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.
Applies to NOLs arising from tax years beginning after Dec. 31, 2017, and to tax years beginning on or before Dec. 31, 2021.
Dr. John Connors, JD, CPA, LLM
Tax Educator’s Network, Inc.
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