The Cares Act is tested on the CPA Exam Starting October 2020. Certain rules of the Cares Act are testing on the CPA from October to December and other section are permanent.
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CARES ACT IMPACTS ON NET OPERATING LOSSES: FREQUENTLY ASKED QUESTIONS
APRIL 2020
On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act), a $2 trillion stimulus package intended to help mitigate the economic devastation caused by the coronavirus.
The CARES Act includes changes to the tax treatment of business net operating losses (NOLs) for corporations and other taxpayers. Given the significant role NOLs can play in increasing cashflow and helping to mitigate financial distress, we’ve compiled Frequently Asked Questions around NOLs to help break down the latest changes in the CARES Act and what they mean for your business.
What is an NOL?
An NOL occurs when a company’s tax deductions exceed its taxable income within a given tax period. An NOL can be carried forward over future tax periods and used to offset taxable income to reduce a company’s total tax liability. The 2017 tax reform legislation known as the Tax Cuts and Jobs Act of 2017 (TCJA) lifted the previous 20-year limit on NOL carryforwards, but limited NOLs to 80% of taxable income in any one tax period.
Among other changes, the CARES Act temporarily removes this 80% limit for taxable years beginning before 2021 to allow an NOL carryforward to fully offset an organization’s income.
What years can I carry back an NOL under the CARES Act?
The CARES Act allows a five-year carryback of any NOL generated in a taxable year beginning after December 31, 2017, and before January 1, 2021. In addition, fiscal year 2017 returns (i.e., returns that began before January 1, 2018, and ended after December 31, 2017) can now be carried back two years as a result of the technical correction to the effective date language in the TCJA (which originally applied the prohibition on carrybacks to taxable years ending after December 31, 2017).
Are carryforwards of NOLs still indefinite?
Yes, the CARES Act still allows for an indefinite carryforward period. Indefinite-lived NOLs are NOLs generated in a taxable year beginning after December 31, 2017. This indefinite carryforward period includes the 2018-2020 NOLs that remain after the five-year carryback period.
Do the NOL carryback provisions apply only to C corporations?
No. The NOL carryback rules also apply to individuals, estates and trusts and tax-exempt organizations filing Form 990-T, Exempt Organization Business Income Tax Return, to report unrelated business taxable income.
Are there any limitations on which corporate taxpayers can specifically use the five-year carryback?
Under the CARES Act, real estate investment trusts (REITs) are not allowed a carryback to any preceding taxable year. In addition, an NOL generated in a non-REIT year cannot be carried back to a year in which the taxpayer was a REIT. Additionally, there are other provisions of the tax code that could prevent a carryback that were not impacted by the CARES Act.
Is it better to carryback the NOL or to elect to use it to offset future income?
While a company’s specific assessment may vary, often the extended carryback provides a favorable rate differential for C corporations because they are able to carry back post-TCJA NOLs to offset pre-2018 ordinary income or capital gains, which were taxed at higher rates. In addition, a carryback is typically more valuable because of present value discounting, which eliminates the need to generate future taxable income and reduces the risk potential of limitations on future loss utilization.
However, carrybacks can create added tax compliance, including updating calculations for carryback years, expose the organization to tax risks of prior years, or have limited refundability if the organization has experienced certain merger and acquisition activity.
Does the forgiveness of a Small Business Association (SBA) loan have any impact on an NOL carryforward?
The CARES Act treats the SBA loan debt forgiveness as not taxable. While there is some uncertainty, it does not appear that an NOL could be reduced for any small business loan forgiveness.