Net Operating Losses and Considerations under the CARES Act
Changes with NOLs to consider
December 2, 2020
by Gregory S. Dowell
The CARES Act contained a provision that liberalized the treatment of net operating losses (NOLs) for tax purposes. The intent of Congress was to provide some relief to businesses by allowing businesses with NOLs to carryback those losses for 5 years; carrying back NOLs that result in a refund of prior taxes paid would thereby improve a business' cash flow. Not only did Congress allow the carryback of losses incurred in 2020 (the year of the pandemic), but in an attempt to provide more cash flow to businesses, Congress also allowed losses for 2018 and 2019 to be carried back as well.
So while this may sound simple, this clearly becomes a decision that has to be made on a case-by-case basis, as it still may be more advantageous to carry a loss forward, rather than carrying in back. A taxpayer who anticipates unusually high income in the immediate future, perhaps due to postponed pandemic sales, may very well benefit more by a carry forward, when the marginal tax rates may be higher and the offsetting loss will produce greater results.
A taxpayer may also benefit by considering ways to increase losses in 2018, 2019, or 2020, particularly if there are certain years in the prior 5 years where the taxpayer paid unusually high income taxes. Taxpayers have the ability to increase NOLs in a number of ways, including changing depreciation methods or shortening the depreciable lives of assets, accelerating large equipment purchases, or by combining through other revenue and expense accounts to look for flexibility in what has been recorded. The ability to make changes is clearly limited for 2018 and 2019, but the current tax year 2020 provides much more flexibility in these waning days. In the current year 2020, for instance, taxpayers may be able to pay additional compensation or bonuses to increase a 2020 NOL.
Bear in mind that income in the prior years may have been taxed at higher tax rates, prior to the passage of the Tax Cuts and Jobs Act (TCJA). This liberalization, then, allows losses in 2018, 2019, and 2020 to effectively be carried back to offset income that was assessed at higher rates in prior years, resulting in a permanent tax benefit to the taxpayer.
As indicated above, this decision is made on a case-by-case basis, with no one solution fitting every situation. Taxpayers are encouraged to consider their own unique situations.
