The past 18-month stretch has been challenging with health, social, and financial turmoil seeming to come daily. As many are looking forward to the future, they are also excited to finalize their 2020 individual federal income tax filings by October 15th and put 2020 in the rear-view window.
But before any 2020 individual income tax returns are signed, careful consideration should be given on how best to maximize net operating loss (”NOL”) cash benefits. Taxpayers can also consider optimization of 2018 and 2019 NOLs as well, given the taxpayer friendly guidance issued by the IRS in Revenue Procedure 2020-24.
Many businesses have seen the creation of federal NOL’s in 2020 due to the majority of stimulus funding not being taxable, while the associated expenses were still allowed as a deduction. This tax treatment mismatch, coupled with the negative business impact of COVID in 2020, allowed for more NOLs to be reported for the 2020 taxable year than normal.
In general, NOLs created in 2018, 2019, and 2020 are required to be carried back five years and then carried forward indefinitely. So, what’s the big deal? Isn’t it better to carry back the NOL and get the cash refund now as opposed to waiting to carry the loss forward to a future taxable year?
Just like everything in the tax world, it depends. With new 2022 tax legislation looming, and the potential for federal individual income tax bills to skyrocket, taking the time to forecast a future benefit of carrying forward an NOL could result in significant tax savings.
So how do individuals maximize the cash benefit of 2018, 2019, and 2020 NOLs? Two important questions need to be asked:
1. What is the owner’s individual federal income effective tax rate for the carryback years versus the expected rate in future years?
2. What is the owner’s current cash position? Is the need for cash imminent or is there an option to postpone the cash collection to maximize the benefit?
Your Tax Pro on Demand,
R Clyde Olivieri, Jr.
P.S. Should you believe to have fallen into a situation related to this issue and know not what to do, or how to handle your specific matter, call us now, at 215.550.3636, from 1000am until 1000pm, Monday through Sunday. We will come up with solutions or suggestions, related to your potential tax consequences. We have convenient evening and weekend appointment hours.
