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16099: Net Operating Loss (NOL) - Changes


Fed Returns Generally

CARES Act: With the CARES Act, what can I expect in regards to Net Operating Loss guidelines?

 

Under the TCJA (see below), the NOL could no longer be carried back, however, under the CARES Act, it may now be carried back for five years. This is by default unless an election is made to not carryback the NOL. If the NOL is not used in the earliest year of the carryback period, then it will be carried forward to each preceding year. The IRS Newsroom offers the following:

  • “Waiving the carryback period in the case of a net operating loss arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021,
  • Disregarding certain amounts of foreign income subject to transition tax that would normally have been included as income during the five-year carryback period, and
  • Waiving a carryback period, reducing a carryback period, or revoking an election to waive a carryback period for a taxable year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.”

Further, the deadline to file an application for a tentative carryback adjustment has been extended to June 30, 2020.  In order to meet this deadline, Form 1045 or Form 1139 must be filed on or before the June 30th date.  Either form must be filed no later than June 30th, 2020 for a taxable year ending December 31st, 2018 and must include the literal “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”  More information may be found in Notice 2020-26 and Notice 2020-23.

  • Taxpayers other than Corporations will use for the Application for a Tentative Refund – Form 1045
  • Corporations will use the Corporation Application for a Tentative Refund – Form 1139.

For more information about NOL carryforwards, see KB 10863.  

The CARES Act also amended section 461(l) to restrict the limitation on excess business losses of noncorporate taxpayers to tax years beginning after 2020 and before 2026. The Act repealed the limitation for tax years 2018, 2019, and 2020. If you filed a 2018 and/or 2019 return(s) with the limitation, you can file an amended return. Form 461 was not available for tax year 2020, but will be made available for tax year 2021. You can view the Form 461 for further information, or review the Form 461 revisions for prior versions and instructions.

Prior to the CARES Act: With the Tax Cuts and Jobs Act, what changes were made to Net Operating Loss guidelines?

For a NOL generated prior to January 1, 2018:

  • There are no changes in the treatment of NOLs from a tax year that began prior to 01/01/18.
  • If the NOL is not used up in prior year, it can be carried forward only 20 years.
  • This type of NOL can be used to offset 100% of the income in the year it is applied.
  • The oldest losses are always used first. 

For NOLs generated after December 31, 2017:

  • For a farmer or insurance company, it can be carried back 2 years.
  • If the taxpayer/entity is not a farmer or insurance company, it cannot be carried back at all.
  • If the NOL is not used up in prior year, or cannot be carried back, it can be carried forward forever (does not expire).
  • It can be used to offset only 80% of the income. Previously it was 100%.
  • The oldest losses are always used first. 

Per the IRS

"Excess Business Losses

The TCJA modified existing tax law on excess business losses by limiting losses from all types of business for non-corporate taxpayers.

An excess business loss is the amount by which the total deductions from all trades or businesses exceed a taxpayer’s total gross income and gains from those trades or businesses, plus $250,000, or $500,000 for a joint return.

Excess business losses that are disallowed are treated as a net operating loss carryover to the following taxable year.

See Form 461 and instructions for details.

The CARES Act amended section 461(l) to restrict the limitation on excess business losses of noncorporate taxpayers to tax years beginning after 2020 and before 2026. The Act repealed the limitation for tax years 2018, 2019, and 2020. If you filed a 2018 and/or 2019 return(s) with the limitation, you can file an amended return. 

Net Operating Losses

TCJA also modified net operating loss (NOL) rules. Most taxpayers no longer have the option to carryback a NOL. For most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company.

For losses arising in taxable years beginning after Dec. 31, 2017, the new law limits the NOL deduction to 80% of taxable income.

Additional updates can be found on the Tax Reform Provisions that Affect Businesses page of IRS.gov."

 

See Related Links below for details on data entry for NOLs. 


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