Net Operating Losses: 100% Of The Time, They Work 80% Of The Time…

Business Tax

You’re heading into year-end and your corporation is showing its first profit. Congrats! What about your tax bill?

You aren’t worried because you have plenty of net operating losses (“NOLs”) from when you started the company, back in 2018. There’s no tax bill to worry about, right? Right?

Wrong. For tax years beginningafterDecember 31, 2020, the use of NOLsgenerated in 2018 and beyondare limited to 80% of taxable income, without regard to the NOL deduction.

Are you telling me I owe taxes?Maybe. Let’s assume your 2021 taxable income is $1,000,000, and you have NOL carryforwards from 2018, 2019 & 2020 totaling $1,500,000.

Prior to 2021, under the CARES Act, your taxable income would be $0, and you would carry forward the remaining $500,000 NOL to subsequent tax years ($1,500,000 NOL – $1,000,000 taxable income).

In 2021 (and beyond), your taxable income increases from $0, to $200,000 [$1,000,000 taxable income – ($1,000,000 * 80%)]. Your NOL is limited to $800,000, and you would carry forward the remaining NOL of $700,000 ($1,500,000 – $800,000).

The corporate tax bill on $200,000 = $42,000. Owing taxes when a business has yet to produce a cumulative profit can become a cash-flow nightmare for unsuspecting, uninformed taxpayers.

This “80% NOL limitation rule” was supposed to take effect in 2018 (originally part of the Tax Cuts and Jobs Act of 2017); however, the CARES Act suspended the effective date until 2021.

What Can Withum Do to Help?

  • We can review your specific tax situation and determine the potential tax exposure from the 80% NOL limitation (remember, this depends on facts and circumstances and the 80%-rule does NOT apply to pre-2018 NOLs)
  • If there is a limitation, resulting in Federal tax liability, Withum can advise on planning opportunities, including:
    • R&D Tax Credit– if available, this credit can offset taxes triggered by the NOL limitation;
    • Change in Accounting Method – converting from accrual-to-cash, cash-to-accrual, or other accounting method changes, if available, could mitigate tax exposure;
    • Transfer Pricing Review– for entities with related parties or international operations; and
    • Cost Segregation Studies– for companies with substantial assets (primarily real estate), cost-segregations studies can accelerate depreciation deductions.
  • Remember: it’s not too late, tax planning can still be implemented prior to the March and April tax filing deadlines.

Contact Us

Companies interested in learning more about potential NOL limitations and planning opportunities should contact a member of Withum’s Tax Services Team.