Net Operating Loss (NOL) provision has long been a massive support for businesses incurring an overall net loss in a tax year. The tax code helped such businesses by allowing them quick cash which acted as a support to the business.
Unfortunately, the introduction of the Tax Cuts and Jobs Act (TCJA) took away this ability to receive instant benefit from NOL provision in 2018. The good news is that the government understands the economic impact of the COVID-19 pandemic and the need of businesses for support in these trying times has restored the NOL provision temporarily. The restored tax code would benefit businesses that have incurred net loss both in the 2018 and 2019 tax year.
Let us understand how you can turn your 2018 and 2019 NOL into some quick cash and along with this, all the rules to get this done seamlessly.
What is NOL?
NOL stands for Net Operating Loss. You become eligible for an NOL when some deductions exceed your gross business income. What this means is that an NOL happens when you face a net business loss in a particular tax year.
A Walkthrough of the Old NOL Rules before TCJA
The following rules were applicable for NOLs arising in the tax year 2017 or earlier:
- You could carry back your NOL for two years and carry it forward to the next twenty years.
- The old rules had it that you could offset up to 100% of your taxable income with the help of NOL provision.
- You had the flexibility to elect-in the year of NOL on a promptly filed return plus extensions and waive the NOL carryback and choose to carry it forward only.
- The NOL carryback provision allowed you to savor an instant refund of cash from a prior tax year to help support your business.
Tax Cuts and Jobs Act NOL Rules
The TCJA implemented considerable changes in the NOL arising in the tax year 2018 and onwards which are as follows:
- You could not carry back your NOL but could carry it forward for any number of years in the future.
- The NOL could only offset up to 80% of your taxable income prior to your section 199A deductions.
- The TCJA made it very difficult for businesses to get their tax savings for business losses by causing a considerable delay in the ability to do so.
The COVID-19 NOL Temporary Rules
The CARES Act introduced by the federal government to support the nation through the COVID-19 crisis has suspended the TCJA limitations on NOL. The suspension is valid on NOLs for the tax year 2018, 2019, and 2020. The new rules allow you to do the following:
- Get your NOL carried back by five years or carried forward for an indefinite period in the future.
- Apply for 100% of the loss incurred during these years.
- You also have the ability to waive the carryback and opt only to carry forward the NOL.
If you are found eligible for filing for your refund, then following are the benefits you get:
- The IRS goes easy on you by making only a limited examination of the claim for omissions and computational errors.
- You would get your refund within 90 days of filing your application.
Points to remember to get your refund:
- As per previous rules, in order to qualify this procedure to get your refund, you would need to file your application within 12 months after the year in which you incurred an NOL. Therefore, if your NOL arose in the tax year 2018, then, in a normal scenario, you would be out of luck now because the last date to apply for it was December 31, 2019.
- The IRS has provisioned an extension of 6 months to file for Form 1045 or Form 1039 if you have an NOL that arose in 2018 and that ended on or before June 30, 2019.
- Since the COVID-19 pandemic has currently stopped paper processing by the IRS, they would now process your 2018 and 2019 NOL by fax starting from April 17, 2020, until further notice.
The CARES Act restoring the NOL provision is a bold move by the federal government to support the economy and businesses flourish back to normal. 2020 has been a harsh year for the global economic landscape, and the news about the NOL comes as a sigh of relief for businesses facing net losses in 2018, 2019 & 2020. The blog talks all about the basics to file for the NOL refund. In case, any of you wish to understand more in detail, then please touch base with your MyTaxFiler expert at C19Grants@mytaxfiler.com.