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CARES ACT IMPACTS ON NET

OPERATING LOSSES: FREQUENTLY
ASKED QUESTIONS
APRIL 2020
On March 27, President Trump signed the Coronavirus
Aid, Relief, and Economic Security Act (also known as
the CARES Act), a $2 trillion stimulus package intended
to help mitigate the economic devastation caused by
the coronavirus.

The CARES Act includes changes to the tax treatment

of business net operating losses (NOLs) for corporations
and other taxpayers. Given the significant role NOLs
can play in increasing cashflow and helping to mitigate
financial distress, we’ve compiled Frequently Asked
Questions around NOLs to help break down the latest
changes in the CARES Act and what they mean for your
business.

What is an NOL?
An NOL occurs when a company’s tax deductions
exceed its taxable income within a given tax period. An
NOL can be carried forward over future tax periods and
used to offset taxable income to reduce a company’s
total tax liability. The 2017 tax reform legislation known
as the Tax Cuts and Jobs Act of 2017 (TCJA) lifted the
previous 20-year limit on NOL carryforwards, but limited
NOLs to 80% of taxable income in any one tax period.
Among other changes, the CARES Act temporarily
removes this 80% limit for taxable years beginning
before 2021 to allow an NOL carryforward to fully offset
an organization’s income.

What years can I carry back an

NOL under the CARES Act?
The CARES Act allows a five-year carryback of any NOL
generated in a taxable year beginning after December
31, 2017, and before January 1, 2021. In addition, fiscal
year 2017 returns (i.e., returns that began before
January 1, 2018, and ended after December 31, 2017)
can now be carried back two years as a result of the
technical correction to the effective date language in
the TCJA (which originally applied the prohibition on
carrybacks to taxable years ending after December 31,
2017).

Are carryforwards of NOLs still

indefinite?
Yes, the CARES Act still allows for an indefinite
carryforward period. Indefinite-lived NOLs are NOLs
generated in a taxable year beginning after December
31, 2017. This indefinite carryforward period includes the
2018-2020 NOLs that remain after the five-year
carryback period.

Do the NOL carryback provisions

apply only to C corporations?
No. The NOL carryback rules also apply to individuals,
estates and trusts and tax-exempt organizations filing
Form 990-T, Exempt Organization Business Income Tax
Return, to report unrelated business taxable income.

Are there any limitations on which

corporate taxpayers can
specifically use the five-year
carryback?
Under the CARES Act, real estate investment trusts
(REITs) are not allowed a carryback to any preceding
taxable year. In addition, an NOL generated in a non-
REIT year cannot be carried back to a year in which the
taxpayer was a REIT. Additionally, there are other
provisions of the tax code that could prevent a
carryback that were not impacted by the CARES Act.

Is it better to carryback the NOL or

to elect to use it to offset future
income?
While a company’s specific assessment may vary, often
the extended carryback provides a favorable rate
differential for C corporations because they are able to
carry back post-TCJA NOLs to offset pre-2018 ordinary
income or capital gains, which were taxed at higher
rates. In addition, a carryback is typically more valuable
because of present value discounting, which eliminates
the need to generate future taxable income and
reduces the risk potential of limitations on future loss
utilization.

However, carrybacks can create added tax compliance,

including updating calculations for carryback years,
expose the organization to tax risks of prior years, or
have limited refundability if the organization has
experienced certain merger and acquisition activity.

Does the forgiveness of a Small

Business Association (SBA) loan
have any impact on an NOL
carryforward?
The CARES Act treats the SBA loan debt forgiveness as
not taxable. While there is some uncertainty, it does not
appear that an NOL could be reduced for any small
business loan forgiveness.

Does the 80% limitation on

taxable income apply to NOLs
generated in 2018 through 2020?

The 80% limitation on taxable income only applies to

the use of NOLs in taxable years beginning after
December 31, 2020. However, only NOL carryovers
generated in taxable years beginning after December
31, 2017, are subject to the limitation once they are
carried over to a period in which the limitation applies.
NOL carryforwards from earlier pre-TCJA taxable years
will not be subject to this limitation.

Can a taxpayer carry back an NOL

to specific years, for example, the
preceding taxable year but not
any further? Or must the NOL be
carried back for the full period to
the extent the corporation has
taxable income in those years?
Generally, the entire amount of the NOL for any taxable
year (a loss year) must be carried back to the earliest
taxable year to which such loss may be carried. Such
carryback must be applied until the maximum NOL is
absorbed with respect to that year. Any remaining NOL
is then carried forward to the next carryback year, and
so on. However, an exception under the CARES Act
exists where taxpayers can elect to exclude taxable
years with Section 965 income (untaxed foreign
earnings from certain specified corporations) from the
carryback period.

What are the options available to

taxpayers in accessing a refund as
a result of these new carryback
provisions?
The specific form an organization must complete to
request a refund varies by entity type; however, all
organizations must file the return first before generating
the NOL.

How should a taxpayer proceed if

it has filed a calendar year 2018
return and would now like to carry
back the 2018 NOL?
The Treasury Department and the IRS have granted a
six-month extension to file for a tentative refund on
Form 1045 for individual taxpayers, trusts and estates
and Form 1139 for corporations for the carryback of an
NOL that arose in a taxable year that began during
calendar year 2018 and that ended on or before June
30, 2019.

This extension is limited to requesting a tentative refund

to carry back an NOL and does not extend the time to
carry back any other item.

For example, in the case of an NOL that arose in a

taxable year ending on December 31, 2018, a taxpayer
normally would have until December 31, 2019, to file the
applicable forms but due to this extension will now have
until June 30, 2020.

For quicker tax refund, where Forms 4466, 1045, or 1139

are used, the IRS recommends including the following
direct deposit request forms: (1) Form 8050 for direct
deposit amounts of less than $1 million, and (2) Form
8302 for direct deposit amounts of $1 million or more.

If this taxpayer is a corporation that is also seeking to

claim an alternative minimum tax (AMT) credit refund,
they can file one application for both the AMT refund
and the NOL carryback. However, if they file for both
simultaneously, they will need to do so by the earlier of
the two deadlines.

Additionally, it appears the carryback may result in a

new or increased credit in the carryback year, therefore
requiring additional amended returns and potentially a
larger AMT credit refund.

Understanding and applying these rules to maximize tax

savings and increase cashflow is a complex task. Get in
touch with our team to understand what these changes
and other provisions of the CARES Act mean for your
business’ tax planning.

HAVE QUESTIONS? CONTACT US

CONTACTS

RANDY DOUG BEKKER

SCHWARTZMAN Partner
Corporate Tax and
Mergers and
Acquisitions (M&A)
National Technical
Practice Leader

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