1 1 (April 15, 2020)

handle is hein.crs/govctys0001 and id is 1 raw text is: 









              Researh Sevice






Tax Treatment of Net Operating Losses

(NOLs) in the Coronavirus Aid, Relief, and

Economic Security (CARES) Act



Updated April 15, 2020
Increased benefits from net operating losses (NOLs) had been discussed as part of the response to the
economic effects of the coronavirus (COVID- 19). The Coronavirus Aid, Relief, and Economic Security
(CARES) Act (P.L. 116-136) included a provision increasing tax benefits for NOLs. This revision
temporarily suspends current rules that were last revised in the 2017 tax revision, popularly known as the
Tax Cuts and Jobs Act (TCJA) (P.L. 115-97).


Temporary Revisions in the CARES Act

Under current permanent law, when a firm has a loss (a net operating loss, or NOL), taxes are not reduced
immediately beyond zero. Rather, the business owes no income tax in that tax year and the loss can be
carried forward indefinitely. In subsequent years, the NOL can be used to reduce up to 80% of taxable
income, thus reducing taxes in the future. Individual taxpayers' losses that can be offset against
nonbusiness income are limited to $500,000 for joint returns and $250,000 for single returns, under a
provision that expires after 2025. The current permanent rules were enacted in the TCJA and became
effective for 2018. Prior to that revision, losses could be carried back two years and carried forward for 20
years, fully offsetting tax liability. Carrybacks of losses yield immediate tax reductions, while
carryforwards reduce future tax liabilities. There were no dollar limits on loss offsets for individuals.
The CARES Act allows firms to carry back losses in tax years beginning after December 31, 2017, and
before January 1, 2021 (for calendar year firms, covering 2018, 2019, and 2020) for up to five years.
NOLs carried back can also offset 100% of taxable income-an increase from the 80% offset under
permanent law. The Internal Revenue Service has issued guidance.
In addition to allowing immediate tax benefits for losses incurred in those years and increasing the loss
carryback to cover 100% of taxable income, NOLs carried back are allowed to reduce taxable income that
was previously taxed at higher tax rates under pre-TCJA rates. The TCJA reduced corporate rates from
35% to 21%, and reduced individual rates in many cases, including lowering the top individual rate from
39.6% to 37% or 35%. Thus, for corporations, a dollar of loss carried forward to the future would save
                                                             Congressional Research Service
                                                               https://crsreports.congress.gov
                                                                                  IN11296

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