With the lockdowns continuing, many businesses struggling to stay in the black may be looking for some kind of good news. Maybe that good news is seeing the lockdowns lifted, maybe it’s finding a way to adapt to the “new normal,” or maybe it’s a legislative change that could ease the burden of operating in an environment where state governments refuse to open.
Well, the last of these three just happened—meaning that even those organizations who have spent the last few years riding unprecedented growth might be able to make the most of ‘losing bigly’ in 2020.
The Impact of CARES on NOL and More
As discussed in a recent Wall Street Journal article, Congress is letting companies get refunds of taxes they paid at the 35% corporate rate that existed before 2018 rather than at today’s 21% rate. This change, part of the “Coronavirus Aid, Relief, and Economic Security Act,” or “CARES Act,” temporarily suspended the TCJA business loss limitations and made the following changes:
- 2203: Section 172(b)(1) – “Net Operating loss carrybacks and carryovers” – Special Rule for losses arising in 2018, 2019 and 2020, such loss shall be a net operating loss carryback to each of the 5 taxable years preceding the taxable year of such loss.
- 2203: Temporary repeal of 80% income limitation to deduct a 2018 and forward NOL for year beginning before 2021.
- 2204: Repeal of 461(l) for 2018, 2019 and 2020 – excess business losses
- 2206: 163(j) special rules for 2019 and 2020, increasing ATI percentage from 30% to 50% for limitation on business interest
Big Losses Mean Big Refunds
Not only a lifeline for companies who have struggled as a result of lockdowns but a huge opportunity for undoing the damage caused by the lockdown, nearly two dozen large publicly traded companies are reporting more than $2 billion in combined tax benefits using this rate arbitrage, according to a review of securities filings.
By packing deductions into 2020, companies with past profits, current losses, and little risk of insolvency could see massive tax savings—a $1 million deduction taken in 2020 is worth up to $350,000 in federal tax savings. The same in 2021? At most $210,000.
Wall Street Journal authors Richard Rubin and Theo Francis add that,
“Companies are already claiming benefits related to 2018 and 2019 losses, and they have the rest of this year to maximize 2020 losses before the opportunity begins to expire. Strategies include buying deductible equipment, accelerating bonuses, contributing to pension plans and exploring accounting-method changes.”
While the strategy has been around for a while, the idea of carrying back losses was limited in 2017 to help pass the Tax Cuts and Jobs Act, replaced with the ability to carry forward losses indefinitely.
Following the passage of the March 2020 CARES Act, companies immediately began asking for refunds based on 2018 and 2019 losses and examining 2020 finances to see what deductions they could take—equipment buying, new projects, and more could all become viable options in the wake of the change.
Keeping Up with Changes: Controllers Council is Here to Help
2020 has presented a plethora of changes in the way that controllers need to operate, and this is just one of the many things you need to consider as you close out the year. Q$ is coming up and March 2021 is just a few short months away, so if reclaiming past income tax payments seems like a viable strategy, time is likely limited.
If you’re looking to stay ahead of the trends, keep up with the changes, and put your organization in a position for long term success, the Controllers Council is here to help. Offering networking opportunities, learning, and a forum to discuss all the latest news, Controllers Council Members are ahead of the curve. Get to know more about all the benefits of membership here.
Additional Tax Resources
Could COVID Leave You with a SALT Problem?
Future-Proofing the Tax System: AICPA Addresses Small Business Challenges in Letter to Congress (Part 1)