Among the raft of changes ushered in with the CARES Act is an overhaul to net operating losses that can impact your 2020 tax obligations. Overall, the changes were designed to increase the amount of liquidity available to businesses to help them survive the pandemic, with a special eye toward helping small business payroll obligations. This means that your business may be able to enjoy a wide range of unexpected benefits when you file this year. Find out how these changes can impact your 2020 taxes and if you stand to gain from them.
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What is an NOL?
A net operating loss (NOL) occurs when a business’s taxable income is less than the deductions for which it qualifies. The 2017 Tax Cuts and Jobs Act allowed businesses to carry forward losses indefinitely, allowing them to use these to lower future tax burdens. Before these changes, businesses could carry the losses back a maximum of two years or forward up to 20. The Act allowed businesses to reduce their taxable income, but only by a maximum of 80% in any one period.
How Does the CARES Act Change NOL Rules?
The CARES Act made some changes to NOLs that gave businesses much more flexibility in determining how they would be applied to their tax burden, along with how much businesses could potentially save. In short, the CARES Act lifted time and amount limitations on NOLs, allowing businesses to claim an unlimited amount of NOLs and permitting them to carry them back several years or forward indefinitely.
However, not all businesses can take advantage of these changes, and there are some specific ways in which these changes must be applied to your income. You’ll need to have a good grasp of what they mean to know if your business can benefit from the changes and how much.
Five-Year Carryback
Under the CARES Act, businesses are now able to carryback NOLs up to five years instead of two. This allows them to claim larger tax savings, as corporate business taxes stood at 35% prior to the Act’s passage and only 21% after.
Temporary Suspension of the 80% Limit
The CARES Act temporarily suspended the taxable income reduction limit of 80%, allowing businesses to apply the losses they suffered in 2020 to earlier years. For businesses that saw tremendous losses in 2020, this can be a lifesaver. Depending on how your business fared in 2020, you may owe little to no taxes.
Pass-Through Loss Limit Increased
Pass-through businesses also saw their limitations on taxable income deductions removed through the CARES Act. Previously, single-filers could only deduct up to $250,000 in NOLs in a single year, while this limit stood at $500,000 for joint filers.
Who Can Take Advantage of the NOL Carryback Provisions?
Most individuals and businesses in the United States can take advantage of the CARES Act’s NOL carryback provisions. There are, of course, some exceptions. Pass-through entities are subject to a different set of rules than individuals, C-corporations, and most other organizations. REITs as a group are notably unable to take advantage of the Act’s carryback provisions.
Are Indefinite Carryforwards of NOLs Still Allowed?
Indefinite carryforwards are still allowed under the CARES Act for tax years beginning after January 1, 2018. However, in order to qualify as a carryforward, an NOL must first be carried back to the previous five years. Any remainder after this process can then be applied to years in the future.
How Does SBA Loan Forgiveness Impact NOL Carryforwards?
Under the CARES Act, many small businesses qualified for emergency loans through the Paycheck Protection Program. The terms of these loans stated that if businesses fulfilled their terms, they would be forgiven tax-free. While tax experts are still sorting through the implications of 2020’s policies, it does appear that any loan forgiveness through the Small Business Administration loans wouldn’t impact the amount of NOLs your business could claim.
What Should You Do To Maximize the Net Present Value of Your NOLs?
Given the removal of restrictions of the amount of taxable income that businesses could write off due to NOLs, the CARES Act restored their net present value. However, this is a temporary change, meaning businesses will have to act soon to take advantage of the change. The net present value change also only applies to three years – 2018, 2019, and 2020.
Looking For a Tax Agency to Make Sense of 2020? We Have You Covered
Filing taxes for 2020 can be daunting, to say the least, making it wise to work with a tax specialist when filing for your business. It’s easy to miss tax benefits you could be missing out on through the CARES Act or any of the other policy changes made in 2020. At Larry L. Bertsch, CPA & Associates, LLP, we can guide you through the filing process to help your business obtain the maximum amount of benefits as your small business CPA. Schedule an appointment with us today to get the tax services you need!
