New Loss Carryback Rules Fortify Coronavirus Relief Package

By Joseph Mandarino
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Law360 (March 24, 2020, 6:46 PM EDT) --
Joseph Mandarino
The current version of the stimulus legislation pending in the Senate is the Coronavirus Aid, Relief and Economic Security, or CARES, Act. This article considers the changes to the net operating loss rules in the Cares Act.


A taxpayer that has deductions and losses that exceed income and gains for a tax year has a net operating loss, or NOL.[1] Under current law, an NOL can be carried forward and used to offset income and gains in future years.[2] Generally, an NOL cannot be carried back, only forward.[3]

However, in prior years an NOL could be carried back. For example, prior to 2018, an NOL could be carried back two years.[4] During certain years prior to 1997, an NOL could be carried back three years.[5] During times of economic downturn, the carryback feature of the NOL rules operated as an automatic — and virtually cost free — form of economic stimulus.

For example, assume a company had income of $100 in 2019, but has a $100 loss in 2020. Under current law, this tax attribute would not be usable until, at the earliest, 2021.

Assume further that due to the economy the company remains in a loss position for an extended period. In that case, the tax attribute might never be realized and in the worst-case scenario the company could go bankrupt and the NOL could be effectively lost forever.

In previous periods, as noted, businesses could carry back a NOL. If those rules applied today, the company in our example could carryback its 2020 loss to 2019 and get an automatic refund from the IRS. Thus, an immediate and targeted stimulus payment could be obtained by our company. Indeed, the cost to the U.S. Department of the Treasury of this refund arguably would be nil, on the theory that the company would eventually utilize the NOL at some point in the future.

Finally, there is a strong libertarian bias in providing a stimulus payment to a business that is measured by the income taxes it already paid.

Perhaps in recognition of this effect, Congress has frequently liberalized the NOL carryback rules during times of significant economic distress. For example, the stimulus package enacted to mitigate the economic deterioration coming in the wake of the 9/11 attacks amended the then-applicable two-year carryback period to allow business to carry back NOLs for five years.[6] The rule applied to losses arising in 2001 and 2002.[7]

There were at least two attempts to extend the NOL carryback rules in response to the 2008 mortgage crisis, and these efforts may be instructive in light of the current NOL proposals in the CARES Act.

Initially, Congress passed a rule permitting taxpayers to carryback losses five years, which superficially appears to be similar to the approach in 2002 stimulus package.[8] However, this rule only applied to losses arising in 2008, and could only be used by taxpayers who met the definition of an eligible small business.

Perhaps in response to the continuing economic stagnation, Congress made another foray into the carryback rules the same year. This time it eliminated the eligible-small-business hurdle, thus providing a generalized five-year carryback period.[9]

Unfortunately, this rule only applied to NOLs arising in 2008 or 2009 — taxpayers had to elect to apply the carryback period to only one year.

There is no concrete evidence as to whether the disjointed and stingy carryback relief enact by Congress in 2009 slowed the recovery or if other factors were in play. At a minimum, the contrast between the 2002 and the 2009 relief efforts is stark.

CARES Act NOL Proposals

As currently drafted, the NOL carryback relief in the CARES Act more closely mimics the 2002 efforts. For example, Section 2203 of the CARES Act amends the carryback rules so that losses that arise in 2018, 2019 and 2020 can be carried back five years.[10]

Thankfully, the proposed legislation is not limited to smaller taxpayers, and does not require taxpayers to elect to apply the carryback relief to only losses from one tax year.

There are at least two criticisms, however, that can be made. First, if the dire predictions of some economic observers are to be believed, business losses may extend well beyond 2020. Thus, it would make sense to include losses arising in 2021 and 2022 in the rule.

Second, the benefit of a NOL carryback is that losses that arise during bad years can be carried back and used to offset income in prior years. As a practical matter, this is done by filing what amounts to a refund claim for the year to which the losses are carried. However, this generally cannot occur until the close of the year in which the loss arises.

Given current economic projections, many businesses are expected to have substantial losses in 2020. With respect to those losses, the proposed relief will have no effect until early 2021, when businesses will be able to file their 2020 tax returns, crystalizing the amount of the loss for that year and starting the refund process.

If more rapid stimulus is desired, Congress should consider an accelerated refund procedure. For example, instead of waiting until early 2021 to process refunds from losses arising in 2020, Congress could authorize the Treasury to administer refunds on a quarterly basis.

Assume a company has an estimated $500 loss at the end of the first quarter of 2020. That company could then immediately carry that loss back for up to five years and get an immediate refund of prior year taxes, without having to wait until early 2021.

Assume that by the end of second quarter of 2020, the same company now has an estimated cumulative loss of $750. Because $500 has already been carried back, the company can only carryback $250. Again, however, it can apply for a refund shortly after these numbers are finalized, instead of waiting until 2021.

There are likely to be some criticisms of such a system, in that it deviates from the annual account period and would necessarily rely on estimates. However, it is simply the flip side of the estimated tax payment system, which also deviates from the annual account period and relies on estimates.

Moreover such a system could provide substantial relief, especially for particularly distressed industries. For example in 2009 the domestic aviation industry lost about $8 billion.[11] If U.S. airlines experience similar losses in 2020, and if they were permitted to file quarterly refund claims, it might be possible to push out at least $1.7 billion in stimulus relief to this industry very quickly and for very little cost to the U.S. Treasury.

Note that while the rapid refund procedure set forth above could be included in the current legislation, it is also possible that the Treasury secretary has sufficient administrative power to put such a system in place even in the absence of specific legislation.


The current proposal to permit NOL carrybacks is a welcome addition to the package of economic stimulus contained in the CARES Act. Congress should also consider (1) permitting the use of a rapid refund system based on quarterly estimates and (2) including losses arising in 2021 and 2022.

Joseph C. Mandarino is a partner at Smith Gambrell & Russell LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] IRC Section 172 .

[2] IRC Section 172(a) .

[3] There are exceptions for certain types of farming losses and for some NOLs of insurance companies. IRC 172(b)(1)(B) and (C) .

[4] See, e.g., IRC 172(b) prior to amendment by the Tax Cuts and Jobs Act of 2017, P.L. 115-97 , Section 13302(b)(1)(A).

[5] See, e.g. IRC 172(b), prior to amendment by P.L. 105-34 , Section 1082(a)(1).

[6] See, generally, Job Creation and Worker Assistance Act of 2002, P.L. 107-147 (3/9/2002).

[7] Id.

[8] See, generally, American Recovery and Reinvestment Act of 2009, P.L. 111-5 (2/17/2009) .

[9] See, generally, Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92 (11/5/2009).
[10] It appears that there is a typo in the version reviewed for this article. Specifically, the language appears to extend the carryback period only for losses that arise in 2018 and 2019, while the heading that precedes this language states that the rule applies to losses arising in 2018, 2019 and 2020. Presumably this will be corrected at some point in the process (the counterpart House legislation, HR 748, does not contain this error). This article assumes that losses arising in 2020 are covered by the five-year carryback rule, notwithstanding the typo.

[11], p 20.

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