The CARES Act includes provisions that greatly enhance the options available for net operating losses (NOL). The Act provides new rules that will affect all taxpayers with an NOL, including ag producers.
Prior to 2017’s Tax Cuts and Jobs Act (TCJA), taxpayers who incurred an overall tax loss that was generated by a business loss had the option of carrying that loss back several years to offset prior years’ tax or carrying it forward to offset future income. The TCJA eliminated the carryback provision, allowing only a two-year carryback for farmers.
Currently, amidst the economic slowdown brought on by COVID-19, Congress has provided additional flexibility for taxpayers incurring an NOL.
As with much of the tax law, these new rules are complex and detailed. Here is a rundown of some key points:
- NOLs generated in tax years 2018, 2019 and 2020 are now required to be carried back to the previous five years to offset income and tax paid in those prior years.
- Farm taxpayers who had previously elected to forego the two-year NOL carryback of 2018 or 2019 losses can now change their election and carry those NOLs back five years.
- Any NOLs that are unused in the carryback can be carried forward indefinitely.
- Any NOL generated in 2018, 2019 or 2020 will offset income fully. The loss offset is no longer limited to 80% of the taxable income being offset.
- Taxpayers still have the option of electing to forego the five-year carryback and carry the losses forward only.
- The loss carryback will not be affected by the different tax rate structure that existed prior to 2018.
These new rules might be particularly helpful for farmers and ranchers. A loss generated in these years can now be carried back as far as 2013 and 2014, years in which some producers were still profiting from higher commodity prices.
NOL options available
There are several strategy points to consider when evaluating the options available. Most situations will need to be individually analyzed in order to match the choice of strategy to each taxpayers’ unique facts and circumstances. Some points to consider are:
- Does your farm business have a fiscal year-end, and did you incur a loss for a year ending in 2018? If so, you might be able to carry that loss back five years under the pre-2018 law.
- Did you incur a loss in 2018 or 2019, and did you pay significant income taxes in 2013 through 2017? If so, and you paid tax at a higher percentage rate in effect at that time, you could realize a significant benefit from a loss carryback.
- Do you expect higher income in the future? Or do you expect your tax rates to be higher in the future (e.g., C corporations with modest profit levels).
- If you could obtain a refund due to an NOL carryback, will that cash be more valuable now than the future tax savings of carrying the loss forward?
- For state tax considerations, some states automatically follow the federal rules, while other states have their own unique rules on computation, limitation and carryback/carryforward.For instance, Montana rules for individual taxpayers follow federal rules, while the corporate rules are different.
- If you did not incur NOLs in 2018 or 2019, an NOL generated in 2020 also qualifies for the five-year carryback. You may be able to utilize proactive planning to generate a 2020 NOL to carry back to 2015 for refunds.
NOL rules and your individual situation
This matter needs immediate analysis and planning for any taxpayer with a significant net operating loss. There are some deadlines for significant elections that occur as soon as June 30, 2020.
If you or your business are or could be affected by these new rules, consult with your tax professional as soon as possible. If you have questions or would like to connect with me, I can be reached at firstname.lastname@example.org.
Also make sure to visit our COVID-19 resource center, where you can find more resources to help navigate the impact of the coronavirus.