The past few years have seen significant changes to the tax code. As a business owner, it’s now more important than ever to be aware of new opportunities. NOL carrybacks for 2020 presents one such opportunity.
2020 was a year of many changes. Two large stimulus packages passed that have drastically changed the landscape for many businesses. Although much of the focus has been on the Paycheck Protection Program, not enough attention has been paid to Employee Retention Tax Credits or the Net Operating Loss (NOL) carrybacks. These are both from The CARES Act.
This article will focus on NOL carrybacks and how they can provide a much-needed cash benefit to business owners. We’ll also go through opportunities to create losses for 2020, so you can take advantage of this incentive.
NOL Carrybacks: A History
Loss carrybacks are not a new idea. Before the Tax Cuts and Jobs Act of 2017, loss carrybacks were available to businesses that experienced a loss year on a business tax return. A company experiences a loss when expenses are greater than gross receipts.
This is how it worked:
If you had a loss, you could either carry it forward to offset income in future tax years or carry it back up to two years to offset income in prior tax years. The result of carrying back losses to offset income in prior years is a refund of taxes paid on that income.
In most situations, carrying the loss back would provide an immediate cash benefit in the form of a refund of taxes already paid. Carrying the loss forward would delay the advantage of offsetting income for a year or longer. The loss carryback was a standard tool many businesses used.
The Tax Cuts and Jobs Act of 2017 did away with loss carrybacks to make room for other tax cuts and incentives, including the decrease in the corporate tax rate and the qualified business income deduction for pass-through entities.
The CARES Act passed in April 2020 was a large stimulus package that included many items for businesses that have gone mostly unnoticed. One of these items is the resurrection of loss carrybacks for businesses that have losses in 2018, 2019, or 2020.
The provision allows carrybacks for not two but up to five years! This means if you have a net operating loss for your business in any of those three tax years, you can use that loss to offset income in any of the past five tax years. Moreover, a simplified process was identified to execute these transactions and apply for refunds without having to amend any prior-year tax returns.
NOL Carrybacks: 2020 Strategies
There are several ways for businesses to recognize losses in a particular tax year without simply having their ordinary expenses outweigh gross receipts in that year. One way enterprises accomplish this is by buying assets at the end of the year that can be expensed under IRC Section 179. This increases your expenses or depreciation.
Another way business owners can create losses is particularly for owners of income-producing real estate. Or those who own the buildings they operate in or are considering new construction or acquisition.
These buildings and their components can create large year-one depreciation deductions, resulting in a net operating loss for a business owner in the year of purchase, construction, or execution of a cost segregation study. Cost segregation studies are an essential tool in recognizing the benefits of real estate construction and acquisition.
Some other ways to generate losses can be summed up under Automatic Accounting Changes, many of which were updated for small businesses under the Tax Cuts and Jobs Act.
The relaxing of these rules for small businesses (under $25M in average annual gross receipts) has created business owners’ opportunities to examine how they report on their tax returns. Accounting method changes, from accrual to cash, are now available to these small businesses, and this change can create a large one-time deduction in some cases.
Additionally, rules surrounding inventory reporting have been revised, which allow for expensing of inventory in some instances, which again can result in a sizable one-time deduction which could put a business into a loss situation.
2020 NOL Carrybacks: A Takeaway Message
All in all, loss carrybacks provide much-needed cash benefits to businesses that have a loss or can generate one in any of the prior three tax years.
Take advantage of this unique opportunity to save money on your taxes and protect your bottom line. Contact us today at (508) 797-5003 to see how we can help you with a tax and cost segregation strategy.