Coronavirus Tax Assistance: Congress Temporarily Reinstates Net Operating Loss Carrybacks Under the CARES Act

Apr 14, 2020   
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Under the COVID-19 stimulus package, formally titled the Coronavirus Aid Relief and Economic Security Act (“CARES Act”), which the President signed into law on March 27, 2020, taxpayers who have been unable to carry back net operating losses originating after 2017 based on recent changes to the Internal Revenue Code (“IRC”) have been provided substantial relief.

Specifically, under newly enacted IRC § 172(b)(1)(D), taxpayers may now carry back net operating losses (NOLs) arising in any tax year beginning after December 31, 2017 and ending before January 1, 2021, to each of the 5 preceding tax years. This revision to § 172 expressly (if temporarily) revokes a provision of the Tax Cut and Jobs Act of 2017 (TCJA) which barred NOL carrybacks (instead allowing only NOL carryforwards) for most taxpayers.


Prior to the TCJA, taxpayers were generally permitted to carry back NOLs (that is, the excess of deductible losses over gross income in a given tax year, subject to certain modifications) 2 years from the year of origination, and then carry them forward another 20 years.  The carryback or carryforward of NOLs potentially allowed taxpayers to use a current year loss to generate a refund of tax paid in an earlier or later year.  For a simplified example, assume that in Year 1 a taxpayer has taxable income of $100,000 and pays tax of $35,000 based on a flat tax rate of 35 percent.  In Year 3, the taxpayer generates an NOL of $50,000.  Under the pre-TCJA rules, the taxpayer could apply its $50,000 Year 3 NOL retroactively to Year 1, thereby reducing Year 1 taxable income to $50,000 and generating a refund of $17,500 (that is, half of the tax paid in Year 1).

The policy underlying NOL carrybacks and carryforwards is to smooth out the peaks and valleys of the business cycle and more closely align a taxpayer’s tax obligations with the taxpayer’s economic performance over an extended period of time.  If a taxpayer was very profitable in one year, but suffered losses in succeeding years, the taxpayer could carryback its NOLs to the profitable year and recoup some or all of the tax it had previously paid, thereby creating a truer picture of the taxpayer’s economic performance, and resulting tax obligations, over that period of time.

However, effective for the 2018 tax year and forward, the TCJA eliminated the ability for most taxpayers to carryback NOLs (although it did allow for unlimited NOL carryforwards, as opposed to the 20 year carryforward allowed under prior law).  The effect of the TCJA was especially harsh for taxpayers anticipating the carryback of losses arising in 2018 or 2019 to offset income and generate refunds of tax paid in prior years.  Moreover, in circumstances of a sharp economic decline, like the one the country may be facing, the ability to carry back NOLs is crucial because it is more likely that tax was paid in the immediate past, and it is less likely that tax (or a similar amount of tax) will be paid in the immediate future.  Therefore, the most effective refund-generation efforts will be retrospective rather than prospective.

CARES Act Changes

Under the CARES Act, notwithstanding the limitations of the TCJA, all taxpayers may carry back NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 (which therefore includes calendar years 2018, 2019, and 2020) to each of the 5 previous tax years.  For instance, if a taxpayer generated an NOL in 2019, that loss can now be carried back to 2014 and then carried forward through 2015, 2016, etc. until the NOL is fully depleted, whereas under prior law the 2019 loss could only be carried forward to 2020, 2021, etc.  To the extent the taxpayer paid tax in those earlier years, the taxpayer may be able to file a refund claim (most likely through the filing of an amended return for the appropriate year) and recoup some of the tax previously paid.

Alternatively, a taxpayer may waive the five-year carryback with respect to NOLs originating in tax years beginning in 2018 or 2019, and choose instead to use an NOL going forward only.  This approach may be preferred by new businesses, businesses which expect an uptick in income in future years, or taxpayers who haven’t paid a substantial amount of tax during the 5-year lookback window.  The procedures and time limitations for making this election are set forth in IRS Rev. Proc. 2020-24.

Note that the TCJA generally limited NOL deductions to 80 percent of the taxpayer’s taxable income in the carryback or carryforward year with respect to NOLs arising after December 31, 2017.  Under the CARES Act modifications, the 80 percent cap is eliminated for carrybacks or carryforwards to tax years beginning prior to January 1, 2021.  However, the 80 percent cap remains effective for all NOLs carried forward to 2021 or later years, even if the subject NOL originated in 2018, 2019, or 2020.

The changes to IRC § 172 discussed in this blog are reminiscent of Congress’s response to prior economic downturns.  For instance, following the 2008 financial panic and subsequent decline in the U.S. economy, Congress extended the usual 2-year carryback to a period of up to 5 years for losses originating in 2008 or 2009.  One notable difference is that in the 2009 law, taxpayers were given the option of expanding the carryback period to 3, 4, or 5 years, whereas the CARES Act allows only a 5 year carryback period.


Unfortunately, after years of economic expansion, many individuals and businesses will suffer economically in 2020 due to the COVID-19 pandemic.  In addition to other relief measures passed by Congress, the changes to IRC § 172 outlined in this article will allow taxpayers who suffer economic losses in 2020 (or suffered them in 2018 or 2019) to recover some of the tax they paid in more prosperous times.  If you or your business have incurred net operating losses in 2018 or 2019, or anticipate incurring one 2020, you should discuss this opportunity with your tax professionals to ensure you maximize the benefits made available under the CARES Act.