What the new Net Operating Loss Carryback rules could mean for your Business

As we move into 2021, many of us are crossing our fingers for a better year. For small business owners, 2020 has been especially tough, even with the small business relief packages that Congress has enacted. The CARES Act, P.L. 116-136, enacted on March 27, 2020 provided relief to small business owners with the Payroll Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL). Included in this relief package was loosened restrictions for net operating losses (NOLs) for businesses.

The Tax Cuts and Jobs Act (TCJA) enacted in 2017 amended Section 172(a) and disallowed net operating loss carrybacks, before the TCJA NOLs could be carried back 2 years and carried forward 20 years. With the disallowed NOL carrybacks, businesses could only carry forward their NOLs. The TCJA also amended Section 172(a) where taxpayers could only use 80% of their NOL to offset their taxable income.

The CARES Act, P.L. 116-136 Section 2303(b) amended Section 172(a) to allow businesses to carryback their NOLs for tax years beginning after December 31, 2017 and before January 1, 2021 five years and carryforward for 20 years. If the business had a NOL in 2018, they could carryback the NOL to 2013. The CARES Act also removed the 80% restriction of the NOL, meaning that businesses can use their NOL beginning after December 31, 2017 to fully offset their taxable income.

For business taxpayers this could mean an influx of cash to help the business through this difficult time. With the allowance of the NOL carrybacks, businesses can file a Form 1045, Application for Tentative Refund for noncorporate taxpayers or a Form 1139 for corporate taxpayers.

The uncertainty of how the Coronavirus will affect businesses in the upcoming year, businesses should consider taking advantage of the amended NOL carryback rules.

If you have any questions you can contact me at [email protected]

Julie Moran, C.P.A., M.S.A.

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