With every business comes risk. Unfortunately, sometimes a business suffers a net operating loss (NOL). When that happens it has the option of applying that loss to one of its prior annual tax returns. This is called a “loss carryback” and reduces the tax liability for that prior year, which could result in an instant refund of taxes that have been paid.
However, before choosing a loss carryback for an NOL, it’s important to be up-to-date on the current legislation, which can change over time. This is why it is so important to speak with a qualified tax attorney. If your business has suffered an NOL, it’s important to understand your options for recouping a portion of your paid taxes. Contact our San Francisco tax attorneys at the Regal Tax & Law Group, PC today to get started!
What Does a Loss Carryback Serve to Do?
A loss carryback can produce a refund of prior taxes from the previous year since the business now has reduced tax liability. Essentially, once a loss carryback has been applied, it is as if the business simply overpaid its annual taxes. This is similar to loss carryforwards, except for the fact that the latter applies to subsequent years rather than preceding.
Businesses have the option of applying an NOL by carrying the loss back in time or forward. However, once a taxpayer makes that choice they cannot undo it. It is important to note that loss carrybacks are usually more beneficial than loss carryforwards in that present tax savings are generally more valuable than future tax savings according to the time value of money. This is not to say that there are not situations in which it makes more sense to carry a loss forward.
NOL Carrybacks May Differ from Year to Year
Historically speaking, NOLs have been eligible to be carried back from zero to five years. Often these time periods have been made longer during recessions. At times, carrybacks have also been removed from the tax code, only allowing for carryforwards.
Intended as a short-term benefit for companies that suffered losses post-WWI related to the sale of war-related products, the carryback provision for NOL began as part of the Revenue Act of 1918. It was originally referred to as the carryover provision and was to last for one year. However, the provision was maintained for those businesses that were cyclical by nature, such as those in agriculture as they are largely dependent upon the weather, which can differ dramatically from year to year.
A History of the NOL Carryback Provision
Under the Tax Relief Act of 1997, the NOL carryback provision was limited to two years while the carryforward provision was extended to 20 years. Additionally, the time period allowed for carrybacks was extended to three, four, or five years in response to some socio-economic events, such as the attack on the World Trade Center in 2001 and the Great Recession in 2009.
Then in 2017, the Tax Cuts and Jobs Act (TCJA) removed the carryback provision starting in 2018, but for certain specific non-life insurance companies and farming losses.
In 2020, amid the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act served to delay those changes made in the TCJA concerning carryforwards and extended the period of time for carrybacks. The CARES Act now allows for those with an NOL carryback to do so for up to five years before January 1, 2021.
Some States Have Loss Carryback Limits
Some states, such as California, have implemented stricter time limits on carrybacks and carryforwards about state income taxes. California state’s Governor Gavin Newsom signed AB-85 into effect on June 29, 2020. This legislation suspended the use of California’s NOL for tax years 2020, 2021, and 2022. Additionally, taxpayers in California who have a net business income of at least $1 million cannot utilize their NOLs for tax years 2020 to 2023.
Contact Our Experienced San Francisco Loss Carryback Attorneys
At Regal Tax & Law Group, PC, each client receives powerful representation and individualized attention. When you consult with us, we will take the time to help you understand all the options available to you so that you can make informed decisions about your business NOL or other tax matter. We’ll help you gather the relevant evidence, fill out the correct paperwork, and negotiate on your behalf.
We have a well-earned reputation as trusted tax attorneys with the know-how to resolve the most complex tax controversies. If your business has suffered an NOL, don’t hesitate to see what you can do to best serve your interests. Please contact our office today for a complimentary consultation.