CARES Act Provides Tax Relief and Refund Opportunities by Removing Restrictions on Use of Net Operating Losses and Excess Business Losses

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted on March 27, 2020, includes tax relief provisions designed to provide financial assistance and stimulus to address the economic impacts of COVID-19.

The CARES Act amends the Internal Revenue Code to provide tax savings and refund opportunities to businesses and business owners by removing restrictions on their ability to use certain losses to offset taxable income, including income that was taxed in prior years.

  1. Net Operating Losses

The Tax Cuts and Jobs Act of 2017 (“TCJA”) previously prohibited taxpayers from carrying back net operating losses (“NOLs”) generated in tax years beginning after December 31, 2017 and using those NOLs to offset income taxed in prior years. Additionally, the TCJA allowed a maximum of 80% of the taxable income from any year to be offset by NOLs from a prior year. Any NOLs beyond that limit were required to be carried forward to future years until they could be used against eligible taxable income.

The CARES Act removes those restrictions for tax years beginning before January 1, 2021. Accordingly, in addition to providing tax relief for the current year, the changes apply retroactively to previous tax years. Taxpayers are now allowed to carryback NOLs generated in tax years beginning in 2018, 2019, and 2020 and use those NOLs to offset income taxed in the five tax years prior to the tax year in which they were generated. These changes provide benefits for both corporations and pass-through entities (e.g., partnerships, S corporations, and LLCs taxed as partnerships). Corporate taxpayers can apply their NOLs directly to the taxable income of the corporation, and the owners of pass-through entities can use their share of the entity’s NOLs to offset eligible income on their individual tax returns.

The TCJA significantly reduced both individual and corporate income tax rates for tax years beginning on or after January 1, 2018. As a result, the refund opportunities provided by the carryback provisions of the CARES Act are magnified when applied to income that was taxed prior to the tax rate reductions of the TCJA. The CARES Act allows taxpayers to carryback an NOL and apply it to income that was taxed at a significantly higher rate than the rate applicable to the year the NOL was generated. For example, an NOL generated in 2018, when the corporate income tax rate was 21%, could be carried back as far as 2013, when the applicable corporate tax rate could have been up to 39%. This creates an additional tax savings for NOLs that are carried back rather than carried forward. Additionally, all NOLs generated in tax years beginning prior to January 1, 2021 can now be used to offset 100% of the taxable income of any tax year beginning prior to that date. The 80% limit remains in place for tax years beginning on or after January 1, 2021.

The CARES Act provides valuable tax relief opportunities for taxpayers that have unused NOLs, but it also creates three separate sets of rules that could apply to those NOLs, depending upon the year they were generated. Taxpayers will need to examine the nuances of these rules and how they apply to their specific circumstances to maximize their tax savings and refund opportunities.

Year NOL Generated Carryback Period Carryforward Period Taxable Income Offset
Beginning December 30, 2017 or prior 2 years 20 years 100%
Beginning January 1, 2018 through December 31, 2020 5 years No limit 100% for 2020 and prior;

80% for 2021 and beyond

Beginning January 1, 2021 and beyond No carryback No limit 80%


The CARES Act provides specific guidance on the application of the new NOL rules to real estate investment trusts, insurance companies, taxpayers that were subject to the Section 965 Transition Tax or alternative minimum tax for past years, and other unique circumstances. Additionally, the CARES Act does not modify the current rules applicable to capital losses, which allow a three-year carryback and five-year carryforward for corporate taxpayers. Individuals that own pass-through entities may not carryback their share of capital losses generated by those entities, but their share of capital losses can be carried forward indefinitely.

  1. Excess Business Loss Limitation Rules

For tax years beginning after December 31, 2017 and before January 1, 2026, the TCJA enacted limitations on the use of excess business losses (“EBLs”) for all taxpayers other than corporations. The effect of the new rules was a limit on the amount of losses generated from ownership of pass-through entities that could be used to offset non-business income like wages, dividends, interest, and investment gains. Owners of passthrough entities were prohibited from using more than $250,000 ($500,000 for married couples) of net losses generated from all trades or businesses combined to offset non-business income. Any net business losses beyond those limits were considered EBLs and carried forward to be used in future years.

The CARES Act temporarily delays the enactment of the EBL limitations until tax years beginning on or after January 1, 2021, including retroactively removing the EBL limitations for all tax years beginning prior to that date. Owners of pass-through entities remain subject to other restrictions on the use of losses generated by their businesses, such as tax basis limitations, at-risk limitations, and passive activity loss limitations. However, the delayed enactment of the EBL limitations still provides potential tax relief opportunities for many business owners who are actively involved in the operation of their businesses and earn significant income from other sources.

The CARES Act also includes amendments to the EBL limitations applicable to tax years beginning after December 31, 2020. Those amendments generally include revisions and clarifications related to which income sources are considered to be derived from a trade or business for the purpose of calculating a taxpayer’s EBL limitation.

  1. Filing Procedures

To carryback NOLs and claim a refund, individual taxpayers (including trusts and estates) must file an Application for Tentative Refund (Form 1045). Corporate taxpayers are required to file a Corporation Application for Tentative Refund (Form 1039). Generally, both forms must be filed within 12 months of the end of the tax year in which the NOL was generated. However, on April 9, 2020, the IRS released Rev. Proc. 2020-26, which provides a six-month extension for taxpayers to file Form 1045 or Form 1039 to take advantage of the NOL provisions provided by the CARES Act. This means that the earliest due date for refund applications is now June 30, 2020, which is the extended due date for refunds related to NOLs generated in the tax year ended December 31, 2018.

In order to take advantage of the EBL provisions in the CARES Act, taxpayers can amend previously filed 2018 and 2019 tax returns to apply the more favorable tax laws that are now in place for those years. Individuals should file an Amended U.S. Individual Income Tax Return (Form 1040-X). Trusts and estates should file a U.S. Income Tax Return for Estates and Trusts (Form 1041) with the “Amended Return” box checked. For either type of amended tax return, a Limitation on Business Losses (Form 461) with revised EBL calculations must be attached. Generally, amended income tax returns are due three years after the date the original return was filed.

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