By Myra Tunstall; Financial Strategist
Net Operating Losses (NOL’s) are generated when a company’s allowable tax deductions exceed the company’s taxable gross income within a tax year resulting in negative taxable income.
Tax Treatment of Net Operating Losses (NOL’s)
Net Operating Loss (NOL) rules were created to allow taxpayers to offset the gross income from profitable years with losses from years that were not profitable.
Prior to 2018 NOL rules allowed a loss to be carried back for up to two years and carried forward for up to twenty years, or indefinitely based upon the industry and in most cases were allowed to offset 100% of the taxable income whether carried forward or back.
The Tax Cut and Jobs Act (TCJA) of 2017 modified the rules for treatment of NOL’s by disallowing the carry back of losses but allowed losses to be carried forward indefinitely except for certain industries. Likewise, TCJA placed a limit on the deduction to 80% of taxable income for losses in tax years after December 31, 2017.
The CARES Act of 2020 again modified the rules for treatment of NOL’s. The CARES Act now allows a five-year carryback for NOL’s for taxable years beginning for tax years 2018, 2019 and 2020 and suspends the 80% loss limitation thru December 31, 2020.
Does This Mean I Can Receive A Refund?
Due to the new provisions within the CARES Act, taxpayers with Net Operating Losses in 2020 may be eligible to file amended returns and receive a refund of a portion of the income taxes paid over the last five years for years in which the profit was realized. Special provisions may be applicable for S-corps, partnerships, multinational corporate groups.
The above summary of NOL’s is provided for informational purposes only. Contact your Tax accountant or attorney for further information on the impact of the CARES Act and Net Operating Losses on your business.
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Sources:
U.S. Department of the Treasury. Internal Revenue Service. (2019) Publication 536: Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
U.S. Department of the Treasury. Internal Revenue Service. (2020). Treasury Department and IRS issue guidance for consolidated groups regarding net operating losses.