Net Operating Losses

Net operating loss occurs if a company’s deductions exceed its taxable income. It is a deferred asset for the company as the NOL can be used to reduce their taxable income in the future years. So it is a deferred tax asset

The Tax Cuts and Jobs Act (TCJA) made significant changes to the NOLs at federal level. Prior to the TCJA, companies could carry back their NOLs up to 2 years and carry forward their NOLs for 20 years on their federal taxes. The NOL deduction was up to 100% of taxable income. But after the TCJA, the carry-back option is cancelled but the NOLs can now be carried forward indefinitely but they are limited to 80% of taxable income in any one tax period. So if in a year your taxable income is $10 million you can offset it by a maximum of $8 million of NOLs (provided you have those). Note that the 80% rule applies to NOLs generated in 2018 and after, so if you have NOLs from prior periods you can still use them at 100%. The TCJA also created a single corporate tax rate of 21%.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) revised a few provision of the TCJA for the tax years 2018,2019 and 2020. Taxpayers can carry-back NOLs arising in 2018 to 2020 for 5 years and the NOL limitation of 80% of taxable income is also suspended for the three years. Being able to carry back an NOL up to five years also means that some or all of taxes that are recoverable will be in years when the corporate tax rate was 35 percent rather than 21 percent, thereby increasing the value of the NOL. So some respite for those hit by the pandemic!