Temporary Modification of NOL Rules

Previously, under Code §172(a), amount of NOL deduction equal to lesser of:

Aggregate of NOL carryovers to such year and NOL carrybacks to such year, or 80% of taxable income computed without regard to any NOL carryover.

Bottom line: NOLs were subject to taxable-income limitation and could not fully offset income.

CARES Act temporarily removes 80% taxable income limitation.

80% limitation reinstated for tax years beginning after 2020 but before any Sec. 199A deduction and the utilization of any pre-2018 NOL carryovers.

Example: Individual has a taxable income in 2021 of $100,000 before a QBI deduction of $30,000. They also have a pre-2018 NOL carryforward of $150,000. The reinstatement of the 80% taxable income limitation in 2021 would result in a cap of $80,000 (80% x $100,000) on the utilization of the $150,000 NOL carryforward. In other words, the $100,000 taxable income amount would not have to first be reduced by the QBI deduction of $30,000.

Effective date

Applies to NOLs arising from tax years beginning after Dec. 31, 2017, and to tax years beginning on or before Dec. 31, 2021.

 

Authored by:

Dr. John Connors, JD, CPA, LLM

Tax Educator’s Network, Inc.

[email protected]

 

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