1 1 (October 06, 2020)

handle is hein.crs/govdcdc0001 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 October 6, 2020

Increased benefits from net operating losses (NOLs) had been discussed as part of the response to the
economic effects of the COVID-19 pandemic. 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 (enacted in the TCJA and effective in 2018), 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, 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. Prior to the TCJA, losses could be carried
back two years and carried forward 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, carrybacks reduce taxable income previously taxed at higher
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 taxes, whereas a dollar of
                                                             Congressional Research Service
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