COVID-19 Relief for Businesses with Losses

Many businesses struggling as a result of COVID-19 experienced losses in 2020. To provide some relief, the Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily relaxed certain restrictions on the deductibility of net operating losses (NOLs). This change gives many businesses an opportunity to carry back losses to previous tax years and seek refunds of tax overpayments in those years. At one time, businesses were permitted to carry NOLs back up to two years or forward up to 20 years. In 2017, however, the Tax Cuts and Jobs Act (TCJA) disallowed NOL carrybacks (beginning in 2018) and limited deductions of NOL carryforwards to 80 percent of taxable income in the deduction year. (It allowed NOLs to be carried forward indefinitely, however.) To give struggling businesses a cash flow boost, the CARES Act allows businesses with NOLs in 2018, 2019, or 2020 to carry those losses back up to five years to offset up to 100 percent of taxable income in those years. This is a particularly attractive opportunity for businesses that are able to carry back NOLs to years before 2018. That’s because corporate and individual tax rates were higher in those years, making deductions more valuable. Businesses that wish to take advantage of this opportunity should consider filing amended returns to claim refunds for earlier tax years. Keep in mind, however, that NOL carrybacks can sometimes interact with other tax deductions or credits, affecting your eligibility for those tax breaks. Your tax advisors can help you see the big picture and adopt a strategy that’s right for your business.