In 2017, the Tax Cuts and Jobs Act (TCJA) provided that net tax losses from businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. This new rule eliminated the ability for a business owner with a loss to carry back the loss to a prior year, thus delaying any tax benefit.
Earlier this year, the CARES Act liberalized this rule by retroactively postponing the limits, so they now apply to tax years beginning in calendar years 2021 through 2025. This means the $500,000 limitation (or $250,000 for single taxpayers) on excess business losses for non-corporate taxpayers does not apply until Jan. 1, 2021. As a result, affected taxpayers may be able to fully deduct business losses arising in 2018, 2019 and 2020. The CARES Act also eliminated the TCJA rule that limited a loss to 80% of taxable income. Companies are now permitted to fully offset their taxable income in such taxable years with NOL carryforwards without regard to the year in which such NOL arose. NOLs from taxable years beginning after Dec. 31, 2017, that are carried forward to taxable years beginning after Dec. 31, 2020, will be subject to the 80% limitation that was enacted as part of TCJA.
In summary, the CARES Act reinstates loss carrybacks for NOLs arising in 2018, 2019 and 2020 (taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021) to the five taxable years preceding the taxable year in which the loss arose. Taxpayers generally have 120 days after March 27, 2020, the date of enactment of the CARES Act, to either carry back their 2018 NOLs or relinquish the carryback period and carry such amounts forward.