CARES Act Temporarily Restores NOL Carrybacks
Immediate Benefit for Businesses with Losses in 2018 or 2019
By Bradley Hope
The Coronavirus Aid, Relief and Economic Security (CARES) Act temporarily restores net operating loss (NOL) carrybacks for the 2020, 2019 and 2018 tax years, enabling business owners to obtain tax refunds to help recoup some of the losses they have suffered due to the COVID-19 crisis.
Businesses that showed losses in 2018 or 2019 can benefit immediately, while those with current losses will have to wait until they file their 2020 tax returns next year.
Net operating loss (NOL) carrybacks, which allow businesses to apply current losses to previous years’ tax returns and receive refunds for the taxes they paid for profits in those years, were eliminated by the Tax Cuts and Jobs Act (TCJA) of 2017. However, Congress temporarily restored carrybacks in the CARES Act and applied them to the 2018, 2019 and 2020 tax years to create a cash infusion for businesses hit hard by COVID-19-related losses.
The NOL provision allows businesses to “look back” – or apply losses incurred in 2018, 2019 or 2020 – to the previous five tax years. Therefore, businesses that experienced a loss in 2018 may look back as far as 2013 to recoup taxes paid.
Two Ways to Make a Claim
Businesses that experienced losses in 2018 and/or 2019 that would qualify for carryback under the CARES Act have two ways to make a claim:
- File a Form 1139 (for C-corporations) or Form 1045 (for individuals) with the IRS, which has established dedicated FAX lines to receive these forms. The IRS must respond to the claim within 60 days.
- File an amended tax return for the year(s) in question.
Of the two methods, filing the Form 1139 or Form 1045 is faster and simpler, but there may be good reasons to file an amended return.
The elimination of NOL carrybacks by the TCJA changed the tax strategies used by many businesses. Because NOLs no longer enabled businesses to recoup taxes paid in previous years, certain deductions and depreciation strategies no longer made sense, so they were not widely used for the 2018 and 2019 tax years.
However, with NOL carrybacks restored, it may make sense for businesses that showed small profits in 2018 and 2019 to take another look at their 2018 and 2019 tax returns to see if amending those tax returns is the correct strategy.
What if the offset doesn’t cover my losses?
The five-year carryback enables taxpayers to apportion current losses to different years. For example:
A food regional distributor that supplies restaurants has experienced $100,000 in losses due to restaurant closures since the onset of the COVID-19 crisis. Since those losses have occurred in 2020, the distributor will be able to “look back” five years to 2015 when filing income tax returns next year.
In 2015, the distributor paid taxes on a $50,000 profit, so filing an amended tax return for 2015 will enable them to recoup the taxes paid that year. But that only addresses half of the 2020 losses.
The distributor may also file an amended tax return for 2016, a year in which they paid taxes on a $35,000 profit. Now they’ve covered $85,000 of the 2020 losses.
Finally, the distributor may file an amended tax return for 2017, a year in which the taxes they paid on a $25,000 profit will more than address the remaining $15,000 in 2020 losses. Only a portion of the 2017 taxes will be recoverable since the 2020 loss that is applied to 2017 is lower than the profit on which taxes were paid that year.
Interim Relief for 2020 Losses
Even if your business did not experience a loss in 2018 or 2019, but you project a loss for 2020, talk to your tax advisor about adjusting estimated quarterly income tax payments. This will provide some interim relief until you are ready to file your 2020 tax returns next year.
If your business experienced a NOL in 2018 or 2019, or if you think filing an amended tax return may benefit you, contact our tax advisors.