The stimulus package to combat the coronavirus crisis fixed the effective date and several computational issues stemming from the Tax Cuts and Jobs Act’s provision that restricted net operating losses.
Technical corrections for computing NOL deductions proposed in an early version of the Senate’s relief bill survived the accelerated legislative process leading to the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), which President Trump signed into law March 27.
Those clarifications mirrored previous proposals in a technical corrections discussion draft put forth by former House Ways and Means Committee Chair Kevin Brady, R-Texas.
Congress modified section 172 to address liquidity issues arising from the coronavirus pandemic by temporarily repealing the 80 percent NOL limitation and allowing deductions for loss carryovers and carrybacks to fully offset taxable income for tax years beginning before January 1, 2021. The new law also allows businesses to carry back 2018-2020 losses for up to five years before the year of the loss.
One technical amendment to the TCJA remedies an error in the effective date by making the carryforward and carryback rules effective for NOLs arising in tax years beginning after December 31, 2017, rather than in tax years ending after that date. For fiscal-year filers for the year straddling January 1, 2018, those losses can be carried back to the preceding two years under the pre-TCJA rules.
Another long-standing question under section 172 has been how taxpayers should determine the NOL limitation in years that they have pre- and post-TCJA carryover losses. The issue arose because pre-TCJA NOL carryovers are deductible to the full extent of taxable income compared with the post-TCJA losses that are limited.
Congress answered the question by providing that the deduction limit is equal to the pre-TCJA NOLs plus 80 percent of taxable income that is computed before any NOL deduction attributable to post-TCJA NOL carryovers but is reduced by pre-TCJA NOL carryovers.
According to the Joint Committee of Taxation’s blue book explanation, that interpretation is consistent with Congress’s intent but may have required a technical correction.
The blue book illustrated how that rule, which is now the law, would work for a calendar-year corporate taxpayer with $120 of pre-TCJA NOL carryovers and $70 of post-TCJA NOL carryovers to year 1 — a year that the taxpayer has $100 of taxable income before any NOL deduction.
In that situation, the taxpayer’s pre-TCJA NOL deduction is limited to $100 of taxable income in year 1, resulting in a $20 carryover to year 2, along with $70 of post-TCJA NOL carryover. If the taxpayer has $100 of taxable income in year 2, the taxpayer’s allowable NOL deduction is the $20 pre-TCJA NOL plus $64 of post-TCJA NOLs, which is 80 percent of the taxable income after accounting for the pre-TCJA NOL deduction of $20.
Fewer Algebraic Equations
The CARES Act provides an ordering rule for computing the allowable NOL deduction that’s limited for tax years beginning after December 31, 2020, which means that fewer simultaneous equations would be needed in tackling the TCJA’s complexities.
Because the TCJA limited several deductions based on taxable income and Congress didn’t specify how the multiple deductions should be calculated, taxpayers have had to consider using simultaneous equations absent ordering rules from Treasury and the IRS.
For example, the section 163(j) net business interest expense deduction is limited to 30 percent of adjusted taxable income, and the deductions for global intangible low-taxed income and foreign-derived intangible income are subject to the section 250 limitation rules.
The CARES Act addressed interactions with section 172 by clarifying that the post-TCJA NOLs are computed based on taxable income without regard to section 199A business income deductions and those allowable under section 250.
Undoubtedly, Treasury and the IRS will need to assess the effects of the CARES Act on the proposed NOL regulations that presumably had been on Treasury’s shortlist for public release, having cleared the Office of Management and Budget's review March 11.
That reg package, however, could take a back seat to CARES-related guidance, in part because some of the TCJA rules that might have been addressed in the regs have been addressed in the new law. Also, any remaining TCJA-specific issues don’t come into play until tax years beginning after December 31, 2020.