The CARES ACT, passed by Congress in early 2020, contains various economic tools to assist businesses as they navigate through the financial impacts of COVID-19. Some of the opportunities in the CARES ACT are easily overlooked by taxpayers. We would like to bring an important item to your attention.
One of the economic tools contained in the CARES ACT is the ability to carryback a net operating loss incurred by a taxpayer during their 2018, 2019 or 2020 tax years. The loss can be carried back to offset income in up to five prior tax years.
Taxpayers that paid Federal income taxes during their 2014 through 2018 taxable years have an opportunity to recoup all or a portion of the Federal income taxes previously paid by using the five-year carryback provision. The CARES ACT change is intended to help businesses that incur losses in 2019 or 2020 to generate cashflow from the losses and hopefully assist their businesses through the economic downturn caused by COVID-19. Prior to this change, most taxpayers could not carryback but instead had to carryforward any net operating loss they incurred.
Timing is everything for a taxpayer to take advantage of the five-year carryback opportunity as the losses must be incurred in their 2019 or 2020 tax years. The law reverts to the original provisions in 2021. Planning strategies can be reviewed to maximize the losses and generate as much tax refund cashflow as possible.
For example, taxpayers can use bonus depreciation and certain accounting method change adjustments to increase the available loss carryback. The CARES ACT also made changes to the bonus depreciation rules and the IRS has liberalized the accounting method change rules to assist businesses in taking advantage of the five-year carryback rule.
We are available to assist you in evaluating the potential benefits of the five-year carryback provision.