19 Mar How the CARES Act Impacts Your Business’s NOL
Last year was a difficult one for many businesses. Even with assistance from the Paycheck Protection Program, a lot of small businesses experienced significant financial losses in 2020. But what you might not know is that the CARES Act enacted last year offers more than just PPP loans for businesses; it also includes some changes to carrying over your business’s net operating losses that could help you find some relief during these difficult financial times. Here’s what you need to know.
How NOLs Are Usually Carried Over
Carrying over a net operating loss (NOL) to another tax year isn’t a new concept. It’s been around for quite some time, and until 2017, you were able to carry an NOL back two years and forward up to 20 years, with the NOL being fully deductible. With the Tax Cuts and Jobs Act introduced in 2017, this changed; NOL deductions were reduced to 80% of taxable income and carrybacks were eliminated, but the 20-year limit for carrying a loss forward was lifted as well.
Carrying over business losses help companies that experience more dramatic swings in their income from year to year pay less in taxes than they would otherwise. This allows them to pay a tax amount more comparable to companies that have relatively consistent income.
How the CARES Act Changed It
Though the handling of NOLs only recently changed in 2017, the CARES Act changed it again for 2020, impacting your ability to carry your losses both forward and backward. Here are the primary points you should be aware of:
- NOLs for tax years beginning in 2018, 2019, or 2020 can be carried back five years.
- If you wish, you can still waive the carryback option and choose to only carry the NOL forward.
- If you choose to carry it back, you must utilize the full five-year carryback period. (For example, you can’t just carry back your 2020 losses to 2018 and 2019. You must carry it back to 2015; if that year’s taxable income doesn’t absorb the NOL, you carry it on to 2016, and so on until the NOL is absorbed.)
- NOLs accrued in the above-mentioned tax years are still only 80% deductible, per the TCJA, but only if it’s carried forward to a year where that limitation applies. If you carry it back to a year when the TCJA limitation was not in place, it does not apply and is fully deductible.
- Your NOL can still be carried forward indefinitely, per the TCJA.
Being able to carry your losses forward or backward can help many businesses find significant tax relief. Carrying it forward can help to reduce your tax liability in upcoming years, while carrying it back may qualify you for a tentative refund.
Is It Right for Your Business?
While there are many possible advantages to carrying over your losses to other tax years, that doesn’t necessarily mean it’s right for every business. Additionally, it’s important to note that not every type of business is able to take advantage of these carryover options. Pass-through entities in particular handle NOLs very differently than other business designations; learn more about those losses and their tax impacts here.
If you do decide you want to carry over your losses, you should work with a business tax professional in Provo to get help deciding the best way to handle your NOL. We can help you address important decisions like whether to carry the loss back, or waive the carryback period and only carry the NOL forward. Should you decide to carry back your NOL, this does require you to file an amended return or tentative refund application; this process is a lot of additional paperwork, and must be handled carefully to ensure it’s done correctly.
For businesses that have suffered during the pandemic, the CARES Act’s temporary NOL changes can offer much-needed relief. Contact The Accounting Guys today to speak to a business tax professional in Provo to ensure you get as much relief as you can from your carryover options.