Net Operating Losses (NOL) are a great tool to offset income and reduce taxes. The CARES Act expanded the time frame business owners can use NOLs to reduce taxes.
Net Operating Losses Defined
Basically an NOL is when your business generates a loss for tax purposes. That doesn't necessarily mean that you had an actual cash loss, but for taxes you did. There are a variety of reasons that you could have had a tax loss, but not an actual loss. For instance, maybe you took accelerated depreciation on equipment or vehicles that you purchased. Or maybe you have a different method of accounting for taxes than cash. In any case, if you have a loss for tax purposes from a business or rental activity, then you have a Net Operating Loss. NOL's occur in ALL business entity types, includingSole Proprietors,C-Corporations,S-Corporations, and Partnerships, but they are treated differently. Consult your Tax Professional!
Prior to the Tax Cut and Jobs Act (TCJA) in 2017, taxpayers could carry NOL's backwards as well as forwards. This allowed businesses to better offset the timing of taxes between good and bad years. The TCJA eliminated the ability to carry NOL's backwards, you could only use them in future years, and limited the offset to 80% of your taxable income.
The CARES Act reinstates the carry back rules, but only for those created from 2018 through 2020. AND it reinstates the 100% offset! Temporarily, you can carry back NOL's 5 years. Of course, if you prefer you can carry the loss forward instead, BUT you must make an election to waive the carry back. Again, consult your Tax Professional.
So What Do I Do?
If you have eligible NOL's from 2018 or 2019, you need to act now! Normally you wouldn't be able to do anything about 2018, but the IRS has extended the deadline until June 30, 2020 to file for 2018. For NOL's generated in 2019, you have until December 31, 2020. If you are anything except a C-Corporation, you can file Form 1045, Application for Tentative Refund, by faxing it to 844-249-6237. If you are a C-Corporation, you need to file Form 1139 and fax to 844-249-6236. the IRS is promising a 90 day refund time frame.
When considering whether you should carry NOL's back or not, look at your tax rates in the applicable years. You may actually be able to reduce your taxes, rather than just shift the timing. Of course, if you just need the cash now, then the tax rate doesn't make any difference!
Who Is Responsible for Filing and Paying a Deceased Person's Taxes?