COVID-19 and Net Operating Losses

There are many tax issues that are contained in the recent March 2020 legislation on the issue of Coronavirus—and specifically as to COVID-19.

The 3 pieces of Coronavirus legislation in March 2020 included:

1st Act: 3/6/2020: PL 116-123; 8 Billion in Emergency funding relief as to the virus

2nd Act: 3/18/2020: FAMILIES FIRST CORONAVIRUS RESPONSE ACT:

This Act addressed issues involving insurance, tax, unemployment, nutrition, testing and sick pay, among other issues.

3rd Act: 3/27/2020: CARES: Coronavirus Aid, Relief, and Economic Security Act:

This Act added over 2.2 trillion dollars of relief for the public. The relief is in the form of unemployment benefits, relief to small businesses, tax relief for individuals, and numerous other areas that have been stung by the impact of COVID-19.

Many areas of these new and important Acts will be addressed in coming Tips.

This particular Tip is focused on the import of changing the Federal Tax law to allow the use of net operating losses (NOL). Generally speaking, a pass thru entity, such as an LLC or partnership, prior to CARES, could not give its owners the right to use a current year operating loss to carry it back to prior years and claim a refund. However, under the change by CARES, the NOL can now be carried back to prior years, within certain limits, to allow a refund of some or all of the taxes paid in prior years. In summary, Code Section 172 was amended to allow a loss in years 2018, 2019 or 2020 to be carried back, allowing the qualified taxpayer to seek the tax refund.

This change could be very important for businesses that suffer losses, as an example, in 2020. Such business, if otherwise qualified, could seek to amend the prior returns as noted and gain a current refund, generated by the NOL deduction. Such action would provide more liquidity to the taxpayer as opposed to having to carry the NOL to a future year, such as 2021.

By

Dr. Mark Lee Levine,

Professor, University of Denver