Michael Bosma: Refunding high tax rate years with new carryback provisions (Voices)

If you or your C corporation generated a net tax loss during 2018, 2019 or 2020, a CARES Act provision allows you or the C corporation to carry the loss back to offset taxable income during the previous five tax years.

This would generate a refund of taxes paid in earlier years. In many cases, the IRS will pay those refunds within 90 days, providing immediate cash flow benefits. Alternatively, you can choose to carry the loss forward to offset future income.

Aside from the cash flow benefits of obtaining an immediate tax refund, the loss carrybacks present an opportunity to secure permanent tax savings by using losses to offset income generated prior to passage of the Tax Cuts and Jobs Act (TCJA), when the maximum tax rates were higher. Remember that depending on where you and your business are located, the loss carrybacks may not be available for state tax purposes.

Let's discuss a few situations where you may prefer to carry a net operating loss forward and some planning ideas on how to increase your tax losses to take advantage of the loss carryback opportunities.

Deciding whether to carry the loss forward or back

In most cases, you will want to carry a tax loss back to a prior year to generate the immediate cash flow benefits. Your tax adviser can help you decide what's best in your situation, but here are a few examples of situations where you might prefer to carry a loss forward:

1. The tax refund you expect to recover from the loss carryback is less than the expected future tax savings associated with a carryover (taking into account the time value of money).

2. The tax loss will be carried back to a tax year where you or the corporation took an aggressive tax position.

3. Another party is entitled to the refund.

Strategies to increase the loss carryback

If you or your C corporation have sufficient taxable income subject to higher tax rates during the five-year carryback period, you may be able to generate additional cash flow and achieve permanent tax savings by proactively planning to increase the amount of your tax losses.

Here are a few tax planning strategies to increase your tax losses, which could increase your tax refund. Remember, you should consult with your tax adviser prior to implementing any of these strategies.

1. Accelerate equipment purchases.

2. Analyze tax asset depreciation methods and lives.

3. Write off old or uncollectible receivables and harvest tax losses.

4. Make retirement contributions.

5. Work with your tax adviser to identify possible beneficial accounting method changes.

A few notes of caution

1. Year 2018 “Easy” Carry Back Claims due 6/30/20: Notice 2020-26 grants a six-month extension of time to file a Form 1045 or Form 1139 to taxpayers that have an NOL that arose in a taxable year that began during calendar year 2018 and that ended on or before June 30, 2019. This extension of time is strictly limited to requesting a tentative refund. To take advantage of the extension of time for requesting a tentative refund based on an NOL carryback, a taxpayer must file the applicable form no later than 18 months after the close of the taxable year in which the loss arose, with the notation “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment” added at the top of that form. Thus, for example, 2018 calendar year taxpayers now have until June 30, 2020, to request a tentative refund using Form 1045 or Form 1139. You can file a amended return for a 2018 carry back, but it requires more forms, more time, and human IRS person will review the claims, and generally more fees. Better to file the Form 1045 or 1139 respectively to get a quick (90 day) refund of the refund claim.

2. Alternative Minimum Tax: Carrying back an NOL to an earlier tax year may create an alternative minimum tax (AMT) liability for that earlier year. This may be true even if there was no AMT liability on the tax return filed for that earlier year.

3. Carry Back to “Aggressive” Tax Years: The IRS generally has three years from the time you file your tax return to audit the tax year and adjust the tax liability reported on the return. However, if a taxpayer carries a loss back to a particular tax year, the IRS can offset the refund with other tax adjustments in the carryback year, even if the time has exceeded the regular three-year statute of limitations period. If you took an aggressive position in a prior tax year, you may prefer to carry the tax loss forward to avoid this potential risk.

4. More Tax Deductions is Not Always “More Better”: The allure of saving tax at the highest corporate and individual graduated rates of 35% and 39.6% respectively is tempting to say the least. Savvy taxpayers weigh the potential loss of itemized deductions and the lowest income tax rates when navigating their NOL carryback. Some simple planning (opting out of bonus depreciation) can optimize the carryback to the best tax year, and not leave a taxpayer exposed to higher tax rates moving forward.

Conclusion

Loss carrybacks present an opportunity to improve cash flow and achieve permanent tax savings. Sophisticated planners help taxpayers evaluate whether to carry a loss back or forward, develop strategies tailored to your situation to increase your loss carrybacks, and prepare the carryback claim.

Please note that this discussion is general in nature. Please consult with a CPA to get answers to your specific fact pattern. CLA's John Werlhof and Jason Flattum assisted with this article.

Michael Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. He's also the host of “Bosma on Business,” which airs Saturdays at 10 a.m. on Newstalk 780 KOH. Reach him for comment at mike.bosma@claconnect.com.