Tax Treatment of Net Operating Losses (NOLs) in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (IN11296, Version 7, Updated June 1, 2020)

Summary

Version 7 of a Congressional Research Service Insight, IN11296, updated June 1, 2020 and written by Jane G. Gravelle, on the CARES Act's temporary changes to net operating losses. The Act lets firms carry losses from tax years 2018 through 2020 back five years against 100% of taxable income and suspends the limit on individuals using business losses against other income. The Joint Committee on Taxation estimated a revenue loss of $80.0 billion in FY2020 from the general changes, and estimated that 82% of the loss from lifting the individual limit goes to taxpayers with expanded incomes of $1,000,000 or more. The HEROES Act (H.R. 6800) would restore that limit permanently, raising $254.1 billion over 10 years. This version adds that the Congressional Budget Office and Moody's estimated small stimulus effects for loss provisions.

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INSIGHTi

Tax Treatment of Net Operating Losses
(NOLs) in the Coronavirus Aid, Relief, and
Economic Security (CARES) Act

Updated June 1, 2020
Increased benefits from net operating losses (NOLs) had been discussed as part of the response to the
economic effects of the coronavirus (COVID-19). The Coronavirus Aid, Relief, and Economic Security
(CARES) Act (P.L. 116-136) included a provision increasing tax benefits for NOLs. This revision
temporarily suspends current rules that were last revised in the 2017 tax revision, popularly known as the
Tax Cuts and Jobs Act (TCJA) (P.L. 115-97).

Temporary Revisions in the CARES Act
Under current permanent law (enacted in the TCJA and effective in 2018), when a firm has a loss (a net
operating loss, or NOL), taxes are not reduced immediately beyond zero. Rather, the business owes no
income tax in that tax year and the loss can be carried forward indefinitely. In subsequent years, the NOL
can be used to reduce up to 80% of taxable income, reducing taxes in the future. Individual taxpayers’
losses that can be offset against nonbusiness income are limited to $500,000 for joint returns ($250,000
for single returns), under a provision that expires after 2025. Prior to the TCJA, losses could be carried
back two years and carried forward 20 years, fully offsetting tax liability. Carrybacks of losses yield
immediate tax reductions, while carryforwards reduce future tax liabilities. There were no dollar limits on
loss offsets for individuals.
The CARES Act allows firms to carry back losses in tax years beginning after December 31, 2017, and
before January 1, 2021 (for calendar year firms, covering 2018, 2019, and 2020) for up to five years.
NOLs carried back can also offset 100% of taxable income—an increase from the 80% offset under
permanent law. The Internal Revenue Service has issued guidance.
In addition to allowing immediate tax benefits for losses incurred in those years and increasing the loss
carryback to cover 100% of taxable income, carrybacks reduce taxable income previously taxed at higher
rates under pre-TCJA rates. The TCJA reduced corporate rates from 35% to 21%, and reduced individual
rates in many cases, including lowering the top individual rate from 39.6% to 37% or 35%. Thus, for
corporations, a dollar of loss carried forward to the future would save $0.21 in taxes, whereas a dollar of
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loss carried back to years before 2018 would save $0.35 in taxes. Losses incurred in 2018 could be carried
back as far as 2013.
The CARES Act also suspended for 2018-2020 the provision in the TCJA (Section 461(l)) that limited the
amount of NOLs that individuals could use to offset other income. It also clarified that other income
included wages from the business for purposes of the limitation in future years.
The CARES Act also included a technical correction to the TCJA, allowing certain firms whose fiscal
years are not based on calendar years to use the pre-TCJA rules for losses in the year spanning 2017 and
2018. It also allows taxpayers to disregard years in which a tax was paid under the TCJA’s transition tax
(Section 965) on previously accumulated earnings abroad.
The Joint Committee on Taxation estimates a revenue loss of $80.0 billion in FY2020 and $8.7 billion in
FY2021 from the general NOL changes. This revenue loss is followed by gains in subsequent years,
resulting in an estimated overall loss of $59.5 billion in the first six fiscal years (FY2020-FY2025) and a
loss of $25.5 billion in the first 11 years (FY2020-FY2030). Some of the revenue loss is a matter of
timing (receiving tax reductions now instead of in the future) and some is permanent due to the tax rate
differential.
The lifting of the limit on losses for individuals was estimated to lose $74.3 billion in FY2020 and $64.0
billion in FY2021, with smaller amounts in subsequent years, for an overall estimated loss of $135.2
billion in the first six years (FY2020-FY2025) and $135.0 billion in the first 11 years (FY2020-FY2025).
The Joint Committee on Taxation has estimated that 82% of the revenue loss is realized by taxpayers with
expanded incomes of $1,000,000 or more.
These provisions have been criticized as benefiting wealthy taxpayers. Senator Sheldon Whitehouse (S.
3640) and Representative Lloyd Doggett (H.R. 6579), with numerous cosponsors, propose to restore the
limits on individual loss offsets against ordinary income, provide NOL carrybacks for two years for 2020
losses, limit carrybacks to businesses with gross receipts up to $15 million, and make other changes.
The Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act (H.R. 6800) would
provide carrybacks for 2019 and 2020, but only back to 2018, and restore and impose permanently the
$500,000 ($250,000) limits on business losses that can be offset against ordinary income. The revenue
gains over a 10-year period are $254.1 billion, with most of that gain ($246.2 billion) due to the limit on
individual losses.
More generous NOL treatment has been used in the past to address the effects of disasters and economic
downturns on businesses.

Economic Effects
A broad swath of industry, including energy, manufacturing of durable equipment, travel, and tourism, as
well as the restaurant industry is expected to be especially affected by economic slowdown from the
COVID-19 pandemic. An objective of more generous NOL rules is to increase liquidity and cash flow and
make it easier for businesses that benefit to survive the economic disruption caused by the pandemic. A
survey of manufacturers indicated that 3.9% of firms had taken advantage of the more generous rules.
Past expansions of NOLs have been used as economic stimulus. More generous NOLs are not expected to
be a particularly effective stimulus to the economy, as stimulating the economy generally requires some
incentive to spend. The efficacy of a provision as a fiscal stimulus is reflected in its projected multiplier
effects (how much output a dollar’s worth of revenue or spending causes) and both the Congressional
Budget Office and Moody’s (a private forecaster) estimated small effects for NOLs. (Note, however, that
these estimates were made during the Great Recession and the underlying causes were different.)
Increased cash flow is not generally viewed as an incentive to invest, and thus usually has limited
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effectiveness as economic stimulus. As noted above, however, it can provide increased liquidity and cash
flow.

Author Information

Jane G. Gravelle
Senior Specialist in Economic Policy

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IN11296 · VERSION 7 · UPDATED

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