Allow Businesses to Quickly Deduct 2020 Income Losses

The Problem

Businesses bear unfair, inefficient tax burdens when they experience heavy annual losses, and the coronavirus pandemic has only magnified this weakness in federal and state tax codes.

The State Solution

States should ease this tax burden by adopting changes from the federal CARES Act and conforming with the treatment of net operating loss (NOL) it enacted.

The federal CARES Act provides a five-year net operating loss (NOL) carryback for business losses sustained in 2018, 2019 and 2020. This federal action provides more generous net operating losses for 2020, ensuring a tax code that will allow businesses to preserve precious liquidity that is needed to remain afloat.

Why This Matters

Businesses are experiencing an historic year of losses and need greater liquidity reserves to preserve their operations, maintain payroll, and make new investments. This can be achieved by conforming with the NOL tax provisions of the CARES Act and ensuring that businesses can quickly “cash out” losses in 2020 against gains from prior years.

Without making this change, businesses will still be able to deduct their 2020 losses against income earned in future years. However, some businesses won’t survive, and others will be slow to add payroll if they have to wait years to cash out the income losses of 2020. Businesses need near-term liquidity if there is to be a swift and robust recovery.

States Currently Adopting the CARES Act Approach to Net Operating Loss

22 states, shaded in blue below, automatically conform with the federal changes in the CARES Act unless they explicitly pass legislation to decouple from the CARES Act. The blue states should remain in conformity with the federal treatment of NOLs, while the other states should conform to adopt the CARES Act’s tax changes.

What States Should Do Next

States should enact conformity legislation to bring the positive elements of the federal tax code into their state tax codes. Furthermore, states that already conform with the relevant federal tax changes should make sure to lock in those changes rather than allowing policymakers to decouple from the federal tax code in order to raise more near-term tax revenue.

Additional Resources

• Guide: A Review of Net Operating Loss Tax Provisions in the CARES Act and Next Steps for Phase 4 Relief (Tax Foundation)
• Report: GILTI and Other Conformity Issues Still Loom for States in 2020 (Tax Foundation)

Model Legislation

Think tanks should work with a legislator to request legislation be drafted to conform the state’s tax code with the tax changes (specifically for NOLs) adopted in the federal CARES Act.