If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.
If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.
You used to be able to carry back your NOL two years and get immediate tax refunds from prior years; however, the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.
What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.
Thank COVID-19
Let’s be real: there’s little to be grateful for with COVID-19, with one of the several exceptions being the potential opportunities to turn NOLs into cash for your business.
Two NOL opportunities come from the Coronavirus Aid, Relief, and Economic Security (CARES) Act:
The CARES Act allows NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years for refunds against prior taxes.
The CARES Act allows application of 100 percent of the NOL to the carryback years.
Before the CARES Act, you could not carry back your 2018, 2019, or 2020 losses, and your NOL could offset only up to 80 percent of taxable income before your Section 199A deduction.
We understand taxes can cause confusion. Remember, that’s why you have me and my team here at Driscoll & Associates to answer your questions and be of service. If you want to discuss any of the strategies above, please call our office at 951-2196-9393.
Sincerely, John Driscoll, CPA
Driscoll & Associates