The United States government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law to help provide financial stability during these uncertain times. The piece of legislation led to many changes — changes that could directly impact tax returns both from the past and into the future.
How could the law impact taxes that were already filed?
A number of provisions within the CARES Act are retroactive. This means the law impacts not just tax returns from 2019 and moving forward, but, in some cases, can reach back to 2013. The impact of these provisions on tax returns is complex. As a result, we will break down the analysis of some of the larger provisions into a series of four posts. This, the first, deals with a portion of the CARES Act that changes that impact of taxes on net operating losses (NOLs).
How did the law impact net operating losses?
In order to appreciate the full impact of these changes, it is important to take a step back. In 2017, the Tax Cuts and Jobs Act (TCJA) contained provisions that negatively impacted the ability of businesses to claim NOLs. The TCJA limited the deduction and essentially removed the ability to apply the expense to previous tax years.
The CARES Act helps to balance out these negative issues with the following:
- Eased taxable income limitation. NOL carryovers can now fully offset taxable income.
- Allows prior year deductions. The CARES Act also allows for carrybacks. NOLs from 2018 through 2020 can be carried back and applied to the five preceding tax years.
This last point is significant. Taxes were higher from 2013 through 2017. As a result, there is a strong likelihood that businesses paid tax obligations during these years and could now use the carryback provisions to claim current NOLs and receive a refund.
There are other nuances to consider before claiming a carryback. In some instances, it may be advantageous to reserve the NOL for future tax years. Businesses are wise to seek legal counsel to review their situation and discuss the benefits and risks of each option. The attorneys at Goldburd McCone are familiar with these issues and provide guidance.