For taxable years beginning after December 31, 2017 (Tax returns filed on 2018, 2019 and 2020 forms), the net operating loss rules are changed.
1. The 80% usage limitation going forward is waived
2. The prohibition on loss carry backs has been replaced with a 5 year carryback. So losses which were identified on the 2018 returns which have not been carried back may now be carried back 5 years to request refunds of previously paid taxes. Remember that the years which the losses are being carried back to may have substantially higher effective tax rates since the tax rates from January 1, 2018 forward have been reduced. The corporate effective tax rate for some of these now eligible carrybacks may be as high as 39%, compared to the current 21% rate – That is an 18% difference. If a $200,000 corporate loss is carried back five years to a year that the corporation had $300,000 of taxable income, the refund would be $78,000. The same loss carried forward to years with tax rates defined by the 2017 tax act would only reduce tax by $42,000.
For corporations with lower taxable income in the 5 preceding years, it may actually yield more tax savings to carry the loss forward under the modified rule allowing 100% use of the loss (not 80% as was allowed before the Relief Act), since the tax rate is a flat 21% now on corporate taxable income, compared to the tax rates before the 2017 tax act was effective, which started at 15%. Be sure to consider both alternatives before moving forward. For taxpayers who have made or not made elections to address the net operating loss carryback period, the election to forego or not to forego the net operating loss carryback period under Section 172 of the Code shall be considered timely filed if filed within 120 days after the date of enactment of the Relief Act: March 27, 2020. Taxpayers with net operating losses in 2018, 2019 or 2020 need to revisit the treatment of these losses and consider amending their tax returns to either make the election to forego the loss carryback or to carry the loss back and request a refund.