Net Operating Loss Carrybacks Are a Welcome Return for Taxpayers

By Dwight Baumgardner, CPA, LSWG Manager

Included in the CARES Act signed into law last March, were changes to the tax treatment of business net operating losses (NOLs) for corporations and other taxpayers. 

As COVID-19 continues to wreak havoc on our health, well-being and every-day life choices, many businesses and individuals are suffering substantial financial losses. Many times these financial losses result in net operating losses (NOLs) for income tax purposes.

An NOL occurs when a company’s tax deductions exceed its taxable income within a given tax period. An NOL can be carried forward over future tax periods and used to offset taxable income to reduce a company’s total tax liability.

As part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) signed on March 27, 2020, the carryback of these NOLs was brought back into tax law. Prior to the CARES Act, NOLs could be carried back for 2 years, and forward for 20 years to generate refunds on carrybacks or offset future income for carryforwards.

The Tax Cuts and Jobs Act (TCJA) approved by Congress on December 22, 2017, eliminated carrybacks and only allowed carryforwards of NOLs for tax years beginning after December 31, 2017. Fortunately for taxpayers, this has been reversed with the CARES Act and actually now allows for a five-year carryback of NOLs generated in taxable years beginning after December 31, 2017 and before January 1, 2021 (i.e., 2018, 2019 and 2020 returns).

This option to carryback an NOL generated in 2018-2020 affords taxpayers a wonderful opportunity to get some much needed cash flow by amending prior-year tax returns as far back as 2013 and recovering income taxes paid in those prior tax years. In many cases the taxes paid in those prior years were at higher tax rates than are currently in effect thus making the NOL carryback even more impactful.

If you and/or your business have experienced losses and generated a net operating loss for income tax purposes, it is time to carryback that NOL by amending those prior year tax returns so you can recuperate taxes paid and turn them into refunds now.

Could you benefit from a NOL carryback?  Give us a call (301.662.9200) and let’s discuss.

Dwight Baumgardner, CPA, is a tax manager in LSWG’s Frederick office and a 2020 graduate of Leadership Frederick County. He has 25 years of public accounting experience and specializes in tax planning and preparation for businesses and their owners. You can reach Dwight at 301.662.9200, or by email at dbaumgardner@LSWG.cpa.

Helpful Resources