The $2 trillion Coronavirus Aid, Relief and Economic Security (“CARES”) Act, signed into law on March 27, 2020, contained sweeping, unprecedented relief for businesses and individuals hurting from the immediate and prolonged effects of the COVID-19 outbreak and the responses thereto. One portion of the CARES Act not receiving much news coverage may help businesses large and small find a potential pot of gold. Net Operating Losses (“NOLs”), the use of which were curtailed under the Tax Cuts and Jobs Act (“TCJA”), passed on December 22, 2017, are once again made available to carry back five years.

Before the TCJA was passed in late 2017, NOLs could be carried back two years and carried forward up to 20 years to offset up to 100% of taxable income. However, starting with tax year 2018, the TCJA limited using NOL deductions to 80% of taxable income. Further, the two-year carryback was eliminated. NOLs now could only be carried forward (although the 20 year limitation was removed).

The CARES Act suspends the 80% limit through 2020 and permits a five year carryback for companies with NOLs earned in 2018, 2019, or 2020. Businesses may use NOLs to fully offset taxable income through 2020. In 2021, the 80% limitation returns.

Permitting this carryback and removing the 80% limitation means that businesses with NOLs may be entitled to significant tax refunds. This will impact companies large and small and may provide a significant source of additional liquidity during these difficult times.

Additionally, if a company was sold after 2017, both buyer and seller should review the transaction documents to determine who may have the rights to the NOLs, if the sale generated some. Prior to 2017, these rights had a value to the seller, because the seller could use them to set off past years’ income. However, after the two-year carryback period was removed by the TCJA, the seller in some transactions would have had little use for the NOLs, and sale transactions may not have addressed the ownership of them (likely meaning they transferred to the buyer), or they could have been explicitly transferred to the buyer. Our attorneys can review your documents and determine who may have the ability to use these now that the rules have changed under the CARES Act.

Bottom line: if your company had NOLs – whether generated internally or via an acquisition – it is time to review your information to determine if you are entitled to an unexpected pot of gold.

For more information on how your business can weather the impact of the COVID-19 pandemic, please visit G&M's COVID-19 Resource Page:

Author and G&M Contact:

Maria Aprile Sawczuk | 302-444-6710 | marias@goldmclaw.com

*Maria Aprile Sawczuk concentrates her practice in matters of corporate restructuring and bankruptcy. She represents debtors, creditor committees, and creditors in bankruptcy proceedings, out-of-court workout and commercial lending matters, including loan restructuring and debtor-in-possession financing.