09 Apr 2020 Five-Year Carryback for Net Operating Losses Now Available
The December 2017 tax act (TCJA) eliminated NOL Carrybacks, and limited NOL Carryforwards to 80% of taxable income. The 2020 CARES Act temporarily eliminated these provisions and increased the previous carryback period from two years to five years. This applies to the 2018, 2019, and 2020 tax years.
Excess Business Loss Rules Temporarily Repealed
The 2017 TCJA also instituted Excess Business Loss Rules that limited individuals from using more than $250,000 ($500,000 married filing jointly) of business losses against non-business income. This applies to the 2018, 2019, and 2020 tax years.
Tax Strategies to Consider
The purpose of these temporary changes is to allow taxpayers to recoup taxes paid in prior years because of Covid-19 so that there is cash to work through the current economic slowdown. Here are some possible strategies to consider.
- If the Excess Business Loss Rules were triggered on your 2018 or 2019 tax returns you can amend those years to receive much needed cash flow.
- If your business elected out of Bonus Depreciation or Section 179 Depreciation in 2018 or 2019 because you didn’t want to file a tax return with a loss and you wanted the depreciation to use in the future to offset income, those returns can be amended to reverse your prior election, show a loss, and then carryback the loss to receive a tax refund from a prior year (this assumes you had taxable gains in prior years).
- Depending on your taxable income in tax years prior to 2018 this may result in a permanent tax savings as the tax rates before 2018 were higher than they are now.
- When carrying back NOL’s to prior years you can either file an Amended Tax Return, which the IRS has up to six months to process or File a Form 1045 which typically provides a rapid refund.
- Here’s an example of how this can work:
- Taxpayer started a new business in 2019 and has virtually no taxable income due to the new startup. There were significant fixed assets purchased during the year. The initial intent was to not claim Bonus Depreciation because even with regular depreciation there was going to be a loss for the business, and there was a desire to save depreciation to offset future income. However, with the new ability to carryback losses, this taxpayer can carry those losses back to 2014 when her combined federal and state tax brackets exceeded 35%. The refund of those taxes will provide needed cash flow to survive 2020.
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