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1 1 (March 16, 2020)

handle is hein.crs/govcixy0001 and id is 1 raw text is: Researh Sevice COVID-19: Potential Role of Net Operating Loss (NOL) Carrybacks in Addressing the Economic Effects March 16, 2020 A number of industries may suffer losses in 2020 as a result of the coronavirus disease 2019 (COVID- 19) outbreak. The travel and tourism indstry, and restaurant industry, appear particularly susceptible at the moment due to an uptick in canceled reservations and a reduction in bookings. Other industries are likely to be impacted as well by a drop-off in consumer spending and a resulting reduction in profits, with the impacts likely increasing if COVID- 19 continues to spread. Before 2018, businesses with losses could carry back net operating losses (NOL) and use them to receive a refund for past taxes paid. On several occasions, Congress temporarily extended or enhanced the carryback rules to assist businesses in times of general economic weakness, or in response to natural disasters. Recent changes enacted in the 2017 tax revision (P.L. 115-97), commonly referred to as the Tax Cuts and Jobs Act (TCJA), however, eliminated the ability to carry back losses. This Insight discusses how allowing NOL carrybacks could potentially assist businesses impacted by economic weakness associated with COVID- 19. Carrybacks and Carryfowards When a business experiences a loss (or NOL, in tax jargon) it owes no tax in that year. Currently, a business may use a loss to reduce future taxes by claiming it as a deduction against income earned in some future year. This process is known as carrying forward a loss, and a business may carry a loss forward indefinitely. Prior to the TCJA, businesses were able to use losses to obtain a refund for taxes paid in the past two years, a process known as carrying back a loss. TCJA, however, eliminated the two- year carryback. Businesses generally prefer to carry losses back rather than carry them forward because carrybacks produce a benefit sooner and with certainty, whereas carryforwards reduce taxes at some uncertain time in the future. An example may help demonstrate the mechanics of carrying back a loss. Suppose that a business earned profits of S 100 last year and paid taxes of $21 (i.e., the tax rate was 2 1%). This year the business incurred a loss of $40 and thus owes nothing in taxes. If the business is allowed to carry back this $40 loss it can Congressional Research Service https://crsreports.congress.gov IN11240 CRS }NStGHT Prepaed for Membeivs and Cornm ittees o4 Cor~qress --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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