Individual Loss Carryback Refunds Under the CARES Act

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Overview


The CARES Act allows individuals, estates and taxable trusts with certain business losses in 2018, 2019 and 2020, including losses from pass-through entities, to obtain refunds of taxes paid in the prior five years.

In Depth


Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), individuals, estates and taxable trusts that realized losses from their businesses, either conducted directly or through pass-through entities, could generally offset those losses against non-business income and carry a resulting net operating loss (NOL) back to obtain refunds of taxes paid during the prior two years. The TCJA introduced, in Internal Revenue Code section 461(l), a limitation that prevented individuals from using more than $250,000 in business losses, or $500,000 in the case of joint filers, to offset their non-business income, and eliminated the NOL carryback.

Section 2304 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act amended Code section 461(l) so that the excess business loss limitation now only applies to taxable years beginning after December 31, 2020. Consequently, individuals, estates and taxable trusts may offset their business losses for taxable years 2018, 2019 and 2020 against available non-business income for those years with any remaining business losses treated as NOLs. Section 2303 of the CARES Act amended the NOL carryback rules so that NOLs from taxable years beginning after December 31, 2017, and before January 1, 2021, can be carried back to each of the five preceding taxable years, unless the taxpayer elects to forego the carryback.

Prior law limits on losses, including taxpayers’ shares of losses from LLCs, partnerships and S corporations, remain in effect. Thus losses are allowable only if properly allocated to the taxpayer, only if the taxpayer has sufficient tax basis and amounts at risk to use the loss, and only if the losses are not suspended under rules preventing the use of losses from passive activities against active and investment income. Carrying losses back may have collateral consequences that affect the amount of the refund, such as reducing deductions that are affected by net income.

Practice Points: The CARES Act allows taxpayers with one-time income from foreign subsidiaries in 2017 to elect to exclude 2017 from the carryback years. This election may be advantageous to taxpayers who benefit from lower tax rates or deferred tax payment dates applicable to deemed dividends from foreign subsidiaries in 2017.

Refunds attributable to 2018 and 2019 are available on an expedited basis under procedures announced by the Internal Revenue Service (IRS). For more information, see our prior discussion of CARES Act refund guidance issued by the IRS.