Under the CARES Act, Congress provided many new tax provisions to assist companies and individuals through this challenging time. One of those new provisions allows business net operating losses to be carried back five years for tax years beginning after December 31, 2017 and before January 1, 2021 (for calendar years 2018, 2019, and 2020).
About the Provision
Previously, companies and individuals with net operating losses could only carryback losses two years for tax years beginning in 2017 and earlier. Under the Tax Cuts and Jobs Act, for tax years beginning in 2018 and after, net operating losses could only be carried forward. There was no carryback option. The net operating losses that were carried forward were also limited to 80% of taxable income.
Under this new CARES Act provision, companies and individuals can carry net operating losses from 2018–2020 back five years to the earliest year first, with no 80% limitation of taxable income. This allows companies and individuals that paid tax previously (possibly at higher tax rates like 35%) to get a refund on those taxes paid. In addition, any 2018–2020 losses that are carried forward will not be subject to the 80% limitation of taxable income through 2020.
For tax years beginning January 1, 2021 and after, there will be a 100% deduction for net operating losses for tax years beginning in 2017 and earlier, and an 80% deduction for NOLs for tax years beginning after December 31, 2017. No carryback of losses will be allowed.
If a company decides to waive the carryback of a 2018 or 2019 net operating loss, it must include an irrevocable election with its federal tax return filed for the first taxable year ending after March 27, 2020.
Filing a Carryback Claim
To carryback net operating losses for 2018–2020, the claim for tentative carryback adjustment is made on Form 1139 (Corporation Application for Tentative Refund) or Form 1045 (Application for Tentative Refund, used by individuals, trusts and estates). Carryback claims filed on these forms must be made within 12 months of the net operating loss year. For 2018 net operating losses, these forms must be filed by June 30, 2020. After June 30, 2020, the carryback claims will need to be made on an amended tax return.
The IRS usually issues the refund within 90 days of filing the carryback claim if it’s filed on Form 1139 or Form 1045.
Now is the time to determine if there was a net operating loss in 2018 or 2019 and see if it makes sense to carryback the loss five years and get a refund of taxes paid. You might be able to create or expand a net operating loss by taking bonus depreciation or by making an accounting method change. This refund could go a long way to improving the cash flow and sustainability for a business.
Please contact your Clark Nuber tax professional for questions and planning opportunities.
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