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Revised NOL Rules: Potential Relief for Businesses With 2020 Losses

Teri M. Samples

November 30, 2020

Many construction businesses expect to post year-end operating losses for 2020 as a result of the economic slowdown. Several provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act could take some of the sting out from this situation by allowing companies to carry back those losses, and potentially claim refunds of previous years’ taxes.

Under the 2017 Tax Cuts and Jobs Act (TCJA), a business that posted a net operating loss (NOL) at the end of the year could no longer carry back that loss to earlier years. Instead, the TCJA only allowed such losses to be carried forward. Moreover, businesses could offset no more than 80% of their taxable income in the year to which the loss was carried forward.

The CARES Act significantly liberalized those rules by allowing net operating losses from 2018, 2019, and 2020 to be carried back as far as five years. This means a corporate taxpayer could use losses generated this year, when the corporate tax rate is 21%, to offset taxable income in 2015–2017; when the rate was 35%. Furthermore, companies that posted NOLs in 2018 or 2019 could file amended returns to claim potential refunds from as far back as 2013.

The Act also removed the 80% carryforward limitation for the current tax year, but NOLs used in 2021 and later years will remain subject to the limitation.

The CARES Act also offers potential tax relief to owners of pass-through entities. The TCJA’s excess business loss rules limited owners’ deduction of losses to $250,000 ($500,000 for couples filing joint returns) for tax years 2018–2025. The CARES Act postponed the effective date of these rules until January 1, 2021.

For more year-end tax planning information, or for a one-on-one discussion, please contact our team, or your dedicated Mueller Prost advisor.

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