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Tax Treatment of Net Operating Losses

(NOLs) in the Coronavirus Aid, Relief, and

Economic Security (CARES) Act

Updated April 28, 2020
Increased benefis from aet operaing iosses (NOLs had been discussed as part of the response to the
economic effects of the coronavirus (COVID-19). The Coronavirus Aid, Rceic1f and Economic Seciurity
(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
camed forward indefinitely. In subsequent years, the NOL can be used to reduce up to 80% of taxable
income, reducing taxes in the future. Individual taxpayers' losses that can be offset against nonbusiness
income are limited to $500,000 for joint returns ($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 camed 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 camed 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 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 $0.21 in
                                                             Congressional Research Service

Prepared for Members aisd
C o m m itte esn o fo f o  o rfre s s  ------------------------..--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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