Providing Taxpayer Relief with New Net Operating Loss Tax Provisions

When the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, certain tax provisions were established to provide relief to taxpayers. The tax act repealed and replaced the two-year Net Operating Loss (NOL) carryback provisions and made the carryforward period indefinite for NOLs generated in tax years beginning after December 31, 2017. In addition, the usage of indefinite NOLs would be limited to 80% of modified taxable income in future years. Maryland soon followed suit with the new tax law, which meant no Maryland decoupling modification would be required for an NOL created in tax years beginning after December 31, 2017.

Fast-forward to the Coronavirus pandemic. The events of this past year created many financial challenges for businesses and individuals. Fortunately, lawmakers responded in March 2020 with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which temporarily suspends and modifies several components of the TCJA. In particular, the CARES Act targets NOLs and temporarily amends the current tax provisions.

The CARES Act allows a five-year NOL carryback, as well as suspends the 80% carryforward limitation. This amendment is for tax years beginning after December 31, 2017 and ending before January 1, 2021 (tax years 2018, 2019 and 2020). Maryland conforms to the federal treatment of NOLs for 2018 and 2019, but decouples from this provision for 2020. This could result in a Maryland decoupling modification for any 2020 NOLs carried back at the federal level and/or any NOL carried forward from prior years that exceeds 80% of taxable income in 2020.

While the maneuver may be temporary, the provisions provide taxpayers the opportunity to receive an immediate refund during a time of crisis and financial uncertainty. As always, please consult with your accountant or financial advisor to see if your business is eligible for this relief.