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Tax Planning for Late-in-Life Net Operating Losses

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The elimination of Net Opperating Loss carrybacks was introduced with the Tax Cuts and Jobs Act, which also added an 80 percent of income limitation in the deduction year. Temporary relief came in 2020 with the enactment of the Coronavirus Aid Relief and Economic Security Act.

Sep 1st 2021
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Net operating loss (NOL) carryovers don’t expire quickly, but recent history has been one of limiting carrybacks and, ultimately, plays an important role in lessening the harshness of the annual accounting concept.

For example, the taxpayer breaking even over two years has roughly zero taxable income if the million-loss year precedes the million-in-income year.  With the same figures over two years, assuming no carryback rule and the income year preceding the loss year, the taxpayer owes tax on a million in the earlier year. 

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There’s the contingency this taxpayer will benefit from the NOL arising in the later year, but there is delay of use and the possibility the NOL will expire unused. In a no-carryback world, one can theoretically make a million on December 31, have a million dollar loss deduction the next day, and owe tax on a million despite breaking even over two days.

The CARES Act provides that NOLs of 2018, 2019, and 2020 can be carried back five years without being subject to the 80 percent of income limitation.   

“The CARES Act also temporarily removes the taxable income limitation, therefore allowing taxpayers (to) utilize NOLs to offset 100 percent of taxable income in tax years 2018, 2019, and 2020…. Losses incurred in tax years beginning before January 1, 2018 may be carried forward to tax years beginning after December 31, 2020, without being subject to the 80% limitation.” (“CARES Act Five-Year NOL Carryback Rules Will Have Significant Impact on M&A Transactions,” Hall, Ruiz, Zucker, Mussio,  McDermott, Will & Emery, mwe.com, 3/27/20).

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