CARES Act: NOL Break

One of the CARES Act provisions designed to increase liquidity for struggling businesses allows corporations to carry back net operating losses (NOLs) incurred in 2018, 2019, and 2020 for five years. Post-tax reform, these NOLs could only be carried forward. For tax years beginning prior to January 1, 2021, businesses can now offset 100% of taxable income with NOL carryovers and carrybacks (in other words, the 80% taxable income limitation imposed under the 2017 tax reform legislation was lifted). With respect to partnerships and pass-through entities, the CARES Act delayed the effective date for the new excess business loss rules until 2021 (also lifting the 80% limitation).

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about this tax break for corporations and other business owners.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: Businesses are struggling across the board. Relaxing the 2017 tax reform changes to provide liquidity relief to these struggling business owners is an important way to keep these business owners afloat. Aside from direct handouts, there are only so many tools in the government’s arsenal, and this is an important way to allow business owners to use losses to offset income tax liability while we work through this pandemic.

Bloink: Yes, business owners are struggling. So are average Americans. The NOL relief provision gives help where it’s needed the least. Every business qualifies under the NOL relief rules—even those businesses that have remained profitable, or even become more profitable, in the wake of COVID-19. Businesses who have received bailouts remain eligible. The revenue that would have been received through keeping the rules the same could be used to put food on tables across the country.

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Byrnes: This is basic trickle-down economics. When businesses are able to operate profitably, the entire country benefits from a strong economy. If we can keep businesses afloat, Americans will eventually be able to return to work as we begin to reopen the country. Everyone wins even though the NOL relief appears to solely benefit business owners.

Bloink: Basic rules of trickle-down economics don’t seem to work here. Many Americans are afraid. They don’t feel secure in their jobs and they don’t know how long their money will last. The stimulus payments barely made a dent for most people. Sure, the business can remain open, but a vast portion of the American public isn’t buying anything but essential items. Funds would be better allocated to the American people themselves to provide them with the sense of security needed to, well, give those business owners business.

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Byrnes: Keeping small businesses open in the short-term is exactly what is going to help us in the long run. There will soon some a day when Americans are, once more, financially secure and comfortable with discretionary spending. We need to make sure that the businesses still exist in order for the economy to have any hope of a meaningful rebound as we reopen.

Bloink: The NOL tax break creates another bailout for big business at a time when ordinary Americans are going hungry and can’t pay their bills. Big businesses have already reaped something like $135 billion in aid and JCT estimates show that over 80% of CARES Act benefits will go to Americans making over $1 million per year. I do believe that we have to do everything we can to help business owners, as well as individuals. But in reality, we need to consider the efficacy of these various options and choose those that are tailored to actually help Americans who are suffering. We need a new round of stimulus and it has to focus on the American people. Rolling back the NOL relief can help fund that stimulus.