1 1 (March 16, 2020)

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               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

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