This year in 2020 is going to be challenging for many companies that are likely to incur net operating losses (NOL’s). To help create cash for businesses to survive, Congress changed the rules on NOL carrybacks for the 2018-2020 tax years.
Before we discuss the new rule, here is the background. When the Tax Cuts and Jobs Act (TCJA) was passed in December 2017, it changed the NOL rules. Prior to this legislation, companies could carry their net operating losses back two years, with any excess losses carrying forward up to 20 years. In most cases, the losses could off-set 100% of your income.
With the TCJA, the rules changed. For losses occurring in 2018 or later, the TCJA limited the NOL deduction to 80% of taxable income. Also, you no longer could carryback the losses, only use them into future tax years indefinitely.
Then the COVID-19 pandemic started and we now have yet another set of changes for the 2018-2020 tax years. For those tax years, you are now allowed a five year carryback in which you can offset 100% of income. The five year carryback rules require you to go back five years, then move forward from there.
Here is an example fact pattern:
2015 $75,000 Income & $15,000 taxes paid
2016 $200,000 Income & 45,000 taxes paid
2017 $150,000 Income & $35,000 taxes paid
2018 $350,000 Income & 98,000 taxes paid
2019 $75,000 Income & $15,000 taxes paid
2020 ($350,000) LOSS
Under the new rules, you would go back to 2015, offset the $75,000 of income and receive your $15,000 in taxes paid back to you. You would then move forward to 2016 and do the same receiving $45,000 in taxes back. In 2017, you would have exhausted the $350,000 NOL from 2020, receiving another $18,000 back for that tax year. By allowing the NOL to go back 5 years and off-set 100% of income, it would $78,000 in cash to help keep operations going.
If your company had losses in 2018 or 2019, you could immediately amend those back returns. This is one more tool that will be available to generate cash in a challenging business environment.
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