In 2017, the Tax Cuts and Jobs Act eliminated carrying back of Net Operating Losses (NOLs). However, with recent economic hardships from the Coronavirus, new provisions in the CARES act now waive that and businesses can now carry back a NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021. Revenue Procedure 2020-24 provides guidance to taxpayers with net operating losses.
In order to partake in this entities will need to fill out certain forms. Individuals, trusts, and estates would file Form 1045 (PDF), and corporations would file Form 1139 (PDF). In Notice 2020-26, the IRS grants a six-month extension of time to file Form 1045 or Form 1139, as applicable, with respect to the carryback of a net operating loss that arose in any taxable year that began during calendar year 2018 and that ended on or before June 30, 2019.
What is a Net Operating Loss (NOL)?
When a business has eligible deductions that are more than taxable income for the year, this creates a Net Operating Loss (NOL). The IRS will now allow NOLs to offset past taxable income so the business can receive a refund.
How to calculate Net Operating Loss
Let’s say in 2018 and 2019 your business had a profit of $50,000 each year. With a tax rate of 40%, your tax bill would’ve been $20,000 for each year. Well, in 2020 with the major economic losses from the Coronavirus, lets say your business now has a loss of $100,000.
With carrybacks now waived from the CARES Act, that would mean for the 2020 tax return, your business can receive a refund of $40,000 because you are now able to carry back any Net Operating Losses. How cool is that?!