Finding Relief for Your Business with the CARES Act's NOL Laws
The CARES Act enacted in 2020 to provide COVID relief to Americans included many provisions to offer financial relief to business owners struggling to make ends meet amid widespread shutdowns. With businesses still reeling from the losses of last year, some are still looking for some form of relief. If you extended your business tax return (as many businesses did this year due to complicated returns involving PPP loans), and your business experienced a net operating loss this year, the CARES Act has some extra tax provisions that may help you.
Why NOLs Matter
Why would the IRS offer carryover options for a net operating loss (NOL)? The reason for this option in the first place is to balance out the tax liability for businesses that more volatile income. Businesses that have high income some years and losses in others are ultimately taxed more on the same amount of income as businesses who have consistent income over the years. Carrying over your NOL can smooth out your income so that you pay less in taxes.
How NOLs Are Typically Handled
The tax implications of an NOL for a business have changed many times in the last few years. Prior to 2017, NOLs were fully deductible and could be carried back two years and forward 20 years. When the Tax Cuts and Jobs Act was enacted in 2017, the rules changed. NOL deductions were limited to 80% of taxable income, carrybacks were not allowed, and the 20-year limit for carryovers was lifted.
The CARES Act changed those rules yet again, at least temporarily, and can be applied retroactively as well. Here’s what you need to know.
Here are the key things you need to know about how the CARES Act impacts carrybacks and carryovers for NOLs:
1. An NOL from a tax year beginning in 2018, 2019, or 2020 can be carried back five years.
2. You can choose to waive the carryback period and only carry the NOL forward if you wish.
3. If you carry back, you must use the full five-year carryback period. For example, you cannot only carry back your 2020 NOL to 2018 and 2019. You must carry it back to 2015, then if taxable income can’t absorb the NOL, you will carry forward any remaining losses to the next carryback year, and so on, until the NOL is absorbed.
4. NOLs generated between 2018 and 2020 are subject to the TCJA’s 80% of income limitation if carried forward to a year where the limitation applies. But if carried back to years when the limitation did not apply, it will not be applied.
5. NOLs can still be carried forward indefinitely.
The most important thing to know in regards to carrying over a NOL from this last difficult year is that it can offer you significant tax relief. Whether you carry the NOL back for a tentative refund or forward to reduce your tax liability for upcoming years, it can be a financial relief for your business.
Can All Businesses Do This?
Most business types are eligible to carry over NOLs under the CARES Act. The types that most often can qualify for this tax treatment include C corporations, individuals, estates and trusts, and tax-exempt organizations with separate taxable income related to the business. Partnerships and S corporations might also be able to take advantage of the NOL carryback, but passthrough entities have different rules, so it must be handled with care.
Is Carrying It Over Right for Your Business?
While carrying over a net operating loss has many advantages, that doesn’t necessarily mean it’s right for everyone. Additionally, whether you want to use the carryback option or waive it and only carry forward will depend heavily on your unique financial situation. If you experienced an NOL that you would like to carry over, we strongly recommend working with an experienced business accountant to determine the most beneficial option for your business.
It’s also important to note that, if you want to carry back your NOL for a refund, you will need to file an amended return or a tentative refund application. This is a lot of additional work, and could expose you to audit risks, especially if it is handled incorrectly. A qualified CPA can help you to weigh the pros and cons of these options.
If your business has had a difficult year, carrying over your NOL can offer some financial relief now and in the future. Please reach out to one of our experienced business tax preparers to discuss what the best option is for your business. Give us a call to schedule an appointment today.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174