NOLs from pass-through entities, namely S-corps and Partnerships, are limited to $250,000 (or
$500,000 if MFJ) to offset non-business income starting in 2018.
Post-CARES Act:
What changed?
Taxpayers may now carry back losses as far back as 5 years for tax years beginning after December 31, 2017 and before January 1, 2021!
The 80% limitation now only applies to tax years beginning on or after January 1, 2021.
NOLs from pass-through entities, namely S-corps and Partnerships, are now able to offset non-business income from 2018-2020 even if the NOL exceeds $250,000 (or $500,000 if MFJ).
Example
A corporation had a $100,000 net income in 2017, a loss of $150,000 in 2018 and a net income of $50,000 in 2019.
Prior to the CARES act, they would be unable to carry back the loss to 2017 and would only be able to offset $40,000 of the net income in 2019 (80% of $50,000).
After the CARES act, they can carry $100,000 of their loss back to 2017 and carry forward $50,000 to 2019!
There are nuances to each situation that cannot be touched upon in one article. However, as tax professionals we can walk with you through your unique scenario and help you take advantage of the particular aspects that apply to you!
