Step Aside Tax Cuts and Jobs Act, There’s a New Sheriff in Town

Good to Know

Before the Tax Cuts and Jobs Act (TCJA), a business with an available net operating loss (NOL)1 could offset as much as 100% of taxable income for two previous years (“NOL carryback”) or up to 20 years in the future (“NOL carryforward”). Carrying the loss back to previous years often generated an income tax refund and added to business liquidity.

The Tax Cuts and Jobs Act (TCJA) was widely heralded for its tax benefits to many, if not most, individual taxpayers. While TCJA also provided impactful advantages for businesses, the TCJA “sword” most definitely cut both ways. As one notable example of the sword’s second edge, TCJA eliminated the carryback of NOLs and limited the use of carryforward NOL’s to 80% of the carryforward year’s taxable income.

But there’s new Sheriff in town named the CARES Act. CARES temporarily revoked many of the NOL restrictions imposed by TCJA. For example, NOLs arising from 2018, 2019, or 2020 can now be carried back for as many as five years. In addition, up to 100% of taxable income can be offset by the NOL carryback.

Whether you are serving in a client-facing advisory role or preparing to pass the CFP® Exam, remember how the CARES Act could generate liquidity through tax refunds for clients with NOLs. Our purpose in this blog is to raise awareness only. Client-facing advisors should refer clients to an internal or external tax professional for follow-up.

Disclaimer

The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide tax, legal, or financial advice to clients. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.

1 A net operating loss occurs when business expenses are greater than revenue for the business tax year.