The CARES Act has created many tax planning opportunities for individuals and businesses alike. One of these opportunities is the ability to carry back a net operating loss (NOL) that occurred in a taxable year beginning after December 31, 2017 and before January 1, 2021.
What is a net operating loss?
A net operating loss (NOL) occurs when a company has more allowable tax deductions than it has taxable income. NOLs reduce either past or future taxable income from loss carrybacks or carryforwards. In recent years, tax reform bills have altered the treatment of NOLs though the Tax Cuts and Jobs Act of 2017, and the more recently passed CARES Act.
What are the carryback benefits?
NOLs can now be carried back up to five years to fully offset a prior year’s taxable income resulting in a refund of income tax paid in that year. If choosing to take advantage of this opportunity, the losses must first be carried back to the earliest available year of income.
Since the loss can be carried back to years before the Tax Cuts and Jobs Act, refunds can be generated at a more favorable tax rate of up to 35%, rather than the more current 21% rate. These refunds have the potential to provide cash flow relief for many manufacturers.
How can I claim a refund for NOLs?
Depending on the year the loss incurred and date the return was filed will determine the best method to file a claim for refund. Businesses will be allowed to file Form 1139, Corporation Application for Tentative Refund, or file an amended corporate tax return. Individuals, trusts and estates can file Form 1045. If you have the option, Form 1139 will be processed faster, resulting in a quicker refund compared to filing an amended return. Please refer to Notice 2020-26 for further filing information.
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