CARES Act changes how business losses are treated

In addition to the relief offered to individuals and business owners impacted by the COVID-19 outbreak, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) also contains modifications for how business losses are treated for tax purposes.

What is an NOL?

Generally, a net operating loss occurs when your deductions for the year are more than your income for the year. To have an NOL, your loss must generally be caused by:

  • Deductions from your trade or business;
  • Rental property; or
  • Casualty and theft losses resulting from a federally declared disaster.

The most common reason for an NOL is when losses are generated from operating a business.

What changed with NOLs?

The Tax Cuts and Jobs Act passed in 2017 required net operating losses generated in 2018 and subsequent years to be carried forward rather than carried back. The CARES Act now allows NOLs generated in tax years 2018, 2019 and 2020 to be carried back five years.  Additionally, under the old law, NOLs were limited to 80% of taxable income. The modification under the CARES Act allows NOLs to offset 100% of taxable income through 2020.

What is an excess business loss?

An excess business loss is the excess of trade or business deductions for the tax year over the sum of gross income or gain from a trade or business plus $250,000 for single filers ($500,000 for joint filers).

For example, if your trade or business incurred a net loss of $750,000 and you had wage income of $100,000 reported on your jointly filed individual return, your net loss is $650,000. The excess of that amount over $500,000 for joint filers – in this example $150,000 – is added back to income and you would have $500,000 of excess business losses to carry forward under the TCJA. Under the CARES Act, however, the $500,000 excess business loss is fully deductible against taxable income.

How did this change with the CARES Act?

The CARES Act retroactively modifies the loss limitation for individuals, allowing them to deduct the full amount of excess business losses in the year incurred. In the event the excess business loss creates a net operating loss, individuals have the option to either carry back the NOL or elect to carry forward the NOL.

What does this mean for me?

If you incurred net operating losses in tax years 2018 and 2019, and were not able to carry back the losses under the Tax Cuts and Jobs Act, it may be beneficial to file an Application for Tentative Refund or an amended return to recoup some the taxes paid in prior years.

Additionally, these amendments to the NOL and excess business loss limitation rules affect tax years 2018 and 2019 in a unique way. The excess business loss repeal and five-year carryback period is mandatory for 2018 returns. As a result, all taxpayers who were limited by the excess business loss limitation and generated an NOL in 2018 will likely need to file an amended 2018 income tax return.

Taxpayers with additional NOLs after amending the 2018 return will have a choice: carry back the NOL for the new five-year period to tax year 2013 and subsequent years, or include an election to forego the carryback and carry the NOL to 2019.

Antares Group has assembled a team to review all our clients’ 2018 and 2019 returns to determine whether any modification is needed as a result of these changes.  We will be in contact with each taxpayer to which this modification is applicable.

This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.