Carrying Back Your Net Operating Losses [NOLS]
Updated: Apr 15, 2020
Posted by: Tony
Date: April 10, 2020
Wednesday night I was reviewing the CARES Act with Pat Darche [International Sales Manager, Unified Global Archiving] and he mentioned the carryback provision on NOLs. Frankly, we have been so focused on the PPP and EIDL programs that no one had addressed this remarkable CARES Act benefit. This is one of the reasons why we have over 20 sets of eyes on the CARES Act and all of its provisions, guidance, and applications.
I asked TL Lafornara, our Senior Tax Accountant from Advantage Global Resources, to look it over and provide us with his opinion. Section. 2303. Modifications for Net Operating Losses. Section 172(b)(1) P.G. 195 The 2017 tax reform bill changed the treatment of NOLs. The CARES Act relaxes these limitations on a corporation’s use of NOLs. The CARES Act allows businesses to carry back NOLs incurred in 2018, 2019, and 2020 for five years. Previously, these NOLs could only be carried forward. This could be significant for businesses that have the ability to carry back NOLs to offset income that was taxed at 35% before 2017 tax reform.
In addition, for taxable years beginning prior to January 1, 2021, taxpayers can offset 100% of taxable income with NOL carryovers and carrybacks (instead of limiting such offsets to 80% of taxable income). If there are refunds available by operation of these new rules, corporations can use the IRS’s quick refund procedures (Form 1139) to claim the refund. Now that the losses for 2018, 2019 and 2020 can be carried back up to five years, this will allow for an immediate claim for a refund for taxpayers who had taxable income during the carryback period. Additionally, the limitation of only being able to offset 80% of taxable income has been removed. Example: The COVID-19 crisis creates a net operating loss in your business for 2020. Say, for sake of illustration, that you lose $100,000. The new rules allow you to take this $100,000 net operating loss and treat it as a deduction on an amended 2016 tax return. If, in 2016, you made $300,000, you’ll essentially resubmit your amended 2016 tax return with an extra $100,000 tax deduction from your carryback NOL, which means your taxable income drops from $300,000 to $200,000. That tax deduction will create a tax refund.