Although the various programs providing direct financial support to businesses are the most well-known aspects of the CARES Act, the statute also rolls back some of the limitations on net operating loss carrybacks imposed in 2017 by the Tax Cuts and Jobs Act. According to a recent Accounting Today article, these changes to the treatment of NOLs could give a boost to M&A activity. Here’s an excerpt:
The CARES Act included several provisions allowing companies to claim net operating losses for past tax years, temporarily reversing some of the limitations in the Tax Cuts and Jobs Act. Those changes are likely to encourage more companies to pursue mergers and acquisitions once the market recovers from the economic downturn from the novel coronavirus pandemic.
Under the Tax Cuts and Jobs Act of 2017, net operating losses could no longer be carried back to prior tax years to offset taxable income, though they could be carried forward indefinitely from 2018 and on.. The CARES Act, which Congress passed in March to aid the economy in the wake of the COVID-19 pandemic, allows any NOL generated in a taxable year starting Dec. 31, 2017 and ending Jan. 1, 2021, to be carried back five years.
The article says that the CARES Act provisions essentially defer the effective date of the TCJA’s limitations to the beginning of 2021 — including provisions that limited the amount of NOLs that could be used to 80% of taxable income in any one tax period.
The article reviews various options for buyers and sellers when it comes to the treatment of NOLs in acquisition agreements, and points out that the change in ownership rules under Section 382 of the IRC that limit loss carryforwards do not apply to carrybacks.
-John Jenkins, DealLawyers.com June 16, 2020
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