While the unforeseen coronavirus-related economic shut down of 2020 severely impacted businesses across the nation as they lost income when business revenue came to a halt, there is light at the end of the tunnel. With the help of a professional familiar with the CARES Act and new net operating losses (NOL) protocol, many businesses may be able to turn their 2020 losses into cash refunds with NOL carrybacks.
Maximizing Net Operating Losses (NOL)
The formula for calculating an NOL is (total deductions – disallowed deductions) – total income = NOL. When trying to maximize an NOL, the taxpayer should note that enhancement comes from the losses and deductions relating to the taxpayer’s trade or business. Nonbusiness deductions do not enhance, nor do they reduce an NOL.
The part of the equation that can end up reducing a possible NOL would be the income related to the trade or business. A taxpayer’s trade or business directly affects the possible NOL, and as such in an NOL year a taxpayer should seek to limit his trade or business income.
For example, if a taxpayer’s goal is to maximize his NOL loss year, the taxpayer should hold off any sales of business real estate or depreciable business property that could result in again. If businesses have outstanding lawsuits, a settlement before the end of 2020 will allow the taxpayer to utilize a business deduction if there is a sufficient business connection to the lawsuit. This settlement would increase the NOL in a loss year.
Although mentioned previously, it is worth dually noting that an NOL is not enhanced by nonbusiness deductions. Those types of deductions are accounted for by adjusting the total deductions from items not allowed in Form 1045. In terms of efficiency, a taxpayer should seek to utilize this deduction by increasing his nonbusiness income as close to possible to his nonbusiness deduction in a loss year. A large nonbusiness deduction does not affect the NOL, and if not matched by nonbusiness income, results in a missed opportunity by the taxpayer if he has any nonbusiness deduction amount leftover.
Ultimately, the NOL deduction is recognized under § 172, but is subject to any loss limitations and tests under the Internal Revenue Code.
Additional Steps For Obtaining NOL Carryback Refunds
To further maximize net operating losses to a company’s advantage, businesses will need to delve into refund protocol, including:
- Examining the NOL process
- Engaging in strategic planning based on tax rates
- Utilizing proper government forms to expedite refunds
Each of these categories is essential to maximizing a business’s net operating losses so that it could potentially result in a timely refund that provides much needed funding. During this time of economic crisis, a refund may allow taxpayers to access liquidity at a time when they are already struggling to meet existing financial responsibilities.
Plan Your 2020 Tax Strategy
Taxpayers have the remaining months left in 2020 to engage in tax planning that will optimize their losses in a manner that could result in a refund of prior years’ taxes paid. Likewise, this may be an opportunity for taxpayers that still owe unpaid income taxes from prior years to reduce or eliminate that liability.
If you have questions about how the CARES Act could affect your net operating losses, please reach out to the May Firm today.