In the wake of the unprecedented challenges posed by the COVID-19 pandemic, manufacturers have faced financial hardships, which continue to reverberate. The CARES (Coronavirus Aid, Relief, and Economic Security) Act, enacted in response to the economic fallout of the pandemic, provided a lifeline for businesses, including one commonly overlooked provision that allows taxpayers to carry back net operating losses (NOLs) to offset taxable income in previous years and yield immediate tax reductions. However, as we approach the deadline for the period of limitations for affected returns, the window of opportunity to carry back losses and claim immediate tax benefits is rapidly closing.
The ability to carry back NOLs has undergone significant changes in the past decade. Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), which became law in December 2017, losses could be carried back two years and carried forward 20 years. The TCJA changed the NOL treatment to allow an indefinite carryforward period; however, the act also eliminated the ability to carry back losses to previous years. The CARES act removes that restriction and allows calendar-year taxpayers to carry back losses for NOLs arising in tax years 2018 through 2020.
When filing the tax return for the loss year, a decision needs to be made whether to carry back the loss to previous years or elect to forgo the carryback and carry the loss forward to future years. The deadline for amending prior returns for an NOL carryback follows the period of limitations for the loss year, which is generally three years from the filing of the return. This means that for a loss sustained in 2020, the deadline for amending prior returns for a loss carryback would generally expire in 2024.
If taxpayers did not elect to forgo the carryback period for a 2020 loss, the loss can be carried back to the previous five tax years. Amended returns should be filed to carry back the NOL and offset any taxable income in those years and potentially generate refunds.
The CARES Act presents the option to carry back NOLs arising in tax years beginning after December 31, 2017, and before January 1, 2021, for up to five years. As such, businesses experiencing losses in 2020 could apply these losses to previous profitable years, resulting in potential tax refunds and additional liquidity.
The deadline looms. Manufacturers need to be aware that this opportunity is time-sensitive. For many taxpayers, 2024 marks the end of the statute of limitations for utilizing this provision. As we approach the deadline, it is imperative that manufacturers act swiftly to take advantage of this financial relief.
If you have any further questions or would like a consultation you can reach Mark at mroberts@hbkcpa.com or contact your HBK Manfucturing Solutions consultant to schedule a time to meet and discuss how HBK Manufacturing Solutions can help your company.
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