Finding the Silver Lining in a Net Operating Loss
The CARES Act is designed to minimize the economic impact for individuals and organizations; softening the blow of Net Operating Losses (NOLs) is a significant part of that relief. The CARES Act restores a taxpayer’s ability to file an NOL carryback up to five years for tax years 2018 through 2020, which means if an individual or a corporation has a loss during these years, that loss can be carried back to 2013 – 2015. Even better, the tax rates during those years were higher than they are currently, which for many is going to be a game-changer – if you do it correctly.
You may be asking yourself, “How do I benefit from these rules?” Well, first, you need an NOL – not something we’re usually seeking, but that’s where the silver lining comes in. You may not have initially had an NOL for the tax year 2019, but leveraging the technical correction for Qualified Improvement Property (QIP) may generate enough loss from 2018 or 2019 QIPs (and keep in mind there’s an option to push 2018 QIP changes through 2019). For more, see our post on maximizing the tax provisions of the CARES Act.
Once you have identified an NOL, look back to five years from the filing year, e.g., if your loss occurred in 2019, start by looking at the 2014 tax year to see if you have enough income to absorb all of the NOL generated in 2019. If your NOL exceeds your 2014 income, the answer is no—next look at 2015, and so on until you use all of your NOL. If you have NOL left after 2018, that amount is carried forward into 2020 and beyond. It’s a fantastic opportunity.
Once you know the amount of your NOL and which years you’ll be carrying back to, the next step is determining the best way to pursue filing for the refund. A corporation or individual has two options to go about this: 1) file an amended return or 2) file an NOL carryback claim.
The carryback claim is usually the preferred option due to its simplicity and quick turnaround. The downside is that there are strict timelines for filing. For example, you typically have 12 months from the loss year-end to file a carryback claim. The CARES Act is providing some relief in allowing a six-month extension of time to file carryback claims for 2018 – 2020, but it’s not a panacea. For NOLs arising in 2018, calendar-year taxpayers should file their NOL carryback claim by June 30, 2020.
Also, keep in mind that carryback claims typically require a paper filing, and the IRS just recently resumed processing paper returns after a hiatus caused by the pandemic. To provide relief from extended processing times, the IRS has set up separate fax lines for individual and corporate NOL carryback claims.
If you miss the deadline to file the carryback claim, you can still carryback your NOL, but you’ll need to file an amended return – and that may take longer for the IRS to process.
Navigating these uncharted waters may require expert assistance. The Barnes Dennig team is here to help you optimize your strategy and make the best of an NOL. Talk to an expert today to find out how we can help.
Barnes Dennig COVID-19 Advisory Team Leaders: