As part of the CARES Act (Coronovirus Aid, Relief, and Economic Securities) passed on March 30, 202, businesses with Net Operating Losses (NOL) in 2018, 2019, and 2020 can now amend previous tax returns and offset the income in previous years.
Understanding the changes
The goal with this provision was to increase liquidity for companies who are experiencing a decrease in cash flow as a result of COVID-19.
NOL Rule Changes
The CARES ACT includes three significant changes to the NOL rules:
- Carryback provision
- Carryforward provision
- Offset limitations
As part of The Tax Cuts and Jobs Act (TCJA) passed in 2017, companies that had NOLs in tax years starting in 2018 were not allowed to carryback those losses. Now, as a result of the CARES Act, a five-year carryback is allowed for the years beginning after December 31, 2017 and before January 1, 2021. With this provision, a business can amend their previous tax return and get a refund. This applies currently to returns filed for 2018 and 2019. This NOL carryback change allows for an immediate refund. And, when taxes are filed for 2020, businesses will be able to carryback losses at that time as well. But, it also has the potential to impact a business’s current tax rate, thereby further reducing tax payments in the filing year.
In order to take advantage of the NOL Carryback provision, the IRS has stated a taxpayer must:
- File Form 1045 or Form 1139 no later than 18 months after the close of the applicable year where the NOL occurred. For 2018, that would mean the form must be filed by June 30, 2020.
- Include a statement at the top of the form that says, “Notice 2020-26, Extension of Time to File Application for Tenantive Carryback Adjustment.”
Another change as a result of the CARES Act is the carryforward provision. Under this provision, taxpayers are allowed to carryforward their NOLs to future years. With the TCJA Act, an NOL could only be carried forward 20 years. Now, that carryforward period is indefinite.
The CARES Act temporarily removes a restriction on the amount of losses that can be off-set in any given year. Previously, NOLs could only offset 80% of taxable income for the year. Now, with the new CARES Act change, this has been suspended until 2021. Now, NOLs can be used to fully offset taxable income, no matter what year the NOL occurred.
Additional CARES Act for Real Estate Owner Resources
Some additional resources on this issue are here:
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Work with Your Accountant
Accountants across the country are working overtime to help business owners make the right decisions. If you do not have an accountant, and you think you qualify for some savings as a result of tax amendments, please feel free to contact us. We work with a number of accounting firms that focus on real estate. We would be happy to connect you with the right resource for your situation.
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