By: Samantha Levokove
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. This $2 trillion emergency aid package has been described by Mitch McConnell, Senate Majority Leader, as “a wartime level of investment into our nation.” The CARES Act, among other things, suspends certain changes to the loss provisions made by the 2017 Tax Cuts and Jobs Act (the “TCJA”).[1] This allows companies to claim refunds for certain losses and utilize greater losses.
Prior to the passage of the TCJA, the net operating loss (“NOL”) of a business or individual could be carried back two years, forward 20 years, and when carried forward, NOLs could be used to offset 100% of taxable income. The TCJA changed these rules disallowing all carrybacks related to post-2017 losses, limiting the use of post-2017 losses when carried forward to 80% of taxable income and providing for an indefinite carry forward period.[2]
The CARES Act temporarily reverses the changes implemented under the TCJA, and for tax years beginning in 2018, 2019, and 2020: (1) suspends the 80% of taxable income limit on net operating loss (“NOL”) carryovers; (2) allows NOLs to be carried back five years (taxpayers can elect to forgo the carryback); (3) suspends the limitations on excess farm losses and on the use of a pass-through business' losses against non-business income; and (4) delays the implementation of the Section[3] 461(l) loss limitation (which disallows business losses of noncorporate taxpayers in excess of $250,000 per individual and $500,000 per married couple filing jointly) to tax years beginning after December 31, 2020.[4] It is important to note that income includible under Section 965 (TCJA transition-related foreign income) cannot be reduced by the NOLs allowed to be carried back under the CARES Act.
Taxpayers with losses that were not allowed in 2018 and 2019 as a result of the limitation under Section 461(l) of the Code, as well as those with carryback NOLs, may file claims for refund. Refunds within 90 days of processing are generally available for corporations by filing Form 1139 for carryback NOLs and Form 4466 for overpayment of estimated taxes for the current year, and for individuals, estates and trusts by filing Form 1045.
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