Net Operating Losses
September 10, 2021
In general, the net operating loss (NOL) occurs when an individual or company’s allowable tax deduction exceeds the taxable income. The NOL amount may be used to offset taxable incomes in previous tax years or future tax years based on the tax regulations. Before 2017, NOLs can be carried back two years and carried forward for 20 years.:
Limiting an NOL deduction to 80 percent of taxable income,
Disallowing NOL carrybacks, and
Changing carryovers period as indefinite.
In 2020, to relieve the impact of the Covid pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act amended the tax rule of net operating losses set by TCJA.
CARES Act: Modifications for Net Operating Losses
Under the CARES Act, NOLs arising in the tax year beginning 2018, 2019, and 2020 can be carried back for 5 years and carried over indefinitely. For the taxpayers who choose to carry back NOLs, the entire five-year period must be used. That to be said, a taxpayer must carry back an NOL generated in 2018, 2019, or 2020 to the earliest year in the five-year carryback period. The NOLs amounts that could not be used in previous tax years can be carried over to further years. Furthermore, the CARES Act lifted the 80% of taxable income deduction from TCJA for the NOLs arising in these years. Please refer to the table below for the NOLs treatments between TCJA and CARES Act.
NOLs TreatmentTCJACARES Ac
Taxpayers can elect to waive five-year carryback for 2018, 2019, and 2020 NOLs. The election to waive the NOL carryback for NOLs arising in tax years beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020. For example, if a taxpayer wants to waive carrybacks for NOLs arising from 2019, the election must be made before October 15, 2021.
There are two options to apply for an NOL carryback refund: amending tax returns that are affected by the NOL carrybacks or filing a tentative refund claim. Tentative refund claims cannot be filed before the tax returns. Generally, taxpayers must file Forms 1139 (for a corporation) and 1045 (for individual, estate, or trust) within 12 months of the end of the tax year that generated the NOL. For NOLs generated from 2018 and 2019, the due dates for the tentative refund claim have passed, thus taxpayers need to file amended returns if they want to claim the refunds.