For business owners, the timeline of when taxes are due, your busy season, and the end of the calendar year are at constant odds. To some degree, the IRS recognizes that.
In order to tax businesses based on income and not account entries, the IRS allows Net Operating Losses (NOLs) to be utilized.
In addition to other tax benefits for business owners, the CARES Act significantly improved the ability of businesses to utilize NOLs.
Thus by allowing for NOLs from tax years beginning before January 1, 2021 to be carried forward or back to offset up to 100% of income: it could be a worthy play of action to carry back losses incurred as a result of COVID-19.
Pre & post CARES Act & NOL’s:
- Prior to the Tax Cuts Jobs Act (TCJA) of 2017, NOLs could be carried back two years, but they were subject to an 80% limitation.
- On top of that, for assumed NOLs in tax years beginning after December 31, 2017, the TCJA placed a limit on the NOL deduction to 80 percent of taxable income.
- Under the CARES Act, that limit is now removed, and losses can carry back up to 5 years.
- Meaning that even if you carried a NOL in 2017 back to 2015, you still would have utilization for additional NOLS from 2018, 2019, or 2020.
- Taxpayers can elect to carry forward remaining losses and offset future taxable income.
- For subsequent tax years after 2021, taxpayers can elect to deduct 100% of NOLs from tax years prior to 2018.
- Should they choose to not, they can opt to deduct up to 80% of taxable income for NOLs post-2017.
- Potentially more profitable for businesses to carry back losses to years with higher tax rates versus carryforwards
- Finally, Disaster loss deductions can be utilized for tax filings in 2019 & 2020
REMINDER: It is advised to analyze all tax credits, programs, and incentives your business is eligible for before abruptly implementing the Net Operating Loss carry-back.
Roughly 40 to 60 percent of small businesses never reopen their doors following a disaster. But you can.
For a strategy designed to optimize your cash flow in times of need, connect with us.