Businesses were quick to take advantage of provisions in the Coronavirus Aid, Relief and Economic Security (CARES) Act that provided immediate infusions of cash to cover payroll.
Less attention has focused on other provisions offering tax relief to offset hits to income.

One significant set of tax changes significantly loosened the rules for claiming deductions for net operating losses (NOLs). Three specific changes may help businesses that have seen a sharp drop in cash flow.

  1. Carrybacks are Back

CARES established a five-year carryback for losses incurred in 2018, 2019 or 2020. This restores carrybacks that were eliminated under the 2017 Tax Cuts and Jobs Act (TCJA).

This means businesses can file amended tax returns for up to five prior years to reduce taxable income for those years. The carryback can be applied in years where the corporate tax rate was higher than current post-TCJA rates. Amending returns to take the loss in a previous year could result in a tax refund that provides much-needed liquidity for some businesses.

NOLs can still be carried forward and applied to current and future years indefinitely.

  1. No Limits

Under TCJA, the NOL deduction was limited to 80 percent of taxable income. The CARES Act temporarily removes the limit, so firms can use the loss to offset all taxable income. This eliminates the need to carry forward any loss above 80 percent of income to a future tax year. The 80 percent limit is restored in 2021.

  1. Expansion for Pass-throughs

Those who own pass-through businesses can use NOLs to offset more non-business income. Previously, the deduction was limited to $250,000 of income from other sources for singles and $500,000 for married couples filing jointly. Like firms, pass-through owners may apply the NOL deduction to 2018, 2019, and 2020.

These changes offer some flexibility and potential liquidity, but as always, business owners should consider how these changes interact with other tax provisions. Contact us to assess your full tax picture and how these changes might help your business through difficult times.

—Toni Shears