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Summary of Modifications for Net Operating Losses (§ 2303 and § 2304) Summary of Modifications for Net Operating Losses (§ 2303 and § 2304)

Summary of Modifications for Net Operating Losses (§ 2303 and § 2304)

Below is a summary of one of the provisions of Title II - Rebates and Other Individual Provisions and Business Provisions from the Coronavirus Aid, Relief and Economic Security Act (CARES Act).
  • Section 2303 of the CARES Act will allow a corporation's losses from 2018, 2019 and 2020 to be carried back to each of the five taxable years preceding the loss year.
  • Net Operating Losses may be used to fully reduce taxable income by 100% rather than the 80% limit that was put in place under the Tax Cuts and Jobs Act of 2017.
  • Similar adjustments are allowed for non-corporate (pass through) taxpayers.
Detailed Analysis
Full Deductions and Losses Carried Back Five Years
The CARES Act repeals the 80% limit on deductions for net operating losses for 2018, 2019, and 2020 and allows for net operating losses to offset taxable income up to 100%. Note, however, that the 80% limit returns beginning 2021. 

In addition, losses incurred in 2018, 2019, or 2020 can be carried back up to five years. As a result, corporations can file amended returns to receive tax refunds on an expedited basis. 

Section 965 Income
Section 965 requires United States shareholders (as defined under section 951(b)) to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers that carryback NOLs to a year in which the transition tax (under Section 965) applies will be treated as making an election under Section 965(n) that allows taxpayers to preserve their NOLs. 

Special Rules for REITs and Life Insurance Companies
REITs are prohibited from carrying back losses up to five years. With respect to life insurance companies, a five-year carry back will be allowed but will be treated as an operations loss carryback. 

120-day Period
For the 2018 tax year, businesses have 120 days from the enactment of the CARES Act to make elections for carrybacks. 

Non-corporate taxpayers
Section 2304 of the CARES Act provides that for non-corporate taxpayers, limitations on "excess business losses" may be utilized by delaying the application of such limitations to tax years 2021 and onward. Non-corporate taxpayers with losses that were not allowed in 2018 and 2019 as a result of the previous limitation may file amended claims for refunds.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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