Net Operating Losses | Bloomberg Tax

How did the CARES Act affect NOLs for corporations?

Prior to the CARES Act, NOLs arising in years after 2017 were not allowed to carry back, had an unlimited carryforward period, and were limited to 80% of taxable income. The CARES Act retroactively modified and expanded those rules. Under the CARES Act, NOLs arising in years beginning 2018 through 2020 may be carried back five years and the 80% NOL deduction limit is temporarily lifted for NOL carryforwards to years beginning before January 1, 2021.

Under a long-standing provision, IRC §172(b)(3), a corporation can elect to waive this five-year carryback. A corporation making an election under section 172(b)(3) can still take advantage of the temporary changes to the 80% limitation rules and offset 100% of taxable income with NOL carryforwards that would otherwise be subject to the limitation.

There are complicated interactions with other rules, particularly for multinational corporations. Those corporations that repatriated income under IRC §965 between 2016 and 2019 may not offset inclusion income under a deemed election under IRC §965(n). However, CARES provides for an election to skip IRC §965 years while still applying the NOL carryback to other years.

The impact on other tax attributes needs to be carefully considered as well. For example, general business credits (GBCs) and foreign tax credits (FTCs) may be freed up by the NOL carryback and may now carry back or forward to other years. The alternative minimum tax (AMT) may also come into play, not only with a minimum tax but with the limitation for general business credits as well.

The separate return year rules come back into play with consolidated return groups. NOLs may need to be allocated to a departing consolidated return member.

These new rules provide many planning opportunities to provide an infusion of cash to cash-strapped businesses, but it is critical to evaluate all the possible scenarios to avoid any unintended negative consequences.