COVID-19 is changing our daily lives in terms of medical safety and how we conduct business. At Calvetti Ferguson, many of our clients have reached out with questions about their businesses, since after all, businesses pay employees, and employees buy goods and services. If you are a business owner or leader in any capacity, your employees, co-workers, and customers are like family.
How can a business stay afloat during this challenging time?
The CARES Act has some helpful provisions that can generate tax refunds and cash flow. One of the items highlighted by this article is the now-permitted 5-year Net Operating Loss carryback (H.R. 748 §2303).
What does the Net Operating Loss carryback mean for a business?
If you have had a few good years, maybe some business losses or are anticipating a business loss, Calvetti Ferguson may be able to help you get cash back for your business to continue operations. Recall that before we had tax reform, many corporations paid a 35% tax rate, and then it dropped to 21%? Another aspect of previous tax reform was that losses could no longer be carried back but could only be carried forward against 80% of taxable income in future years (IRC §172, as amended by the Tax Cuts and Jobs Act).
As a result of the CARES Act, it is now possible to take losses from returns that have been recently filed and carry losses back to a higher tax rate year instead of carrying them only forward to a lower tax rate year. Every $10,000 of loss carried back equals $3,500 in your pocket now instead of saving $2,100 later against future taxes.
You may not need to wait for the end of your business year, and this can apply to returns already filed. There is a limited window for some opportunities. The IRS will soon receive many of these Net Operating Loss carryback claims. The goal is to get our clients first in line for those refunds to be processed. In some cases, we can increase your cash tax refunds by making these provisions work together. This Net Operating Loss carryback idea interacts with other tax benefits including interest expense deduction limitations and tax credits. One tax credit that is especially beneficial with the new loss carryback rule is the research and development credit.
One particularly challenging aspect of the Net Operating Loss Carryback claims has been that the IRS did what many businesses did during the initial COVID lockdowns. They sent their employees home to work from home. Paper returns and letters could not be processed as a result. To mitigate this, the IRS does allow a taxpayer to fax a carryback claim but not an amended return. IRS employees are able to access e-faxes from their computers so they therefore can be processed. Carryback claims are due by the end of the next calendar year after the loss year. That means that any calendar year 2019 carryback claims need to be filed by December 31, 2020.
It can be difficult to make sense of all the new legislation passed in the wake of COVID-19. Contact us for a consultation on how you can use the CARES Act to improve your cash position. Check out our COVID-19 Resources page for more information.